If we want to empower local authorities, why not give councils the power to develop taxes themselves?

Written by Colin Mair on 17 January 2019 in Comment

Former Improvement Service chief executive Colin Mair takes a look at Scottish Green plans for local tax reform

Image credit: Holyrood

The Scottish Green Party has made “practical” steps towards implementing local tax reform a condition for supporting the Scottish Government’s proposed budget and, given the government needs their support, it is likely that some initial steps towards reform will be made.

The Greens’ key proposals for reform are to move from the Council Tax back to a tax set on the actual value of residential property, and giving local government a “basket” of taxes which they could potentially apply locally. As the Greens have leverage here, but their agenda is not yet wholly thought through, it is worth having a closer look at their proposals.

Their objection to Council Tax is that the banding system, and the multiples between bands, does not fairly and accurately reflect housing market values: the highest band carrying only three times the tax burden of the lowest. They also complain that, as there has been no general revaluation since the tax was introduced, values are out of date and that also creates unfairness between households and areas.

Their preferred solution is a ”residential property tax” of one percent (or a penny per pound) of the market value of a property, with the first £10,000 of value exempted from tax. So, a house valued at £75,000 would have a tax burden of a penny per pound on £65,000 which would be £650, but a house worth £650,000 would have a tax burden of £6,400, almost ten times as much. They argue that this is fairer and more progressive than council tax because the burden of taxation is directly and proportionately linked to the value of property. Though the terminology of “rates” is not explicitly used, this is very much “back to the future” and a return to the old rating system in a modified form, with all the practical issues that raises.

The second element of reform for the Greens is expanding the tax base and fiscal capacity of local councils by giving them additional taxes they can levy. This empowerment, if I read their policy documents correctly, will happen in a strangely “top down” way. Just as parliament would decide the £10,000 exemption, and the core penny in the pound rate, for the new property tax so also it would decide what additional “basket” of taxes councils can levy, rather than councils simply being empowered to create and set local taxes that they see as appropriate to their own areas.

The arguments for reforming council tax seem based on confusion about fiscal “fairness” and “progressiveness”, and neglect of the practicalities of property valuation that their new Residential Property tax would face. The confusion arises from the presumption that “fairness” and “progressiveness” should be characteristics of each individual tax in isolation, rather than characteristics of the tax system as a whole, and of the distribution of public spending between different socioeconomic groups. All European countries have tax systems that include taxes that are in and of themselves regressive ie take more from the poorer than the richer. VAT type taxes, excise and fuel duties are the most obvious examples but congestion and emission charges are also regressive.

The relative fairness of different European systems is not about this or that tax in isolation: it is about how the whole system creates progressiveness. That tends to be most effectively done through income taxation, inheritance taxation and achieving a pro-poor bias in public spending, particularly health, education and welfare spending. If the Greens really want “practical” steps towards a fairer Scotland then using more of the Scottish budget to offset UK Government reductions to welfare benefits would be more sensible than tinkering around with council tax.

It is also worth noting that the council tax, with a top rate three times the bottom rate, is more progressive than the current income tax rates in Scotland. If the same ratio applied, the top rate of income tax would be 57 per cent. Maybe it would be worth starting there, with a tax the Scottish Parliament itself actually levies. Furthermore, progressiveness in taxation is normally indexed to income, not property values. Many people with relatively low incomes live in quite high value housing, and many have relatively low equity in their house and a very large mortgage.

Someone who owns a £150,000 house entirely has more property wealth than someone who owns 20 per cent of a £400,000. It is quite hard to see why, given the financial pressures many people face simply to afford appropriate housing, this would be progressive with respect to income. If the aim is to tax wealth held in property, then equity or gain at point of sale should be the focus.

The points about the council tax not reflecting the current market value of individual properties, and that the multiple between bands does not reflect the full range of market values, are correct. So why not simply have a revaluation and increase the current number of tax bands, and the multiples between them, as parliament is perfectly entitled to do. The proposed new property tax would require a detailed revaluation of every residential property in Scotland anyway so why not make the council tax more up to date and progressive? Councils have a substantial investment in the infrastructure for collecting council tax, and last year saw the highest ever collection rate at the lowest ever real cost.

For the proposed penny rate per pound of residential property value to be levied, a precise and defensible estimate of the value of each individual residential property would be needed and owners would presumably have the right to challenge that valuation. The council tax was based on broad bands precisely because no practical system of maintaining up to date valuation for individual properties could be achieved. With broad bands, that does not matter as much but, if the tax is per pound of property value, it matters a lot.

Such a system would require an initial valuation of every residential property in Scotland and then a system for capturing differential movements in property values over time. Given the Scottish Parliament has not been willing or able to have a single revaluation across the last twenty years then in itself, creating the data base for the new tax would be challenging.

“Big data” might help here but a quick look at property websites shows that the utility of data depends on the volume of transactions at any point in time, and for many parts of Scotland that volume is either low or distorted by “second home” or “buy to let” acquisitions. The current council tax bandings are not controversial or much contested so introducing a new tax that is theoretically better but that may be controversial and harder to collect might actually make life harder for councils. There would be a strong incentive to challenge individual property valuations at the outset and the capacity to adjudicate such challenges would need to be (re) created

 None of this shows the proposed reform is impossible but it does raise significant questions about clarity of purpose and practicality. Equally, the proposal to extend the fiscal powers of councils is to be welcomed as Scotland has the least fiscally empowered local government system in Europe. However, if the purpose is truly empowerment, why not simply give councils the power to develop and set new local taxes themselves. Councils already have a “power of wellbeing”: a general power to undertake any action that advances the economic, social or environmental wellbeing of local communities.

The restrictions on that power are that councils cannot do things that other public bodies are already charged with, without their agreement, and they cannot do things that are illegal. The same could be done for local taxation: giving councils the right to create and levy new local taxes as long as (a) they are either not already levied by another level of government or (b) if they are, that level of Government agrees to the local development and (c) the proposed taxes are not illegal under national or international law.

This would allow councils to create taxes that suit their varying local circumstances across Scotland, rather than parliament deciding a single basket. A power to create local taxes would complement the “power of wellbeing” and could be done by a single clause modification of the 2003 Local Government Act. That act was a classic Scottish Parliament effort at empowerment: councils were empowered to act in any way that advanced local wellbeing but specifically prohibited from raising additional monies to fund such action.

A general power to create and set local taxes, subject to the type of condition above, would much more empower localism than parliament graciously deciding what taxes councils can have on a tax by tax basis. The Green proposal for a business rate set 50/50 by the Scottish Parliament and local councils would fit readily into that framework.

The Greens rightly want practical steps. First, set up a limited life working group to explore options for the valuation of domestic property as a basis for the proposed new residential property tax. Big data may have improved opportunities here but a reliable basis for up to date valuation is an absolute precondition for any future approach based on individual property values.

Second, modify the 2003 act by the addition of a general power to create and levy local taxes subject to relevant conditions of the sort noted above.

Finally, and perhaps most practically, get some extra spend into the local government budget. Longer term reform really matters but short term pressures need addressed as well. 

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