Memorandum by the New Policy Institute
(LGR 16)
NEW WAYS
TO SEE
THE COUNCIL
TAX
1. This submission discusses the fourth
of the questions asked by the ODPM Committee, namely "Is
the council tax a viable and adequate source of local revenue?"
It is limited to an analysis of council tax and does not, for
example, discuss either the theory of property taxes or the merits
of other local taxes.
2. The submission is from Guy Palmer and
Peter Kenway, the directors of the New Policy Institute. Over
the last five years, we have undertaken numerous projects on the
future of the council tax. In particular, we have undertaken major
research projects for the GLA, the SIGOMA local authorities and
the Cabinet Office. We have also produced published reports on
particular aspects in partnership with Help The Aged and the Local
Government Information Unit. Most recently, we were invited by
the Balance of Funding Review to write the paper which they used
to discuss the issue.
EXECUTIVE SUMMARY
3. The material is organised under the following
headings:
— What is wrong with council tax currently?
— Can the unfairness be rectified?
— Transforming Council Tax Benefit.
4. Our overall conclusion is that the answer
to the question "is the council tax a viable and adequate
source of local revenue?" is "yes, but only if the tax
is reformed". More specifically:
— The problem of ever increasing levels
of tax is not the fault of the particular tax (ie council tax)
that local authorities use to raise money.
— Although the council tax is flawed
in some ways, it rests on some sensible principles. Moreover it
is eminently capable of reform. The major problems are to do with
the bands at the bottom and at the top. The solution is to apply
the principles that govern mid-range properties in the heart of
the system (ie those in bands B to F) consistently to both
very cheap and very expensive properties.
— The significance of Council Tax Benefit
has been completely missed in the debate. It is always said that
council tax takes no account of "ability to pay". But
"ability to pay" is exactly what Council Tax Benefit
does take account of. It is a vital part of council tax system
and crucial to its acceptability. The trouble is that it utterly
fails in this regard due to the horrendously low levels of take-up.
By changing both the appearance and administration of Council
Tax Benefit (but leaving its arithmetic unchanged), this problem
can be solved.
WHAT IS
WRONG WITH
COUNCIL TAX
CURRENTLY?
It is not that council tax has been increasing
5. The future of the council tax is currently
a very topical subject, largely because it has been rising so
fast. Over the first 10 years of its life, to April 2003, council
tax for Britain as a whole almost doubled. By contrast, average
earnings were up by a half, while prices were up by around one
third.
6. The total revenue raised by council tax
is effectively the balancing item between, on the one hand, local
government expenditure and, on the other, central government grant
plus non-domestic business rates. The reason why council tax has
risen so fast is because the gap between these two elements has
grown so fast. It is not the fault of council tax itself and would
have happened whatever structure for the local taxation of households
had been in place.
7. So, what has been happening in recent
times is that dissatisfaction with the rises in local taxation
has manifested itself as dissatisfaction with the extant system
for collecting this tax, namely council tax. If local taxes on
households continue to rise in the future, dissatisfaction with
these taxes will continue, whether the council tax is retained
or replaced.
8. We note that the real rise in council
tax over the last 10 years would have been halved if the burden
of bridging the increased gap between local government expenditure
and central government grant had been shared with the non-domestic
business rate. It does seem extraordinary to us that increases
in non-domestic business rate have been limited to inflation only
at the same time as the council tax has doubled.
Rather it is that council tax is unfairly structured
9. The current multipliers, which relate
the amount paid in each band to the amount paid in the reference
band D, are such that the amount of council tax for homes in the
top band (H) is three times that for homes in the bottom band
(A). In contrast, the value of homes in the top band is at least
eight times that of homes in the bottom band (band H starts at
£320,000 and band A ends at £40,000). Research by ourselves
and others over the years has demonstrated that this system results
in low income families, on average paying a greater proportion
of their income in council tax than the average and high income
families paying a lesser proportion than the average.
10. For the lowest income families, this
unfairness is rectified by the Council Tax Benefit (CTB) system
which reduces the council tax to be paid depending on a means-test.
It is those families on slightly higher incomes, and those who
fail to claim CTB, where the greatest unfairness currently lie.
11. More specifically, our analysis shows
that ratio of council tax to average household income is roughly
the same for each of the bands B through F, but that it is higher
for those families in band A not in receipt of CTB and lower for
families in bands G and H.
12. As discussed in detail in our recent
submission to the Balance of Funding Review, [4]the
forthcoming revaluation in England (due to take effect in 2007)
will worse the current unfairness. They will also cause a further
problem, by penalising low and middle income households in areas
with high house prices and high house price inflation. For example,
low and middle income household in London will find themselves
paying a greater share of their income in council tax than households
with equivalent incomes and homes in other parts of the country.
CAN THIS
UNFAIRNESS BE
RECTIFIED?
13. Our recent paper for the Balance of
Funding Review provided a comprehensive analysis of the options
for reforming the council tax system.
14. Drawing on that analysis, our
view is that the way forward lies with extending the principles
that govern the many properties in the middle bands, B to F, (namely,
that the more valuable your home, the more you should pay in council
tax) should be extended consistently to both the cheapest and
the most expensive homes in bands A, G and H. Within the
middle bands, if a house is worth twice as much as another, it
pays about 40% more in council tax. But that is not true either
at the bottom, where a £20,000 home pays the same as a £40,000
one, or at the top, where a £1 million house pays the same
as a £2 million one.
