‘Back to the Future’ or Council Tax: How we Arrived Here

Last week I was invited to a session of the Local Tax Commission to provide a context-setting potted history of local government finance in Scotland. I am no historian but it was an interesting task to delve back into the pre-20th century material as well as the more recent post-war period and especially the last 30 years. I started active research investigating the poll tax and its impact on the housing market, so my historical work was also self-reflective, looking to my own papers from the late 1980s (I even found a longhand essay from 1988 – I used to have quite good handwriting!).

The longer term perspective allows us to think more about the sustainability of local government finance systems and also about recurring themes and problems, some of which predated 1900. A number of generalities struck me as I assembled material for the presentation.

First, there is nothing new in the centralization v localization tensions so apparent since the post-1970s. Goshen reported in the 1870s on local government financing and stressed not only the growth of grant funding (from 0 at the turn of the 19th century to as much as 14% in 1890) but that there were political tensions between Westminster and councils which might be expressed in modern parlance in terms of the desire of councils to promote local accountability and locally sourced tax revenues versus the increasing use in the 20th century of general grant in aid (ie not just specific grants) to support issues of territorial equity by reducing inequalities caused by varying tax bases or different levels of need.

While, in the contemporary era business rates have been nationalised (and become a form of grant) and there is more reliance on fees and charges (and more recently on local council reserves) to balance books, the shift has clearly been towards the centre and away from local accountability. The share of revenues attributed to revenue supporting grant has fallen from its high water mark in the early 1890s but still unquestionably dominates the system.

A second theme is that the British disease, otherwise known as our political inability to enforce general revaluations, is actually a venerable tradition that has been with us for many decades. After revaluing in 1934, domestic rates were not revalued again till 1956 (and then only to 1939 prices – shades of the council tax). The 1963 revaluation became enmeshed in the controversy over the future of schedule A income tax (also based on rateable values). Prior to the council tax, the last English revaluation happened in 1973 and the last Scottish one, infamously, happened in 1985. So, the inability, Wales excepted, to carry out a council tax revaluation has a long backstory, often related to manifesto pledges to support the (home-owning) ratepayer. Without enforcement, a statutory pledge to revalue looks a little hollow.

Third, the memory of the poll tax is very long. This operates on several levels. First of all the council tax was grafted on to the poll tax finance system and also included important features of the poll tax such as the personal discount. Second, the poll tax catastrophe for central government, local government finance, accountability and credibility casts a long shadow and creates an inertia that, outside of Scotland, renders political classes largely unable to contemplate reform of the council tax because of the (well-grounded) fears that ‘there be dragons’. Until the inertia is offset by the palpable failings of the existing system causing real pain politically, it is less clear that meaningful reform can occur.

Perhaps Scotland therefore can be the beacon for the rest of Britain? Though one might also reasonably ask why the Scottish political system and its government is willing to go for reform now – though wide cross party consensus is clearly an important contributory factor.

A fourth theme, and one apparent from re-reading the many inquiries and green papers of the last 50 years (Allen through Layfield up to Lyons and Burt, as well as the many government papers) is that there is considerable risk in just looking at local taxes in isolation from their interaction with local services, the geography or functional bounded-ness of local authorities (and whether unitary or other structures are in place), as well as the underlying balance of central grant and local tax.

There have been reasoned external critiques of the Lyons Review that was commissioned by New Labour but it was surely right on one point. Making reforms in limited parts of the system only makes sense if the reforms offer a road map and enable further complementary reforms e.g. to the grant system or raising more local revenues later on (if that is the target). When we consider reform to Scottish local taxes we must ensure that we do not close the door to the second and third rounds of necessary reform to local government finance.

Finally, the mid-1970s Layfield Commission remains an absolute benchmark of sanity and systematic thinking about the subject. They focused on the long term, on the balance between centralizing and localizing forces. They offered a solution involving a reformed property tax and a local income tax as a way to improve fairness and accountability and to reduce revenue risk. This final point remains highly relevant to modern Scotland. For anyone getting in to the subject they could not do much better than returning to Frank Layfield’s excellent report.

