Scottish Council Tax Banding Reforms

by Ken Gibb

I was back giving evidence this morning at Holyrood. The Scottish Government has drafted a statutory instrument that seeks to increase the weight and consequent charge applied to properties in Band E, F, G and H. They have also proposed an amendment to the means-tested Council Tax Reduction Scheme (CTRS) such that those households on below median incomes who do not currently receive CTRS will be eligible for all of the increase being met by the CTRS if they are in the higher bands. The extra £100m that this will generate will be hypothecated to support the national priority of closing the educational attainment gap. Finally, it is proposed that the long standing council tax freeze will be replaced by a cap allowing up to 3% increases in annual average council tax bills.

There are wider related issues as well concerning ongoing consultation over localising a share of income tax receipts so as to promote local economic growth.  Second, the Government is also consulting over taxes that encourage the reuse of vacant and derelict land and tax development. Finally, councils will be given the power to charge the full council tax on second homes.

The whole process around the Statutory Instruments and related immediate changes is highly truncated with the rapidly approaching new financial year, changes to CTRS, the new cap – and of course local elections thereafter in 2017.

The proposals are the outcome of the process begun by the Commission on local tax reform. The proposals need to command a majority in Parliament. Not everyone in Holyrood agrees with this current band-tinkering direction of travel (e.g. the Scottish Greens).

There is interesting written evidence on the site, not least from David Bell and form the former minister and co-convenor of the Commission, Marco Biagi.  In the section below, I paraphrase the main reflections in my written evidence.

Reflections on Reform and Beyond

Is the proposal package more progressive (i.e. ‘fairer’)? It makes a regressive tax less regressive and offers significant exemption and hence compensation (albeit through a means-tested route) to all of those on below median incomes. The changes proposed do not appear on reflection to be massively difficult for councils to implement though there will inevitably be opportunity and transaction costs. However, I think there are wider questions and concerns.

While there was not complete consensus on the Commission for the action recommended there was agreement on the need to end the council tax and the freeze. What is being proposed, especially given the absence of a general revaluation, is clearly what the Scottish Government, in carrying through manifesto pledges, feels it can do. But what is maximal for them is less than the minimum in the context of the reasonable expectations generated by the Commission. My worry is that without further commitment to substantive reform we will back in five years saying here is a property-based tax which sets values on market levels from 30 years in the past. The weighting may be more fair but the values that place properties in bands will be in most cases wrong and increasingly illegitimate. It is hard not to see this as a political fudge which does not resolve the underlying problems indicated above.

A second point is that fairness with property taxation is complex. It is not just about tax in relation to current income (important as that is) but it is also about the importance of inequality transmitted and reflected in the housing market and the relative failure to tax housing as an owner-occupier investment. While we repeatedly hear of the importance of social justice and tackling inequality, one of the key sources of that inequality (as well as damage through market volatility to economic productivity) is apparently sacrosanct. Moreover, as John Muellbauer at the University of Oxford pointed out, there are other ways to support low income households pay their local taxes, such as through allowances (like the Greens proposed), deferred payments as well as well-designed benefit systems.

Third, while the CTRS reform is in many ways a neat solution to compensating those in low incomes in higher value properties, it does add a further layer of means-tested complexity, and it is not clear at this point what will be done to ensure the highest levels of take-up. This is all the more germane given that the exemption would go much further up the income scale to immediately below median net incomes. There is a tension here with government policy elsewhere which will likely lead to councils setting full council tax on second properties on the basis to bring properties into more efficient use, yet at the same time CTRS is being used to help households stay in properties that are often only marginally affordable, if that.

Fourth, I was surprised that it was deemed unnecessary to carry out an equality impact assessment for the CTRS and that no wider assessments were required for either the tax change or the CTRS. The £7m figure for the additional cost of the CTRS must have assumptions about take up rates – it would be interesting to know more about these – as I think there would be grounds to think that rates might be relatively low. Additionally, aren’t the lessons from the land building transactions tax introduction that these sorts of tax changes do have market effects at the upper end of the housing market and that this is likely to have some degree of impact on when people decide to move how and could conceivably affect the labour market decisions of higher net worth households. I would have thought that was something working looking into.

Fifth, while ending the freeze and giving councils back the power to charge full council tax on second homes provides more discretion locally, this is offset by the implementation of hypothecation the extra £100 million to a national government priority.

Following the evidence session this morning, a few final thoughts struck me.

First, the truncated nature of the process has left a few uncertainties. There was a lengthy discussion this morning about the mechanism by which the £100 million for education will be managed and allocated locally. Second, we are unclear about the timeline and practical proposals for the localising of income tax receipts. Third, there is clearly no appetite for revaluation within the Scottish Government but the underlying problem and entropy of increasingly non-credible valuations will not go away. Fourth, there may be other unintended consequences and transaction costs if many high band property households seek to have their homes revalued down to lower bands – though I do not know the scope in practice for people to do this.

All in all, to paraphrase Marco Biagi, concerning the council tax, few people would have started from where we are now but equally on reflection how many will be happy with where we have ended up?