The annual setting of council tax rates invariably generates media headlines and 2023 is proving no exception. But 2023 also marks the 30th anniversary of the introduction of council tax and it is timely to reflect on issues which don’t often feature in public debate but perhaps should.
There’s an element of ‘if it ain’t broke, don’t fix it’ but underneath the surface, the foundations of council tax look increasingly shaky. Most obviously, the tax is based on hopelessly out-of-date property valuations. Another issue is the regressive impact of the tax. In 2020/21 local taxation accounted for 5.9% of gross household income for those in the lowest quintile of the economic distribution but only 1.4 per cent for those in the top quintile.
But what might be a better system of local taxation? Reform of council tax is possible with an extra band having been added in Wales and ratios between bands revised in Scotland. But such steps don’t address problems inherent to the fundamental structure of the tax and periodic reviews (e.g. 2007 Lyons Inquiry in England, 2006 Burt Committee in Scotland, 2015 Scottish Commission on Local Tax Reform and most recently 2021 work by the Welsh Government) have considered three further options.
First is a Local Income Tax (LIT). LITs are well established around the world and are used in half of OECD countries. The link to income means a clearer relationship with the ability to pay. The need for property revaluations ceases to be relevant.
On the downside, LITs impact more on people in work than those with accumulated wealth. Yield can be unpredictable. Unfairness can be felt if income is limited to wages but if the responsibility rests with councils that creates difficulties. The Welsh Government review concluded a Welsh LIT would require a whole new administrative infrastructure for collecting income information including universal self-assessment tax returns. A LIT is therefore not as straightforward as might first appear and its introduction would require overcoming a series of complex practical issues.
The second option is Land Value Tax (LVT). The basic idea behind LVT is that pieces of land get their value from their location and surrounding infrastructure rather than the quality of the development on them. This infrastructure has not been paid for by the landowner but by generations of taxpayers. Proponents of LVT argue it captures an uplift in value gained by landowners, it is a progressive form of taxation and is economically efficient.
Again drawing on the Welsh Government review, the finding was a local LVT in Wales could raise enough to replace current local taxes and would be more progressive than council tax. But the review also found that data requirements for implementing LVT are not currently met, information is needed on property characteristics, property transactions, precise mapping, plus evidence on agricultural land ownership (with caution urged about the accuracy of current land value estimates). The conclusion was that LVT offers a number of opportunities but would require significant resources to implement.
That leaves a third option – a new local property tax. Detailed plans have been put forward by the Resolution Foundation and Institute for Public Policy Research. Proposals are based on a proportional tax on the capital value of properties e.g. 0.5%, 0.7%, 1% etc. It is argued that increases in house prices would be captured, disposable income would rise in the bottom half of the income distribution and 80% of households would benefit from the change.
There could also be scope for local discretion, use of new technologies for regular revaluations and additional variations such as regional tax-free allowances. In terms of practicalities, a new property tax certainly presents a lot less challenges than a Local Income Tax or Land Value Tax.
After the traumas of Poll Tax, political will regarding changes to local taxation is in short supply. But if the foundations of council tax become increasingly unsteady, other options are certainly available.
Michael Orton is a Senior Research Fellow/Assistant Professor at the University of Warwick. This blog is based on a presentation made at a recent event organised by the Social Policy Association Taxation and Social Policy Group and draws on a chapter in a forthcoming book Taxation and Social Policy.