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Three Days of the HSA

I have spent the last two and a half days in York at the annual Housing Studies Association conference. The themes of the conference included housing, inter-generational struggles and responses; housing policy in the context of the general election and constitutional change; and, the very rich and very poor in contemporary urban Britain. There were also parallel sessions of both academic papers and early career researcher streams. Everything was well-organised, ran smoothly and was an enjoyable environment of polite and engaged inquiry.

There were great plenary speakers including Beverley Searle, Sue Heath, Kate Barker, Rowland Atkinson and Lisa Mckenzie.  I also enjoyed some great workshop papers. One in particular was by Sarah Payne on the first day on house builders and their recovery from recession, a paper which spoke directly to Kate Barker’s plenary on housing policy, much of which was concerned with planning and housing supply.

Conferences like HSA are very social both in terms of meeting up with old friends but also about engaging fully with social media. Apart from Twitter and such like, Alex Marsh and I planned beforehand to do a podcast interview on housing and the election (what else do you do in that hour before dinner?).

My plenary paper was a reflection on the diverging housing policy framework in Scotland, the experience and consequences of the referendum and Smith proposals, and the implications for the UK election and for policy transfer in both directions.This hopefully complemented Kate Barker’s more detailed assessment of known housing policy proposals in the election debate. We had interesting questions, particularly one suggesting that much of the debate was really about upstream issues to do with the labour market, income and wealth distribution, health inequalities and education.

My recurring theme or metaphor was quantum mechanics. I recalled the day of the referendum when we held an important strategic meeting about future work and simply did not know which vote outcome would happen and hence where our new work would best be directed. On reflection, a bad choice of day for such a meeting but it was very creative! Moreover, we were like Shrodinger’s Cat – both outcomes were possible until the vote was over. The general election is currently highly uncertain and discussing it inevitably leads us down similar alternative futures. It also strikes me that the choices we make at such a conference with all these different parallel workstreams mean that we experience quite different conferences as a result of our choices – something like a series of parallel universes!

One workshop discussion I was in did raise the lack of range in the political discourse at the conference – the almost complete absence of a non-left or non-centre left position or narrative. Some were relaxed about this fact or even welcomed it; others worried that perhaps it may limit our capacity to influence and persuade. 

My other memories of the event that will remain include when Kate Barker was talking and made the comment that on a specific policy issue she was ‘barking up the right tree’. Also, I finally met my namesake, Len Gibbs, who is doing interesting research on low demand and market failure. Nice man and surely he and I should be writing papers together and causing copy editors great confusion (in fact the Scottish MSP, Kenny Gibson, has also made a similar suggestion to me).  

Finally, it was good that we had an opportunity to remember Alan Holmans, who was a longstanding pillar of the HSA, a great housing scholar and a thoroughly nice man.

Housing Policy and the Election ‘Unpacked’

I have put a link here to a podcast I did yesterday with Alex Marsh while at the Housing Studies Association conference in York. It is a tour through the pre-manifesto proposals and pledges by the main parties with regular digressions into Scotland. We also talked about housing supply, property taxation, social housing, private renting, welfare benefits and demand-side home ownership policies. Hope you find it interesting. You will also find the podcast at Alex’s Archives.

Monstrous and Unique

In a recent piece in the Financial Times [A Fiscal Fix for a Pecuiarly Flawed Property Tax], John Muellbauer continues his long term campaign to improve the working of the housing market. His belief is that fiscal levers could play a more coherent role and could on the one hand improve economic efficiency and productivity, while at the same time increasing fairness of tax outcomes.
The piece is about the ‘monstrous and unique’ council tax system of local taxation. Muellbauer provides a clear case in favour of reforming rather than replacing council tax. This short paper is, to my mind, the clearest and strongest defence of such a strategy and is consequentially worth closer scrutiny. What does he say, are the consequences and how does this play into the ongoing Scottish local tax commission?

Muellbauer begins with an increasingly familiar litany of council tax problems: the failure to have regular general revaluations and the fact that banding (and weighting the bands to dampen tax payment differentials) means that households in low value properties pay more as  proportion of their property value than do high value property owners [indeed, measured against current income, the Burt Review evidence in 2006 suggested that Scottish council tax payments were straightforwardly regressive over large parts of the income distribution]. He also criticises the council tax reduction system which through the 10% reduction in support, has brought many low income households into paying the tax for the first time (shades of the poll tax) and has created a forest of different local means tests into the bargain. As he notes, council tax debt now exceeds credit card debt as the most common debt-related problem according to the Citizens Advice network.

