Labour’s New Property Tax Proposal

 

Today, Scottish Labour announced their contribution to the reform of the council tax following the recent Local Tax Commission. To recap, while the Commission proposed replacing the council tax and ending the council tax freeze, it left to the Scottish parties to announce their way of doing this in the election campaign now upon us. The Commission called for a property tax alternative, perhaps with an income tax-related component but they kept it at a high level of generality.

The Scottish National Party announced modest reform proposals to increase the weighting on the top bands, protect low-income households in higher value properties, to end the freeze (subsequently capped) but remarkably did not propose to undertake a general revaluation. This was a minor tinkering of the present council tax and difficult to square with the bottom line of the Commission’s recommendations.

Interestingly, these proposals were strikingly similar to those of the Scottish Conservatives, who did not take part in the local tax commission. However, it has been suggested that this is maybe a short run solution for the SNP leadership with further reforms somewhere in the future. Similarly, the SNP, if re-elected, will use some of the Scottish income tax revenues to supplement local resources. This has been linked (rhetorically at least) to more use of incomes within local revenue sources, though it is not clear at this stage of the consultation process how this will actually work.

It is in this context that Scottish Labour announced their plans today. They propose:

• A new property tax based on a general capital value revaluation (they seem to have taken seriously the worries displayed about not revaluing and the commission’s evidence that around 3 in 5 properties are now in the wrong band).
• The idea would be similar to the 2006 Burt model (a fixed % tax on capital value) but attenuated in a number of important ways: properties worth less than £180,000 would pay £450 plus 0.35% of value and those above £180,000 pay 0.9% with a maximum tax bill of £3,000. Thereafter, increases will be capped at 3% a year.
• Rebates would remain to help low income households.
• Local government would have options to take up a new tourist tax and apply a new land value tax locally but only on vacant or economically inactive land.
• According to their calculations, 80% of households will pay less than currently, as a result of the switch to the proposed new property tax..

A couple of cheers for this policy proposal – the return to Burt-like principles of this property tax proposal is welcome, as is the recognition of the necessity for a general revaluation. Second, the proposals to increase the local fiscal levers available to local government are also helpful. We do need more detail on the policy, its implementation and transition arrangements but this is a more radical and genuinely property taxation based alternative.

However, there are critical points. First, the percentage tax rates appear to be nationally set and invariant at local levels with local tax bills variation depending rather on how the overall tax bill increases each year and of course the local distribution of property values. In principle, this tax-setting by the centre is more top-down than either the council tax or domestic rates. However, on the other hand, the new additional taxes do provide greater local discretion.

Second, Andy Wightman has commented today that the £3000 cap is arbitrary and favours those with the highest value properties (and hence is not particularly progressive at the top end). Clearly the tax rates have been calculated to do two things – deliver a large majority of winners from the tax change but also cap the size of losses for those with the most expensive properties. That is a political calculation and one has to take a view about how acceptable it is.

Third, Andy also criticized the partial and limited use of land value taxation as a proposal just for vacant inactive land. This is not surprising given his position on land value taxation more generally. I also am a supporter of LVT as a possible way forward – at least in principle. Perhaps we should be more charitable and welcome the threshold that is crossed by proposing the tax in the first place?

Fourth, I think the tax proposal, as it stands, probably would not overcome the concerns expressed during the commission about the lack of progressivity with respect to current incomes – this remains a real barrier to the credibility of proposed tax reform in this area and why I for one advocated a property tax with a supplementary income tax element.

For those of us engaged with in the local tax commission’s work in different ways, it has been a rather disappointing few weeks since the launch of the Commission’s report. However, the proposals announced today do constitute real blue water between the parties and genuinely different approaches to local taxation. The debate continues.

Three (tax) strikes and you are out

A relatively little-mentioned aspect of this week’s budget was the continuation of the fiscal assault on buy to let landlords. As we know, the rate of capital gains tax has been cut but the private landlord has been exempted from this effective tax subsidy. The rate of CGT remains at the old higher rate for them. While this is only a relative disadvantage compared to other forms of assets, it is a continuation of a process whereby the Treasury has accumulated fiscal penalties on the sector over the last year or so (reducing tax relief to the basic rate for interest on borrowing and also the 3% hike on all rates of stamp duty quickly replicated in Scotland).

The rationale from the UK Government is two-fold: they want to pursue a tenure-based housing policy that promotes the growth in home ownership and are of course pursuing a range of more or less credible policy proposals to do just that. Second, however, they are justifying this approach insofar as it means reducing the incentives to invest in private renting (or stay in the sector), because the Bank of England published its view that BTL investment may be pricing out home owners and creating bubble like inflation in the housing market (that needs to be moderated).

