Evidence on Council Tax Reform
by Ken Gibb
Local Government Finance and the Reform of the Council Tax
Written Evidence to the Local Government and Regeneration Committee Evidence Session, 20 January 2016, Scottish Parliament
Professor Kenneth Gibb
Council Tax is the local tax levied on households in the UK including Scotland. In 2013-14, total local government revenue was £12.5 billion. In 2013-14, just under £2 billion or around 15% was raised by council tax. In 2015-16, this amounted to 32% of Scottish public spending. If police and fire had not been taken out of the local Government settlement, that share would have risen to 36%. The recent Scottish budget for 2016-2017 shows the levels of local government spending. The headlines are that local government spending will fall in nominal terms from £10.757 billion on 2015-16 to £10.152 billion in 2016-17 (annex G table 4), and this is larger in real terms.
A key feature of central-local Government relations in Scotland since 2007 has been the Concordat, which has loosened various controls on local government (e.g. the ring-fencing of certain spending programmes) in return for, among other things, an on-going freeze on band D council tax levels. This has been in place for eight years and the cumulative budget implications for the Scottish Government (who de facto top up grant to cover the cost of the freeze) of adding a further £70m to the cost of the freeze each year is that after eight years it now costs an annual £560m. The 2016-17 Draft Budget proposes a further ninth year of council tax freeze.
Council tax was introduced across the UK in 1993 and sought to provide a credible way of raising local Government finance, which would be broadly acceptable to citizens. This was done by creating a hybrid property and personal tax wherein the property tax elements were softened by employing eight bands linked less than proportionately to band D (the reference band), reintroducing a maximum 100% rebate for low income households and by retaining some of the elements of the community charge in the form of personal discounts for single adult households. All properties were valued at 1991 house price levels but were not subsequently revalued.
While the council tax settlement was supposed to take politics out of local government finance, it would be more accurate to say that it deferred the problem. Dissatisfaction grew with the tax over time and a number of inquiries and commissions (notably those chaired by Lyons in England and Burt in Scotland) sought to review local taxation – without leading to any significant reform. Under the UK Coalition Government’s localism and deficit reduction policies, council tax benefit was replaced by a series of local schemes with a 10% general reduction in overall support across England. In Scotland a new system of council tax reduction was introduced, ostensibly the same national scheme, with the 10% reduction reinstated through combined funding from Holyrood and town halls.
Finally, in the Autumn of 2014, the Scottish Government’s Programme for Government announced the establishing of an all-party (and also independents) Commission on Local Tax Reform (CLTR) co-chaired by the minister of local government and the President of COSLA (note the Conservative party did not participate). The Commission was charged to look at fair ways to reform local taxation (just the domestic sector) and to consider the future of the council tax freeze. I gave evidence to the Commission and co-authored (with Linda Christie) an international evidence review. The Commission reported in December 2015.
The Commission concluded that the council tax needed to be replaced and that the freeze should end. It did not however categorically support one form of local tax as its preferred solution but rather made the case for three alternative local taxes: a property tax, a local income tax and a land value tax, exhorting the political parties to come forward with their own proposals for the Scottish election in the Spring of 2016. To this end, the Scottish Government is currently developing such proposals.
What is so Bad About the Council Tax?
There are several accounts of the problems associated with the council tax. First, it is regressive across space. Evidence from England indicates that low value regions in the north pay higher proportions of household income on band D properties than do households in the South. Second, a growing proportion of dwellings pay less than the standard council tax liability because of discounts and exemptions. Third, and perhaps most importantly, the council tax is regressive across income bands (as indicated 10 years ago by Burt) but particularly so in terms of the amount of tax paid as property values rise. Fourth, apart from Ireland who recently imitated the UK, no other OECD country has a banded property tax. The bands themselves are very odd, as indicated in Table 1, since their weights flatten the tax liability across different property values such that a band A property pays a 1/3 of a band H property yet the latter may be at least 15 times the value of a band A property. Critically, the council tax has not been revalued since 1991 which creates all manner of anomalies and leaves the market distribution of property value increasingly divorced from the historical 1991 distribution – it is widely recognised that regular revaluation is essential to a sustainable property tax system. These problems accumulate over time and reinforce each other so that the council tax system decays into greater disorder over time.
Local Taxes: International Practice
The research for the CLTR by Gibb and Christie reached the following six conclusions:
First, there is a disconnect between the economic and in-principle arguments about local taxes in general, and property taxes in particular, compared to how they are perceived by people and politicians. Academic commentators are widely positively disposed to property taxation but there is also recognition that as a salient, highly visible, presumptive tax, arguments over incidence (i.e. who ultimately pays?) are trumped by a narrower focus on ability to pay from current income. Ironically, this has led to many of the difficulties we see with property taxes around the world as governments attempt to assuage voters by softening the incidence of the property tax through postponing revaluation and by employing other measures to alleviate the symptoms. Finding the right way to compensate low income tax payers remains a critical issue for property taxation.