John Muellbauer argues that, instead, council tax could be more progressive. He would make the first £40,000 of property value free of tax taking ‘hundreds of thousands out of the poverty trap’. At the same time he would add a higher band for properties over £5 million. He recognises that a key problem with property taxes is the asset rich but cash poor household. He argues for offering all council tax payers a tax deferral in return for a government equity share in the property (1% per year) with a small discount for continuing to pay in cash.

From an economic point of view, Muellbauer argues that this would increase the efficient use of the housing stock. More revenue from council tax could be used to reduce reliance on stamp duty (following the Mirrlees Review agenda of seeking to cut stamp duty), and capitalisation effects would raise house prices in areas of low value and reduce them at the upper end of the market. Overall, this would reduce expected capital appreciation which is argued to be better for younger households, economic performance and the wider housing system. It might also deter speculative foreign investment in high value property.

Clearly, the author is writing a polemical piece aimed at pushing council tax reform into the election debate. However, the ideas regarding the tax free allowance and the deferral/equity stake are of genuine interest. I think to fill the idea out as a policy option, we would need to know:

– How regular general revaluation would take place and be enforced?

– What would the bands look like after the reform and would there be a re-weighting of the bands relative to D?

– Would council tax reduction continue to work in essentially the same way, net of the tax allowance? How would it interact with the deferral?

The proposal involves a further element of nationalising council tax with the government rather than councils operating the deferral system (although councils would receive a cash sum equivalent to the deferred payment each year). This does not really do anything to increase local democratic accountability or to help councils raise more revenue locally. Along with pressure to continue with council tax freezes, it does not reverse the process of centralisation of local government finance that goes back to the 1980s.

In previous writing John Muellbauer has argued in favour of a new national property tax to take on some of the ideas described here. New taxes and a reconfiguration of existing ones can be revenue neutral and need not increase overall tax burdens. They can reallocate resources more efficiently and I can see the in-principle case for better local property taxes more related to current property market values alongside a national tax on land values. This could shift taxes away from more productive activities like work and investing, it might reduce taxes on mobility like stamp duty and/or reduce marginal rates of tax while widening the tax base, thereby reducing revenue risk.

The tax free allowance and the deferral/equity stake ideas are interesting and useful for the Scottish local tax commission. Inevitably, talk of reform raises important wider questions for local government, accountability and autonomy. While this might not be strictly part of the remit of the commission it does remind us that successful policy reform has to be credible to its key stakeholders and that includes local government and advocates of more local democracy and responsibility.

Private Renting, Poverty and Social Exclusion in Scotland

I have been meaning to write something in response to the excellent Joseph Rowntree Foundation Report published last week (Monitoring Poverty and Social Exclusion in Scotland 2015) but I have only now found the time.

Peter Kenway and colleagues point to successes like the steep fall in pensioner poverty and the smaller but still important fall in child poverty since the late 1990s, as well as the benefit of lower housing costs and a larger social rented sector in Scotland. Against that however, working age benefit levels are low relative to minimum income standards. And, there has been a large, sustained increase in JSA claimants being sanctioned or referred for sanctions.

As a result of low income and disparities created by area deprivation, Scotland still performs poorly in respect of big structural inequalities such as premature mortality, the slow rate of progress addressing the educational attainment gap, and in terms of insecurity and low pay at work. The authors also report little progress in terms of the Scottish Government’s wider solidarity target of increasing the share of income going to the poorest 30% of the population.

The report team note important changes to the problems that characterise poverty in Scotland: a rising share of those who are poor being younger adults; a larger proportion living in the private rented sector; and, a rising share of those on low pay having higher education qualifications.

The most recent data for 2012-13 shows an increase in child and working age poverty. The authors state it may only be one year’s data but it may ‘mark the start of a turn for the worse which, if left unchecked, would squander the gains Scotland has made over 15 years’.

The report goes on to identify a number of initiatives and remaining challenges about poverty and exclusion in Scotland. Here I am going to focus on what they have to say about housing and I want to focus on that one aspect of poverty and exclusion, though I could have just as easily concentrated on in-work poverty, health inequalities or sanctions – all of which feature prominently.