The logic of this argument is I think pretty ropey. It is one thing to say that rental investors are bidding up the properties they purchase (they obviously are very active and taking a large chunk of new lending and yes may be pushing prices up a bit); but it does not follow that by choking off the return to such investment via blunt fiscal interventions will (a) deflate any such bubble (whether or not it is a real issue consistently or largely outside of the Metropole) or (b) that this will in the short to medium run actually make things better in terms of the supply of housing. Let’s unpack the argument a bit.

A THOUGHT EXPERIMENT

Clearly, private renting and owner-occupied segments of the housing market are interdependent – they are a more or less functioning system where change in one affects the other. In recent years, largely though not wholly as a result of the non-affordability of home ownership and linked  long term supply shortages, demand has grown and supply has responded on the rental market to accommodate unfulfilled home ownership demand and, to an extent, meet new demands independent of this frustrated non-owning segment. Intervening through fiscal levers to make the rental sector less attractive may well reduce new investment and stimulate disinvestment – slowing the growth and even reducing the sector’s actual size. But there are least three problems that arise in this system where I think the Treasury is not thinking it all through.

First, it will take a long time for any downward pressures on prices caused by a landlord or investor exit to impact on house prices to the extent that they make a material difference to potential first time buyers (and it is questionable if this would ever be the case in some parts of the U.K.)..

Second, the PRS is not the only force acting on house prices – there remains the chronic weakness of new supply to deliver and the myriad host of new announcements and policies supposed to unlock housing supply, as well as of course other demand side policies like Help to Buy.  Where is the evidence that this strategy adds up or that BTL is the critical driver of prices?

Third, in the (potentially lengthy) intervening period while we wait optimistically for this supply renaissance to deliver large numbers annually of a range of owner-occupied supply to locations where there is demand and a good proportion of it is accessible to potential purchasers – just where are the growing number of households going to be accommodated? Will a shrinking rental market simply not reduce the options for people to rent and bid up market rents?  Surely, this continuing long term problem in the home ownership sector is precisely why we need a well-functioning, better regulated (e.g. longer length of tenancy) and well policed rental market? Actively trying to make it less competitive and less attractive to investors is simply wrong-headed.

The quiet man loudly leaves

Last night we heard that Ian Duncan Smith has resigned as Secretary of State for work and pensions, apparently in response to the Chancellor’s budget this week which had sought further large cuts in welfare benefits, this time targeting the disabled through Personal Independence Payments. This was deemed  unfair in IDS’ resigination letter contrasting low income working households facing cuts while higher income groups benefited from proposed tax cuts. Others have attributed the departure from his post in part at least to the growing divisions over the Brexit referendum.

As the dust settles, how should we assess the IDS tenure in DWP?

While in opposition, IDS laid the groundwork for his subsequent policies via his Centre for Social Justice. The welfare reforms that followed were in part a strongly held set of convictions developed by the politician but they were also an opportunistic response to the Government’s narrative around the deficit and the chance to clobber the poorly designed and high cost housing benefit system. So, from the very beginning in 2010, we have had two forces operating broadly together: the desire to make comprehensive reforms and a new settlement for working age households across the means-tested benefits regime, and, at the same time, a Treasury-led (but DWP supporting) downward squeeze on spend either directly or through increased conditionality. 

It is difficult to see the process of reform and cuts as anything but the two departments working closely together and apparently broadly as one.

In previous posts I have been I think consistently critical of the welfare reforms since 2010. But to be clear, there is a case in principle for a single or greatly simplified means-tested system of support for working age households. But it was always going to be difficult to achieve and made much worse by the climate of deficit reduction and cuts. I have also many times written about the structural problems with housing benefit that predate IDS and in many ways are still with us. But that is not an argument for  the reforms we have actually seen.

There are many concerns, for example:  the exclusive focus on working age households and the difference in treatment between old and young (remarkably raised in the IDS resignation letter); the aforementioned conditionality/sanctions regimes; the massive challenges to make universal credit the comprehensive benefit it is supposed to provide; the management of live updates to the UC system; the treatment of housing costs in the UC system; the ideological disinterest with evidence on impacts and behaviour (and actual outcomes); the spare room subsidy or bedroom tax. One could go on or simply look at the back file of Paul Spicker’s blogs.

Even if you were a fan of the reforms, it would be hard to say that independently they have made the sort of progress hoped for; only that it costs a lot to make change and that UC has a long way to go. Cutting spending on social security is hard and you are not of course fully in control of it. Moreover, it should take time to design and launch and then transition the system. It is not going to win short to medium run political plaudits. 

What happens next? Will the new Secretary of State change things? I can’t imagine a big shift in direction any time soon but there will be smaller scale opportunties to make eye-catching announcements and reforms. Perhaps these will be progressive and coherent but I am not hugely optimistic. Meanwhile HM Treasury must be under real pressure over the PPP proposals. Whatever else, the resignation and the problems between IDS and the Chancellor demonstrate the internal divisions in parts of the present Government, especially with the backdrop of the EU referendum. And it is only March.