When Housing to 2040 was launched in 2021, the ambitious vision at the centre of it was, in one respect, quite unprecedented. The Vision and Principles document that accompanied the main report argued for nothing less than a reconfiguring of the housing market through interventions with the aim of stabilising real house prices, reducing capital gains as a source of return in the rental market and helping through this long term adjustment to encourage the diversification of personal wealth and speculative investment away from residential property.

The means by which this would be achieved were not fully specified, though it was clear that Scotland’s devolved housing taxes – Council Tax and Land Building Transaction Tax – would play a central role. The main Housing to 2040 report indicated that the taxes would be reviewed in the current Parliament but there has been no evidence that this has taken place or what outcomes have been identified.

Joseph Rowntree Foundation funded CaCHE to focus on two aspects of rebooting the Housing to 2040 programme. The first, on the Affordable Housing Supply Programme was published last year, proposing short, medium and long term actions to aid affordable and social supply. The second one, newly published, is concerned with our independent review of these two devolved housing taxes.

In the report, we critically assess the contribution and effects of Council Tax and LBTT, identifying well-known and often rehearsed arguments about how they operate. The report then identifies a series of criteria with which to both assess these taxes and possible alternatives.  We then review a growing body of papers, reports and bodies of work that argue for similar but distinct reform packages, all of which involve an element of capital value taxation (or land value taxation) along with combining the revenues from Council Tax and LBTT. This is also fertile ground for us to consider what might be different ways forward for Scotland.

Two innovations in the new work are, first, that we construct a new capital value tax base drawn from careful econometric analysis that allows us to calculate the national Scottish wide proportionate property tax rate that would apply, as well as the land value tax rate that would apply if it was used. These are then applied to specific local authorities to give us a sense of the distributional implications.

The second innovation is that, working with the Joseph Rowntree Foundation, we recruited and ran a citizens’ panel of 20 local people in Glasgow, which took place in the summer of 2024. The panel was fascinating and indicated that once people had spent time learning and thinking about the present situation, they were keen to discuss reform proposals and indeed a majority by the end of the two days voted for more radical proposals.

What were our principal takeaways?

• Council tax is deeply flawed in its design, its regressive outcomes and the failure to revalue for nearly 35 years. Wales show this can be done and our current work shows that large datasets and econometric modelling can quickly deliver automatic valuation for Scotland.
• LBTT is an inefficient, complex tax that discriminates against landlords and works against the interests of a more functional housing system. As with many economists, we think it should be abolished and its revenue added to that to be collected by a reformed or replaced Council Tax.
• The evidence from Northern Ireland also suggests that it is perfectly possible to run a capital value tax, something they have operated effectively for more than 15 years (though they also need to revalue). Northern Ireland’s rates are also an example of a split tax, where revenue goes to both local government and to Stormont.
• We favour a proportionate property tax, regularly revalued and including an element to raise revenue to cover LBTT but which for this element is only paid for by owners of property (rather than just purchasers under LBTT).
• We think that the first step in finalising reform of these taxes should be to hold a national citizen assembly as part of a wide ranging and serious consultation exercise. We were encouraged by the fact that our smaller citizen panel showed none of the resistance to reform usually attributed to them by politicians unwilling to act on calls for reform and revaluation.
• We also recognise that reform will have winners and losers because of the local, regional and national restructuring of housing markets since 1991 and this will require resource equalisation through local government finance. We also recognise the need for both a national rebates system throughout Britain and a deferred payment scheme for cash poor, asset rich owners.
• A key lesson from the poll tax debacle is that there must also be a proper transitional scheme that caps losses people face because of these changes – this should last for 3 to 5 years.
• We believe a proportionate property tax will, over time, act to tax some of the untaxed housing wealth now hampering social mobility and increasing inequality throughout Britain and Scotland. It will also help the housing market function better.
• For Scotland, these reforms also offer the opportunity to think more strategically about the shape of the Scottish fiscal cake, the tax base, which is currently is heavily reliant on elastic income taxes which risk mobility to lower taxed jurisdictions. A greater share of recurring property taxes making up more of that tax base would be potentially both progressive and more sustainable for Scotland.

These are all broad principles that need to be hammered out on a cross-party, inclusive basis with the full contribution of citizens and taxpayers.  One key issue that must be properly addressed is what this all means for local government and its funding. Much of the recent reform debate has been about housing markets, efficiency and fairness, to the relative neglect of local government itself. We strongly support the reversal of the long-term erosion of freedoms and financial powers enjoyed by local government and in particular want to increase the locally derived proportion of local government income.

If that is the goal, or even if it simply to progress a system of local finances that is durable and resilient, then local domestic taxes have to be democratically accountable. This is the point where we depart from much of the recent literature which favours taxing the property of owners and not all households. Given that in the UK there is only one local domestic tax (unlike most other OECD nations), we think this creates a major accountability deficit for the 30% plus of households who rent but who would be able to vote in local elections with no direct tax implication for themselves. The fact that private landlords might be able to pass part or all on their tax bills in higher rents is hardly an adequate response. We therefore conclude that tenants should also pay the local property tax, though we might wish to convert their tax to a rental rather than a capital value base.

The broader conclusion is that in the future debates we want to see, we need to consider the uses of the taxes and recognise that they are not just about housing market fairness and efficiency but also about how we make local taxes work within a reformed set of local government finances that decentralise powers and funding while equalising resources differentials in different places.