One indicator is the changing number of children, working age people and pensioners by housing tenure. A comparison is made for these figures between the three years 2000-01 to 2002-03 as against 2010-11 to 2012-13. Overall, the numbers fell by 230,000 with big falls in social renting (280,000) and home ownership (90,000) but a steep rise in private renting poverty (140,000). The rise in PRS poverty was largely explained by people of working age, whereas where it fell it was more split across the different categories (working age, children and pensioners).

A second indicator looks at housing cost as a percentage of income by tenure and contrasts the same time periods as above (and compares Scotland with England in the latter 2010-11 to 2012-13 period). Social renting costs remained broadly unchanged in Scotland (though were significantly higher in England – 18% versus 24%); home ownership costs fell from 13% to 11% (and remained a little higher in England); private renting rose from 20% to 24% (but still lagged well behind England at 29%). The authors also report that difference between the average private and social rent is larger in Scotland than in any English region outside of London.

Third, the analysis looked at households who report they are cold in winter by tenure and by working age versus pensioner households (all as a percentage of all households). Thus, 18% of pensioners and 22% of non-pensioners said that their heating sometimes failed to keep them warm in winter. By tenure, 19% of homeowners, 32% in social renting and 37% in the private rented sector. This is a different calculation to the official fuel poverty measure but the authors argue that a self-reported subjective measure captures the reality of heating cold homes better.

What are we to make of this? First, I think these indicators really do nail the fact that the private rented sector, albeit a diverse and in places functional part of the housing system, is also the locus for emerging and disproportionate poverty problems in Scotland. And this is despite the several years of good work to improve the sector and the ongoing private rental strategy.

Second, one cannot understate the importance of the interaction of low wages and take-up of in-work housing benefit. The increased flexibility of working arrangements in a context of employer power and declining skill levels of jobs creates further complications. One problem concerns the burden placed by rising private rents but also the importance of transport and childcare costs. A second is the risk of proposed further sanctions under Universal Credit for people in work receiving UC and deemed not to be seeking more hours’ work. This exemplifies the case of the left hand not knowing what the right hand is doing. It will force further conditionality on workers receiving benefits when many have increasingly little control over their hours.

Third, the poverty monitor is challenging for the Scottish Government. While they can rightly point to the areas where wider structural factors prevail (UK markets, globalisation or UK Government policy), several of the pinch points are areas of devolved policy like education, health and, to an extent, housing. The new JRF report presents a mixed picture and poses difficult questions both for Scottish and UK Governments. And right now, as Kenway and colleagues argue, public agencies have to do their best to support those confronting the consequences of the present UK conditionality system.

 

 

What’s Wrong with the Council Tax?

This post is the orginal version of a briefing prepared for the Scottish Property Tax Reform.

The Scottish Local Tax Commission is undertaking a fundamental review of the Council Tax. It may recommend structural reform of the present tax or indeed some new form of domestic taxation to fund local government. This reflects the fact that many are highly critical of the tax. But what is it that people do not like about Council Tax? To understand the main criticisms we need to first say a little bit about its context and its design or structure.

The Council Tax emerged quickly in the aftermath of the fall of Mrs Thatcher in late 1990. It was a political solution to the many problems of the poll tax, not least of which was the non-collectability of the Community Charge and the remaining hostility to a return to the old Rates system, which politicians believed was unacceptable to home-owners. The objective was to neutralise the political toxicity of local taxation but to do so in such a way as to retain the less salient but nonetheless attractive features of the poll tax system of local government finance, such as personal discounts for single adults and single person households (at least this was the view at the time from the perspective of central government).

The Council Tax was therefore something of a political compromise, a fix that would allow normal political life to resume. Of course, from the vantage point of a number of years later it is easy to say that this was unlikely to work well over time, if measured against sensible criteria (technical feasibility, fairness, wider impacts, local accountability, etc.); however, the setting up of the council tax had much shorter time horizons, it was done very quickly and did not carefully consider its longer term impact.

There are several key features of the council tax as it applies in Scotland today. First, it is based on property values set as they were in 1991 (or if built subsequently they are valued back to an imputed 1991 value). Only in Wales have council tax valuations been updated since 1991. This principle of not carrying out a general periodic revaluation stems from the political desire to avoid the previous problems with rates revaluations, which were perceived to be so unpopular with (voting) home-owners.

