In the past few weeks, both the SNP and Labour have revealed their proposals for reforming local taxation. While the SNP is proposing only modest tweaks to the existing Council Tax (a far cry from their previous pledges to scrap it), Labour is proposing a significant overhaul.
I, too, have undertaken some significant work in this field, with my proposals soon to be published in the British Tax Review. In the meantime, I’ve assessed both Labour and the SNP’s proposals against characteristics of good local taxation, as well as parties’ attempts to make local taxation, at least perceptively, “fair”.
Characteristics of good local taxation
Autonomous revenue streams
The rationale underpinning local government is that local decision-makers will sometimes make decisions that would not be made by central government. Divergence is the whole point of having local government. It therefore follows that in order to carry out those decisions, they should have at least some resources that are free from strings from central government.
Revenue expenditure by local government in Scotland is primarily funded from three sources: grants from central government; local taxation (Council Tax and Non-Domestic Rates); and sales, fees, and charges for services. Of these sources, grants from central government make-up by far the largest source of local authority income.
Central government grants come in both hypothecated and unhypothecated form. Hypothecated grants are grants that must be used for a specific purpose, while unhypothecated grants allow local authorities to decide how to spend the money. The “Concordat” between the Scottish Government and Scottish local authorities (acting through COSLA) was lauded for removing ring fencing from most of the central government grant.
However, Government was giving with one hand and taking-away with the other. The Concordat had a profound impact on the fiscal autonomy of local authorities, by requiring councils to freeze Council Tax at 2007-08 levels. Furthermore, though the Concordat removed specific ring fencing, the Scottish Executive (as it then was) sought to replace many of these controls with a package deal – local government agreed to deliver many of the Executive’s policies, including on class sizes, pre-school places, and police numbers.
Local taxation greatly enhances local accountability, by compelling local authorities to justify its spending choices to the electors from whom they raise revenue. Where the levels of expenditure bear little correlation to levels of taxation, invariably, the link between decisions of voters and decisions of representatives will be weakened. Given that fiscal autonomy has been the central issue in consideration of further devolution –with accountability frequently cited as one of the main reasons for further such devolution. There is a logical inconsistency in; on the one hand, seeing fiscal autonomy as essential for the accountability of the Scottish Parliament and Government; but not so necessary where local government is concerned.
One of the most frequent criticisms of the Council Tax in political discourse is that is it “unfair”. However, there appears to be little commonality as to what critics of the Council Tax consider to be “fair”.
Debates around local taxation have featured competing conceptions of what constitutes “fairness”. Margaret Thatcher considered the Rates to be grossly unfair. Her motivation for scrapping them is said to have been inspired by the plight of the “old ladies of Morningside living in six-bedroomed family houses who had no children at home and only had their bins emptied once a week.” Her solution to this was a poll tax. The rationale behind this poll tax was along the lines that as most people, regardless of the size of their properties or levels of income, consumed roughly the same amount of local services, they should all contribute equally to the provision of these services. Everyone paying equally for services consumed roughly equally was, in the mind of Thatcher, fair.
History recalls that large swathes of the population did not agree with Margaret Thatcher’s conception of fairness. Public discontent over the Community Charge was remarkable – inciting levels of public unrest seldom seen in British society. The source of their disquiet over the Community Charge was that it was, in their opinion, unfair. Under their conception of fairness, the charge was unfair because everyone paid the same, regardless of income – it took no account of individuals’ ability to pay.
Upon John Major’s accession to the Premiership, Michael Heseltine was appointed Secretary of the State for the Environment, with a special mandate to formulate a replacement for the Community Charge, and to do so quickly. The result was the Council Tax compromise. It is in part a tax on property insofar as the liability to charge varies in accordance with the value of the property you occupy. It is in part a poll tax because it doesn’t vary very much. And it is in small part an income tax insofar as the income level of the taxpayer is reflected in the availability of Council Tax Reduction (formerly Council Tax Benefit) to low earners.
Residence as a suitable basis for local taxation
If one of the primary justifications for local taxation is local accountability then taxation anywhere other than at the place of residence makes little sense. With the exception of elections to the City of London Corporation, and Business Improvement District (BID) referendums, voting franchises in the United Kingdom are based entirely upon individuals in their place of residence.
While taxation of income makes most sense in the place it is earned, and local taxation makes most sense at the location of residence, income appears to be an entirely unsuitable basis to tax at a local level. This leaves property taxes and consumption taxes as suitable potential candidates for local taxation.
Council Tax in the context of the tax system
It is a generally accepted principle of tax optimisation theory that efficient tax systems favour a broader base with a lower rate over a narrow base with higher rates. Property taxation is a useful tool for broadening the tax base. At present, a number of taxes on property presently exist in the UK. These include Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax, and Council Tax. However, with the exception of Council Tax, all of these taxes require some kind of transaction to take place. The Council Tax is, therefore, the only tax on static property presently in operation in the UK.
Furthermore, there is a considerable body of evidence that property taxes are amongst the most efficient taxes in existence. The OECD’s empirical research confirms that property taxes are, in general
more efficient than other types of taxes in that their impact on the allocation of resources in the economy is less adverse. This is because these taxes do not affect the decisions of economic agents to supply labour, to invest in human capital, to produce, invest and innovate to the same extent as some other taxes.
