What People Think About Local Taxes

 

The final report of the Scottish Commission on Local Tax Reform is believed to be only a few ‘weeks away’. The idea is that the recommendations will help inform the Scottish political parties in the their manifesto development for the May Scottish elections. The main issues that the Commission will report on are:

1. To ask to what extent the council tax needs to be reformed from minor adjustments to significant reform, to abolition and replacement with an alternative form of local taxation?
2. If it is replacement, what for of local tax are we talking about?
3. What is to be done about the council tax freeze, now in its eighth year?

This discussion has been framed around specific criteria that informs the Commission’s work:

“The Commission on Local Tax Reform’s remit is to identify and examine alternatives that would deliver a fairer system of local taxation to support the funding of services delivered by local government.

In doing so, the Commission will consider:

• The impacts on individuals, households and inequalities in income and wealth
• The wider macro-economic, demographic and fiscal impacts, including housing market and land use
• The administrative and collection arrangements that apply, including the costs of transition and subsequent operation
• Potential timetables for transition, with due regard to the 2017 Local Government elections
• The impacts on supporting local democracy, including on the financial accountability and autonomy of Local Government

The revenue raising capacity of the alternatives at both local authority and national levels.” [CLTR Website – Commission Remit]

To whet our appetite and keep us interested until the final report is published, the Commission last week published an analysis of the submissions they received from the public.

There were 4,492 responses to the Commission’s online survey. The sample was not entirely representative. Not surprisingly, there were a lot of people with Band D or above council tax bands, often men, over 55, home-owners and full time workers – all of whom were over-represented.

The main findings included:

• The majority thought that the council tax was easy to pay and understand.
• Three quarters thought that local tax should not be based on everyone paying the same amount; over half felt it should be broadly related to income.
• Regarding views about the council tax – over two-thirds did not feel the council tax was fair; almost half felt it was unclear how council tax payments related to spending on local services; almost two-thirds felt the council tax should be replaced.
• Respondents were asked if there was one thing they could change about council tax what would it be? Only 4% raised the council tax freeze. About a quarter who responded focused on changing the current bands and revaluation. However, to quote the executive summary, many did focus on wider tax reform.: “Almost half of the respondents … said that the main thing they would change about the current system is the basis of taxation. A hybrid tax was the most frequently mentioned of these options, with many supporting a mix of tax based on property, land, wealth and income. Many didn’t comment on their reasons for these suggestions. However, those who did felt that hybrid options which took into account a combination of factors would be fairer than a single system”.

While I would not overstate these views, they are interesting. A hybrid tax or indeed multiple taxes are not uncommon elsewhere and can offer offsetting dimensions e.g. taxing land and/or property but also making a local tax contribution through an income tax supplement. However, the Burt Commission in 2006  rejected a multiple tax system or indeed any alternative to a straightforward property tax.

There is an interesting paradox here. The pure property tax solution proposed by Burt remains a difficult choice politically (despite its many attractions to me) but a hybrid or combination of property and income taxation (starting as a revenue neutral tax) appears to have mileage in some quarters. Many countries have multiple tax systems and the UK is at the end of the spectrum with just one domestic local tax and (outside of Ireland who copied the UK) the only banded property tax.

We will know soon enough what the Commission has to say and I hope, at least, that it is not rejected in the summary way that Burt’s careful and comprehensive analysis was by the then Scottish Executive in 2006.

 

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Housing’s Autumn Statement and a View from Scotland

I have just read Alex Marsh’s excellent post on the housing elements of the Autumn Statement/Spending Review. The key things that I agree with that are worth repeating are, first, that this is a full-blooded return to tenure-based rather than an (all) housing strategy (I particularly liked the proposed renaming of shared ownership as mostly renting). Second, this does indeed look like a serious threat to general needs social housing development in England. Third, as Alex says – there is absolutely no guarantee that the measures proposed and the money directed to home ownership/shared ownership initiatives will actually deliver the scale of change required. That depends on the market and levels of activity. At the moment these claims for housing supply are just words that need the market and local planning functions to accommodate them if they are to approach reality. They did not in previous rounds of housing supply claims made by the Coalition Government. Fourth, it is certainly not all bad – the planning reforms outlined in the statement may in the longer term actually be quite positive but we need to see the details.

A few other points that are housing-related. First, the decision to squeeze social sector housing benefit further by capping it at Local Housing Allowance levels will have most impact in the short run on single people and will matter more regionally where LHA rates are closer to social rents. But there is also a longer term question that arises – is this the first stage of the process of unifying Housing Benefit for all tenants across a common allowance like structure? More broadly, the reversal on tax credits neither reduces the long term impact of their absorption into Universal Credit nor does it resolve the issue of how the Government makes it additional £12 billion in welfare savings. This has just been pushed off stage for a wee while.

Second, I am a bit more sanguine about the stamp duty changes proposed by the Chancellor on buy to let landlords (less so for second homes) for several reasons. The first is that we are told that this will help fund affordable housing and it is not clear to what extent that this hypothecation will be the source of funds rather than a general contributor to the pot. I raise this because for one thing both in rUK and in Scotland the new tax rates have delivered less than projected revenue – a timely reminder of the standard risks of hypothecation. It is all very well to target a tax revenue source but it is another thing to guarantee that it will raise the required funds.