Second, and trying to retain some of the more attractive elements of the poll tax, personal discounts were offered to single adult households. Along with exempted properties, this means that around only 55% of Scottish dwellings are liable for the full Council Tax charge.

Third, properties were banded into 8 bands such that each property within a band faced the same liability. Moreover, the actual payments for each band were deliberately compressed in terms of their differentials (another olive branch to home owners). As Figure 1 describes, this meant that those with the lowest values (under £27,000 in 1991 values) paid 2/3 of the reference Band D and those in the highest Band (H), with properties exceeding £212,000 in 1991 values, paid twice the level of Band D. We can also see from Figure 1 that the bandings do not relate well to the proportions of properties in each band with more than 3/5 of all properties in the lowest three bands and only one percent in the top band. The Burt Review in 2006 noted that they could not find any other country that taxed property, also used a banding system of some kind. Comparing Band A with Band H, we see that properties are at least nine times more expensive but pay only three times more in Council Tax (and thereafter more expensive properties for instance in excess of a million continue to pay only three times more than the lowest valued properties).

Figure 1: The Council Tax

Fourth, Council Tax is a hybrid in that it has property tax and personal tax elements but it also had a rebate system to help those on low incomes providing up to 100% support for those on social security such as income support. This changed after the 2010 UK General Election when in England Council Tax Benefit was cut by 10% and decentralized. In Scotland, the Scottish Government chose to pay the 10% form the Block and broadly retain the old system under the new name of Council Tax Reduction.

What are the main problems with the Council Tax?

• The absence of a general revaluation. While we can probably understand the political calculation of simply not revaluing, the long-term effect is corrosive. Not only is increasing resource required to value new properties back to 1991 values; but more importantly we have no sense of the adequacy of the banding today. Have properties and their neighbourhoods remained static in relative terms and not risen or fallen with economic and social change? This is highly unlikely – some neighbourhoods of course did not exist in 1991 or have been radically recast by processes of development, gentrification and absolute decline. The Burt Review noted that between broadly 1993 and 2005 Scottish house prices rose by around 90% while in the same period Band D council tax increased by 10% – this also masks wider local variation. This is actually an argument about fairness – property taxes can only work if they are regularly and consistently revalued and this is set in stone by statute.

• Council Tax has regressive features. As a percentage of property value, lower valued properties pay a larger proportion of their value in Council Tax than do higher valued properties. To the extent that the distribution of property values proxy for wealth this would seem to be unfair. This is a direct consequence of the banding system. Work done by the Burt Review in 2007 also suggests that lower decile income groups tend to pay an increasing share of their income in Council Tax but that it falls once we are over the median level of income. Households in the top two deciles pay the lowest proportion of their income in Council Tax. It is also the case that the poorest 10% appear to pay more than anyone else despite income-related assistance and this may reflect greater labour market insecurity and self-employment within this group – a segment likely to have grown since Burt was published just before the financial crisis.

• Council Tax also appears to have perverse effects across regions. In work for the Joseph Rowntree Foundation, Chris Leishman and colleagues report that Council Tax as a proportion of property value was higher in low value northern English regions compared to the home counties.

• All local taxes have to meet certain technical criteria if they are to be sustainable. They need to be collectable and Council Tax scores reasonably well on that score but it does less well in terms of buoyancy and yield. Buoyancy concerns the extent to which the tax base rises with general economic growth and incomes – retaining 1991 values does not help this of course and we saw that the yield has trailed well below house price growth despite the net additions to the housing stock. Moreover, in Scotland we have had 8 years of Council Tax freeze, reducing the real cost of the Council Tax and its share of local government revenue.

In a single sentence – the Council Tax was designed to be the most inoffensive possible tax with which to salve unruly home-owners but in so doing it undermined its long term coherence as a valid form of taxation. The implication for the Local Tax Commission is whether adjustments to the Council Tax in the form of re-banding, re-weighting bands and offering a commitment to regular general revaluations, would be sufficient to establish a durable, fair and efficient form of taxation, or whether it is necessary to look at more radical alternatives?