Second, how one judges the incidence of property taxation is also fundamental. If one starts from view that the property tax is one on housing services as opposed to wealth, then completely different conclusions are arrived at as to fairness.
At the same time, third, there are issues with local income taxes – they are only as fair as how they are defined in practice and how progressive the wider income tax structures that they operate within actually are. There are other questions about the degree of local autonomy they afford and the extent to which they may have volatile yields, operate pro-cyclically and whether they induce fiscal mobility of households and firms.
Fourth, land and property taxes may have desirable impacts on housing markets and land use but that also depends on design – there is plenty of international evidence suggesting it can go wrong. The evidence shows remarkable variation in all of the key aspects of property taxes: tax base, assessment method, tax rate-setting and help for households. This generates a large set of design choices for property taxes in practice.
Fifth, systems of local tax and the inter-governmental finance and distribution of services are highly idiosyncratic. They are the product of long periods of evolution and punctuated periods of reform. With such different contexts, design details and complex interactions with other taxes, one must be cautious about reading too much into the simple transferability of local tax systems across nations with often very different governance institutions.
Finally, and returning to Burt and the other cross-national reviews, it is apparent that cities and national systems of local government typically have more than one local tax at their disposal and frequently have many taxes at their disposal. More taxes of lower yield but revenue neutral overall may also of course reduce revenue risk as well. One would need to evaluate the administrative cost of their development and running costs as well as their own buoyancy and capacity to generate revenue. In an international context, nonetheless, it remains odd to restrict oneself to one form of domestic local tax.
Options for Change
- Do Nothing – the main reason for doing nothing is the political difficulties and unpopularity of changing already unpopular local taxes. However, doing nothing leads to worsening problems and today’s denial is tomorrow’s bigger problem. However, we seem to be at a stage in the debate where some change is likely to be forthcoming so this remains an unlikely long term position and of course all of those problems identified above with the status quo continue to apply.
- Minor tinkering. In a recent interview, the first minister indicated a possible way forward introducing new bands and possibly re-weighting the intervals between bands, but not seeing the need for a general revaluation (a more palatable but less technical and probably less sustainable short run reform). Yet, there is no escaping the need for revaluation for a property-based tax. The 2016-17 Draft budget also indicated that the Scottish Government was considering and would consult on assigning devolved income tax to the local authorities the tax was raised in. This is potentially quite problematic and should be considered very carefully.
- Earlier in 2015 the Oxford University economist John Muellbauer proposed a more comprehensive reform of council tax which would add a an extra high value property band, exempt the first £40,000 of all properties, undertake a general and regular revaluation and offer deferred payments to address the cash poor asset rich owner occupier problem. His concern was as much to help use council tax to subdue house prices and employ better ways to address inequity in liability.
- In 2006, the Burt Review clearly came out in favour of scrapping council tax in favour of a simple tax on newly assessed capital values (introduced in Northern Ireland but still called the rates). This was the proposal rejected by the then first minister before it was even published. Burt also argued that a revenue neutral local income tax would impose too high an additional marginal tax on incomes and would likely promote net migration out of Scotland. He also concluded that Scotland would not tolerate a dual solution of property and income taxes, as it would be seen as an increase in taxation.
- A land value tax – taxing the economic rent from land, a proposal widely supported by economists and by many others, too (e.g. Iain McLean and Andy Wightman). There would be technical demands (though not insurmountable) in creating the land tax base and there could be major redistributional effects resulting from initial capitalisation of the new tax on land and property values, which might require transitioning or compensation. Undoubtedly, there would be vocal losers from such a tax reform. LVT might alternatively be established as a central or national level tax alongside other combinations of local taxes (something similar was once proposed by Muellbauer).
- In our evidence to the Commission, we proposed an initially revenue neutral dual tax solution, primarily a property tax along the lines of Burt’s 2006 proposal but augmented by a relatively small income tax component. This latter element was in part to reflect the predominant public concern that local taxes need to in part to be based on current income as well as wealth but also that it was important that the income tax element was locally set and was not an assigned revenue from national taxation. As a small contribution it would be less likely to have revenue risk consequences in the form of fiscal flight.
Tax Reform and the Council Tax Freeze
Tax reform is hard enough but significantly further complicated by 8 years of the freeze. Politically, it is recognised that council tax freeze is popular, it keeps bills down, and that therefore there are no votes in ending it. On the other hand, it undermines local democracy and accountability. And it has an annually increasing and extensive opportunity cost in lost Block spending resources. It will cost £630 million in 2016-17. Assuming that an incoming Government later in the year does bite the bullet, how do you rewind the freeze – could there be a phased removal over a Parliament? Reducing the cost by even £125-140 million a year would produce substantial extra public funds for housing, infrastructure and other pressed budgets. Moreover, there could be caps or other incentives to keep council spending below some agreed norm (e.g. RPI & X%).