A related point is that SDLT or LBTT (the Scottish acronym) is simply not a very clever tax in that as a transactions tax, it inhibits mobility (as the Mirrlees Review makes clear  and far better to raise revenue from property with an annual tax. Instead Osborne is ratcheting up the transactions tax with one presumes more market consequences in the private rented sector. It is a little odd that private renting has been taking such a fiscal buffeting with the reduction in tax relief on interest on borrowing at higher rates of tax and now this further tax. From a wider housing system point of view I don’t think we should deterring investment in this non-neutral but populist way. Intervention should be more about regulation. Interestingly in Scotland (where Osborne’s BTL/second homes stamp duty changes do not apply), we are about to legislate to support tenants and longer tenancies (but also introducing second generation local rent increase limitations in areas designated to be high pressure).

Meanwhile in Scotland we wait to see how this translates into the draft Scottish budget in December when we will also hear for the first time what the proposed Scottish Rate of Income Tax will be for 2016-17. The  SR headlines  thus far are that capital spend will increase by 14% in real terms but revenue funding will fall in real terms by 5.7%. John Swinney has also been helped by the ONS’ decision that their non-distributing model of funding capital infrastructure (Hub) projects through the Scottish Futures Trust has not been reclassified into the public sector.

Unlike rUK, we have a Parliamentary election in May – so there is both a lot of party political noise obscuring policy debate but at the same time there is an opportunity to influence platforms and engage debate. Two examples of this are the SNP’s pledge that, if re-elected, they will up their affordable housing supply programme from 6,000 units per year to 10,000 units (in response to the new national needs figure of 12,000 per annum). Secondly, we anticipate the publication of the Commission on Local Tax Reform’s final report in the coming weeks. It is supposed to provide options to help the political parties to put forward their own local tax reform proposals for the election.

Fear is a Man’s Best Friend

With apologies to John Cale, fear probably is the appropriate word for many when contemplating the Spending Review, which is less than two weeks away. In recent weeks, several Scottish local authorities have warned us of eye-watering cuts ahead, of job losses and service reduction. In Scotland this is also in part to do with the council tax freeze; David Cameron, however, had less excuse when he contacted his constituency council to complain about its cuts.

I do not disagree with the general line taken about cuts and austerity that one would find in places like Mainly Macro  – this is a political choice that is more convincingly about shrinking the state than it is about the necessity for finding rapid fiscal corrections. However, with a majority government this is what we face and it is of course worth thinking about what HM Treasury may propose in the Spending Review.

To this end, the Institute for Government has published an interesting report by Daniel Thornton, Jonathan Pearson and Emily Andrews. Their premise is rather than doing more with less, the public services, particularly in the unprotected areas, will be managing with less. They note that while the cuts to public spending are not without precedent, the sustained nature of reductions over an entire decade, is new. In this context is there a way to a ‘smarter state’?

The authors argue that Departments have to show how they are going to achieve the SR objectives and continue to deliver what they prioritise. In the face of the Review cuts (whatever they turn out to be for specific corners of Government), each department should therefore publish their Single Department Plans by the end of the financial year (March 2016) with a short (i.e. feasible) set of priorities and achievable targets for the SR period and that this be supplemented by project implementation and workforce plans.

Second, the Government has a major projects portfolio and needs to assess which existing projects should be protected and which reduced or even ended.  Project failure risk has to be reduced as a priority by proactive government action, and, any new projects should be much more closely scrutinised before they are announced.

Third, they express muted enthusiasm for public service markets as ways of introducing innovation and efficiencies in to the public sector but recognise the ‘complex challenges in developing and managing effective markets for pubic services, and tee have been several recent failures’ (p.4). So, they recommend establishing a hub of expertise able to steward public service markets – this sounds like a new if necessary layer of regulation.

Fourth, recognising the undoubted importance of the devolution city deals and successive waves of such agreements, they argue for a principled approach to decentralisation. Of course, a key feature of city deals is the lack of a consistent process but rather a series of context-specific ad hoc deals, which look very different across the piece. But it is right that this process cannot simply be a top-down Whitehall-led programme.

Fifth, they recommend continuing to pursue the government’s ‘ambitious digital agenda’, but with strong oversight, including enforcing standards. This is critical to the high risk areas where digital by default is so exposed to possible failure; none more so than in the case of the roll-out and subsequent maintenance of the universal credit system.

Sixth, and in respect of arms-length businesses (which they argue can deliver efficiencies), the authors point to the wastefulness of some institutional reorganisations, which can be ‘disruptive, time-consuming and expensive’ (p.5). They argue instead for careful consideration of the  ‘do nothing’ case to be made and taken seriously whenever such institutional reforms are being actively considered.

Finally, the authors raise questions about the Government’s capacity to actually deliver the legislation it will need in some of these areas as a result of the SR. This needs to be fully considered when contemplating the kinds of changes discussed above. Second, they also question whether the civil service has the capability and capacity to ‘take on the challenge’ of the implications of the likely scale of change implied by the SR.

