Blog: ‘An opportunity that must not be missed’ – council tax reform in Scotland and beyond

Adam Corlett
Adam Corlett

Scotland’s Commission on Local Tax Reform has released its report – recommending the abolition and replacement of the current council tax system. Few would argue that council tax in its current form is particularly sensible or fair, so what happens next ahead of Scotland’s May elections should be of interest far beyond Holyrood.

The independent report quite reasonably does not come out in favour of any single solution, and the commission is not always unanimous, but it makes the following key points:

  1. “The present Council Tax system must end”
  2. “Any reform of local tax has to continue to include recurrent tax on domestic property” and this should, “at the very least… be more progressive than the Council Tax” with both a more progressive structure and an improved form of income support.
  3. “Local Government’s tax base should, if it could be proved feasible, be broadened to include income”
  4. “A new system should offer greater flexibility to Local Government” and “a broadening of the local authority tax base would be advantageous”
  5. “Political parties in Scotland will attach different weights to the considerations we have set out … Our expectation is that this report informs the development of those policies which will be put to the electorate in the Scottish Parliamentary election” but “this is one area of public policy that would benefit greatly from a period of cross-party agreement and consensus in order to create an enduring, stable settlement…”
  6. In Scotland, as across Britain, council tax is in need of reform. For one, a lack of political courage means properties are still taxed based on their relative values a quarter of a century ago, in 1991 (or their estimated value if they didn’t exist at the time). The report presents interesting new analysis “suggesting that 57 per cent of properties in Scotland would have changed Council Tax band if revaluation had taken place in 2014, with roughly an equal amount moving up as moving down.” This gives an indication of how arbitrary the current outdated valuations are, but also of the political difficulty of fixing the problem. Both of these challenges grow each year.

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    Worse, council tax inherited some of the goals of the poll tax, with the highest payment being only three times that of the lowest – even though some properties are worth hundreds of times more than others. The Commission presents a revenue-neutral, illustrative alternative in which those in the highest band instead pay fifteen times that of the lowest. As the table below shows – pulling together various facts from their report and beyond – those in lower bands could expect to pay significantly less tax under such a system. Rather than the typical Band A household paying a tax equivalent to 1.4 per cent of their property value each year (before considering any Council Tax Reduction) and the typical Band H household paying 0.3 per cent, each would pay around 0.75 per cent. While their example retains the current number of bands, a new system could choose a different number or an entirely proportional charge. As the report notes, it’s important to also look at the Council Tax Reduction scheme (also known as Council Tax Support). This is a key part of ensuring that those with low incomes – particularly those without substantial wealth – are not hurt disproportionately by property tax. Although not mentioned by the Commission, there is the chance to incorporate Council Tax Reduction into Universal Credit. This would bring administrative savings as well as the possibility of reversing some of the cuts to the generosity of local support – which has effectively increased council tax for the poorest households. The possibility of a merger is explored in our Universal Credit report, and will be considered as part of a new government review.

    As well as the direct distributional impact, the Commission also looks at the potential broader impacts of any reform. Replacing property taxes with income taxes, for example, might ensure those on the lowest incomes pay the least tax, but would also have less welcome implications for housing affordability and the distribution of wealth (as rents and house prices might be expected to rise), work incentives and tax avoidance. And the devolution of some income tax powers all the way to local authorities would present “substantial administrative challenges”.

    Even a revised tax on property, which the Commission conclude is “the most readily administered alternative”, will take time. The report argues that legislation couldn’t be crafted and passed before the May 2017 local elections. However, if reform is to be undertaken in the next Scottish parliament, we should expect the Scottish government and parties to engage with the issues and make their proposals ahead of the election in May.

    And perhaps, as with stamp duty land tax, where Scotland goes others will follow (though Northern Ireland continues to maintain the arguably more sensible pre-poll-tax rates system). Wales is being handed the same power to reform its property taxes, and calls for similar powers to be handed to city regions, at least, seem likely only to grow.

    There must be a lot of debate, analysis and politics to come before the sclerotic council tax can be reformed in Scotland and beyond, but the Commission’s report is a very welcome starting point and call to action. The ball is now in the political parties’ court.

    • Adam Corlett is economic analyst at the Resolution Foundation
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