Further Stages of Necessary Reform
Local government’s challenges are not just about domestic taxation. Actually, there are a series of linked problems to do with the role of local government and its relationship with Holyrood (I.e. How public services are divided between the tiers) as well as the geography of local government and its wider financing (the balance of funding question between locally and centrally raised sources of finance). In an earlier study we talked about the Rubik’s cube problem of local Government: we tend to address one of the these issues at a time or fail even to see the other dimensions, rather than work towards a genuinely comprehensive solution recognising the interdependence of the problems of funding, functions and geography.
Why is it so Difficult to reform Council Tax?
Tax reform is hard. Local taxes are presumptive because they are highly visible making them unpopular, no more so than when revaluation of property taxation is considered. But Government cannot simply be devised to be populist – it has to do the right things and pay more than lip service to ‘difficult choices’. Failing to deal with the funding of local government finance is ultimately going to fail the people who use these services. The idea behind the Commission, seeking a clear all-party common line about reform, was correct and an obvious lesson learned from the Burt expert approach in 2006. However, the Conservatives did not join and within hours of publication, it was clear that beyond agreeing that the council tax must be reformed and the freeze ended in the future, there was little wider agreement and three quite open reform options proposed. We will see what this actually delivers in term of the detailed government response to come and subsequent manifesto commitments.
But there is also much to gain from better land and property taxation i.e. supporting a more sane and stable housing system, one less obsessed with property wealth. There is increasing concern with wealth inequality and it is currently significantly transmitted through an often arbitrary housing market that is lightly and inefficiently taxed, such that it incentivises mass and undiversified savings into bricks and mortar and discriminates against both rental housing and other more productive forms of savings and investment. The economy grows less, risks are greater and we have a poorly functioning housing system as a result of not tackling housing investment taxation, as well as new supply and housing finance. In the same way that local taxes are part of the wider long term reform agenda for local government, property taxes are part of the bigger picture seeking to address housing in society and the economy. This will be equally if not more challenging but arguably is as important.
Table 1 Strategies for Property Tax Reform
|Issues & Problems||Promising Approaches||Problematic Approaches|
|Salience: property tax (PT) is more visible than other taxes||Link tax reforms with improvement in local services
Withhold tax at source and other payment options
Property Tax capping
|Liquidity constraints: imperfect association between taxpayers’ incomes and PT especially for seniors||Tax deferrals for seniors
More payment options
|Perceived regressivity: taxes higher as a % of income for low income taxpayers||Tax credits
bundle with other tax reforms
Bundle with spending changes
low-income housing exemptions
Classified tax rates
Progressive tax rates
|Volatility: potentially large swings in taxes for some taxpayers||Annual reassessment
Communication in understandable forms
|Presumptive Tax: taxbase is inherently arbitrary||Taxpayer education
Accessible appeals process
Classified PT rates
|Inelasticity is problem for Local Government, not for taxpayers: taxes do not increase with econ growth||Annual reassessment
Source: Slack and Bird 2014 Table 1 – in Gibb and Christie, 2015..
Table 1 suggests some promising and other less promising ways to make progress reforming property taxation. The synthesis of different local tax experiences across countries tell us a lot about property tax reform and how difficult it can be to achieve. One might reasonably conclude that there were many in-built problems with council tax as a model from day one. Moreover, anticipating that there may be short run transitional problems in advance of what are believed to be desirable long-term consequences of well-designed reform, is one important way to mitigate and lay the ground for reform.
 Don Peebles (2015) Council tax in the context of local government finance. CIPFA Scotland
 Alan Campbell (2015) Local Government Finance Facts and Figures: 1999 – 2016 Financial Scrutiny Unit Briefing, SPICe.
 The remit was to identify and examine alternatives to the council tax that would deliver a fairer system of local taxation. In doing so, the Commission also considered:
· The impacts on individuals, households and inequalities in income and wealth.
· The wider impacts, including housing market and land use.
· Administration & collection, including transition and subsequent operation.
· Potential timetables for transition, given the 2017 Local Government elections.
· The impacts on supporting local democracy, i.e. financial accountability and autonomy.
· The revenue raising capacity of the alternatives.
 This is an edited version of our report conclusions.
 Slack, E and Bird, R (2014) The political economy of property tax reform. OECD working papers on fiscal federalism No. 18.
 Interview in the Sunday Post online 14 November 2015: https://www.sundaypost.com/inside-the-sunday-edition/nicola-sturgeon-looks-back-on-a-year-as-scotlands-first-minister/
 Gallagher, J, Gibb, K and Mills, C (2007) Rethinking Central Local Government Relations in Scotland: Back to the Future? David Hume Institute/University of Glasgow, Hume Occasional paper 70