If we examine the likely SR proposals as they are understood and assess them against their own objectives, then there are a few critical points that can reasonably be made. First, Thornton and colleagues have demonstrated that there are many challenges to delivering the programme changes required and that adequate delivery requires a considerable  evaluating and monitoring infrastructure. Meanwhile, however, second, there are genuine issues about the capacity to deliver what would be required.

And in addition there is still the sense that the government will play short run political games and make 3rd best choices to achieve specific goals and often do this when they have not obviously thought everything through. Witness the recent unplanned bandying about of options to find the tax credit savings elsewhere in the welfare reform programme. At the same time, government continues to provide evidence of its lack of sure footedness over the things it proposes that are a part of this wider narrative.

On the other side of the Spending Review on the 25th, people like the IFS will provide detailed analysis of the Spending Review and I daresay there will be more posts. But I did think the Institute for Government’s analysis is a useful step beyond the big headlines and one that goes into just how the SR would actually be delivered in the departments where it will matter – and that it will not happen without much effort and further reform.

Housing the Lords

The House of Lords Select Committee on Economic Affairs yesterday announced that it is undertaking an inquiry into the economics of the UK housing market. The Chair, Lord Hollick, is quoted as saying that the reason for the inquiry stems for the fact that ‘there are serious issues with the UK housing market…young people in particular are struggling with the cost of housing, whether they are looking to buy or rent. There is an affordability crisis in housing.’

The Committee appears to have a refreshing approach to housing policy. The inquiry is concerned both with the supply and affordability of UK housing across all tenures and seeks to assess the effectiveness of government policies on the demand and supply of reasonably priced housing across the UK. 

Lord Hollick also says: ‘the time is right for a thorough evidence-based assessment of the economics of the housing market…is there too much emphasis on owning your own home, should we be focusing efforts on ensuring adequate affordable housing is available for rent?‘

The more detailed prospectus of questions in the call for evidence is divided by housing tenure and asks:

1. Home ownership – how effective have schemes like Help to Buy been and have they exacerbated the lack of low cost supply? Are there tax measures that would boost supply and affordability (they mention inheritance tax and stamp duty)? What impact will the mortgage market review have and should there be further changes? Are further changes to the planning system necessary?

2. PRS – what will the reduction in tax relief to landlords mean for the supply and cost of rental market housing? Will the current trend of the increasing PRS continue? What are the advantages and disadvantages of restricting rent increases in the PRS?

3. Social housing – what will be the impact of the RTB for housing association tenants? What will be the impact of the proposed rent reductions – are there additional or different changes to rents that should be contemplated?

After giving evidence to the Scottish RICS Housing Commission and playing an advisory role in the Shelter Scotland Housing and Wellbeing Commission, it is good to see the continuing of the process of evidencing and building consensus within a broad set of housing market and policy questions. 

A few further thoughts strike me in response to the call for evidence.

I welcome the sense of a systemic interdependent approach. Land and different tenures are not independent in a vacuum but are in fact a system linked to local economic and demographic drivers, cross-tenure spillovers, macroeconomic variables, institutions and a supply side dominated by the existing stock. The pursuit of rising house prices, pushes up land prices, puts pressure on rents and leaves us with a higher housing benefit bill. 

A focus on affordability always raises questions of definition. The phrase widely used in the call is low cost, which makes sense. I did however enjoy the reference to reasonably priced homes – shades of Jeremy Clarkson and Top Gear’s reasonably priced car. Definitional issues there, too.

I was also happy to see the explicit reference to the evidence base – something that too often does not convincingly underwrite housing policy of late. How much thought, for instance, was given to likely supply behavioural responses to cutting tax relief for landlords? Would less and more expensive rented housing be worth the tax reform (a change which is arguably a break with normal tax principles)?

It is refreshing to see the explicit questioning of the (normally uncritical) emphasis on home ownership. However, the call has for me too narrow a focus on tax policies in that it mentions neither council tax nor the continued absence of taxes on investment returns from home ownership. 

It looks like the Inquiry is seeking both micro analysis (on the impacts of Help To Buy and the effects of rent restrictions – currently s live issue in Scotland) and also more macro themes too (the discussion of the mortgage market has economy-wide importance).

The Call’s social housing focus is very much of the moment – RTB and rents – and given the interesting times we live in concerning social housing especially in England, this is not surprising. However the inquiry could also consider the economic implications of the sector’s recent reclassification and the proposals announced last week to end lifetime tenancies. There is also surely a case for thinking long term about how to fund social housing and in so doing seek a sustainable equilibrium funding model (something essentially missing since 2008).

It is UK in focus but of course there are now significant policy divergences across the four nations of the UK, not least with respect to attitudes to welfare reform – a key area of housing subsidy with important impacts on behaviour that are not addressed in the call. Are there lessons to draw and share from around the UK (let alone internationally)?

But I do not want to nit-pick (evidence submissions can of course cover other areas too such as the ones I have mentioned). This looks like an important opportunity to have a wider and more sustained analysis of what ails UK housing, and to reflect on both short run and long term policy proposals that can help steer the UK on a path that would help meet the aims of the Inquiry. It is to be welcomed.