It follows from this that a tax on land alone (and not what’s built on it) is therefore even more efficient. As the amount of land is fixed, taxing it cannot affect supply. It is further arguable that taxing land alone creates additional economic efficiencies in encouraging efficient utilisation of land assets. However, there exist considerable difficulties in disaggregating the value of land from that which is built upon it, in particular where a considerable amount of time has elapsed from the point of development to the point of assessment. Furthermore, the value of land will inevitably be affected by the amenities and built environment surrounding it. It is perhaps unsurprising therefore that, notwithstanding the economic attractiveness of taxing land over property, the prevailing preference in international practice is for property taxes over land taxes.
Operation of the Council Tax at present
At present, every dwelling in Scotland is allocated into one of eight Council Tax bands. Councils decide what the tax bill will be for a “Band D” property, and then tax in all of the other bands is calculated by reference to a fixed ratio. This ratio is in the proportion 6:7:8:9:11:13:15:18 where Band A is 6, Band B is 7, and so on. So the Council Tax for a Band D property is 1.5 times the Council Tax for a Band A, while the Council Tax for a Band H is twice what is payable in respect of a Band D household. So the Council Tax is relatively flat in Bands A to D, and a bit more progressive for Bands E to H. A 25% discount is available for single occupants, and income-assessed reductions are available for low earners.
As can be seen above, 75% of all properties are in bands A to D. so for the overwhelming majority of Scottish households, there is very little difference in the amount of Council Tax you pay.
The SNP and Labour’s proposals
The SNP’s proposals for reforming the Council Tax are incredibly modest: slightly increase the multipliers for Bands E, F, G, and H, with no change to the lower bands. Despite the Local Tax Commission concluding that 57% of all properties are in the wrong band, the SNP do not plan to revalue properties, meaning the tax will still be based upon second-gear valuations from 1991.
By capping Council Tax increases at 3% per annum (presumably even if inflation is running ahead of that), the Scottish Government plans on tying local government to their preferred level of public service provision.
As proposals for reforming the Council Tax go, this is just about as conservative as it gets. Giving the impression that you’re making the tax more progressive while not actually changing anything for 75% of households smacks of cynical populism.
Labour’s proposals, by contrast, really are quite revolutionary, though some elements give the impression that the plan was worked out on the back of a fag packet. Under Labour’s plans, the system of bands would be scrapped altogether. A comprehensive revaluation would take place, and then (as I understand it) would be updated annually on the basis of local trends in property prices. The tax would then be calculated as follows: £450 + 0.35% of the first £180,000 of the property’s value; with any portion above £180,000 being taxable at 0.9%. Labour’s proposals also include a 3% annual cap, though it’s somewhat unclear what that 3% is actually of (The rate? The cap? Bills in cash terms?)
While it’s difficult to characterise Scottish Labour’s proposals as progressive, their proposal is a good deal more progressive than the status quo, and therefore also a good deal more progressive than the SNP’s.
There are other significant advantages to Scottish Labour’s proposals too. One key flaw in the Council Tax is that it isn’t buoyant – every year local authorities have to announce the level they’re setting the Council Tax at, because it doesn’t increase automatically with property prices. By contrast, the Chancellor of the Exchequer doesn’t have to announce increases to income tax levels every year because income tax is buoyant. Scottish Labour’s proposals have the virtue of buoyancy: in order for local authorities to keep up with inflation they won’t generally have to announce increases in rates.
Scottish Labour further proposes to give local authorities the power to levy a Tourism duty, which has the virtue of broadening the tax base further and diversifying councils’ revenue streams.
The key test for both proposals is the extent to which they make the hated Council Tax perceptively fairer. As the SNP’s proposals represent little more than a tweak to existing arrangements, the proposals do little to address the regressivity of the Council Tax. This is exacerbated further when we consider that 75% if properties are in Bands A to D, which won’t see any change to their multipliers at all.
Labour’s proposals, by contrast, create a slightly odd progression. The effect of the £450 floor is to make the tax regressive to property values up to £180,000 (albeit a good deal less regressive than the Council Tax), progressive from £180,000 up to £390,000, then the £3,000 cap causes the tax to regress thereafter. As can be seen above, Labour’s proposals also eradicate the sharp spikes in the tax burden that occur when a property is just above the threshold for a tax band.
Though Labour hasn’t produced revenue projections, my forthcoming article in the British Tax Review demonstrates how a proportionate system of Council Tax ratios raises more revenue than the status quo, though such projections are based upon tax bills as high as £5,500 for Band H properties. The fact that only properties valued above £300,000, which account for fewer than 10% of Scottish properties, will pay more than they do at present means that it is difficult to imagine that Labour’s proposals raise much additional revenue, if any.
Overall, Labour’s proposals for reforming local taxation are a good deal more progressive than the status quo and the SNP’s modest proposals. Though both parties seek to cap the size of the tax and annual rises, Labour is also proposing to give local government some additional sources of revenue – enhancing the autonomy of local government.
My own proposals for reforming local taxation will be published in the forthcoming issue of the British Tax Review, though I’ll be posting a sneak preview nearer the time. Stay tuned.