15. To do this, we suggest that:
— Change is needed at both the top
and bottome of the banding structure, to increase the number of
bands by splitting band A into two or more bands, by splitting
band G into two bands and by splitting band H into as many bands
as necessary. Throughout bands B to F, the most valuable property
in the band is worth around a third more than the least valuable.
A, G and H need splitting because the range they cover is much
greater than this: thus in each of A and H, the top is worth at
least four times the bottom while in G the top is worth twice
the bottom. By contrast, apart from the uplifting necessary to
take account of house price inflation since 1991, bands B through
F can be left alone.
— Multipliers for the new, split bands
can be set so as to maintain the progression in the multipliers
currently to be found in bands B to F. Applying the current multiplier
structure with the new banding structure would produce a system
in which those in the very top band could be paying perhaps 10
times as much as those in the very bottom band, compared with
just three times as much at the moment. The net result is that,
nationally and on average, the ratio of council tax to average
household income would be roughly the same across all the bands.
16. Revaluation also needs to be accompanied
by some element of regional variation, for example, in the band
limits. Whatever is done by way of additional bands or changes
to multipliers, cheaper properties in high inflation areas will
face double digit percentage increases in their council tax bill
after revaluation. So, for example, homes currently in band C
in inner London (half of which are rented with many being social
housing) would face a big tax rise at the same time as many similar
properties in other parts of the country (which would typically
be in the new band A) be enjoying a significant fall in their
bills. More generally, London homes in any particular band would
find themselves paying a greater share of their income in council
tax than homes in that band elsewhere in the country. Introducing
some regional variation into the band limits would solve this.
17. If these reforms are introduced,
then we see no major problems with the council tax system. In
other words, council tax would become a viable source of local
revenue.
18. Reforming the council tax this way could
be implemented for a fraction of the political energy that would
have to be devoted to abolishing it and replacing it with something
else, such as local income tax. In these circumstances, we suggest
that the onus of proof should be on those advocating the abolition
of council tax rather those on those advocating the retention
and reformation of council tax.
TRANSFORMING THE
COUNCIL TAX
BENEFIT SYSTEM
19. Council Tax Benefit (CTB) is esssential
to the acceptability of the council tax system as a whole because
it provides a solution to the problem of the poor person living
in the large house who has a high council tax bill which they
cannot afford. Provided their savings are not too high and depending
upon their exact level of income, such a person's council tax
bill should be met, in full or in part, by CTB.
20. One problem with CTB is the current
savings limit. Households currently lose their entitlement to
CTB if they have only modest amounts of savings; for example,
it takes only an additional £10,000 of savings (above the
first £6,000) to wipe out all entitlement to a benefit worth
on average £1,000 a year. This amounts to a punitive rate
of "taxation" on small amounts of savings. We suggest
that there is a strong case for abolishing, or at least substantially
raising, the current savings limit.
21. More fundamentally, CTB currently fails
to achieve its objective because take-up is so low. Around 6½
million people are entitled to CTB—much more than any other
government benefit—but only 4½ million claim their
entitlement—a lower proportion than any other government
benefit. Take-up is particularly low among pensioners (three-fifths)
and owner-occupiers (half).
22. We believe that it is possible
to raise take-up substantially by changing both the administration
and appearance of CTB, while leaving its financial effects unaltered.
23. The key to our proposal is a new way
of looking at the formula used to work out how much CTB a household
is entitled to. The current method of looking at the formula is
as follows:
— Given a household's council tax band
and the local authority in which they live, their gross council
tax due is calculated.
— If they apply for CTB then, given
their income, their rebate can be calculated.
— The net amount of council tax they
will have to pay is then their gross council tax less their rebate
(if any).
24. It so happens that this calculation
is exactly the same as the following:
— Given a household's council tax band
and the local authority in which they live, their gross council
tax due is calculated.
— Given their income, their "maximum
council tax liability" is 20% of the amount by which their
income exceeds the nationally-defined threshold below which no
council tax is payable.
— The net amount of council tax they
will have to pay is then either their gross council tax or their
maximum liability, whichever is the smaller.
25. The important point about this is that
the calculation of "maximum council tax liability" is
independent of either the amount of council tax charged by the
local authority or the band that a property is in. All it depends
on is personal financial information, coupled with a threshold
value set by the Chancellor of the Exchequer. As a result, the
assessment could be done by the Inland Revenue, perhaps automatically
as part of either the annual tax assessment or the calculation
of the pensioner credit.
26. By transforming the way that
income is taken into account in assessing liability, the calculations
could be done automatically without the household having to do
anything. "CTB"—that part of the gross council
tax that a lower income household does not have to pay—becomes
invisible to them instead of being something they have to apply
for. Although the arithmetic and the personal details
that have to be given are the same, the psychology of applying
for a benefit is quite different from that of having the amount
of council tax that one has to pay take account of all the relevant
factors.
27. Finally, and importantly, there are
particular attractions for pensioner households, where much of
the non-take-up of CTB currently lies. Because a pensioner household's
maximum liability is likely to change very little, even over a
number of years, once its normal council tax has reached that
level, the amount that has to be paid will hardly change. This
gives such households certainty about the size of future council
tax bills and it makes it clear to them that they are protected
against further rises in the level of council tax set by local
authorities.
28. The claim that the council tax system
takes no account of ability to pay is probably what damages it
most. Thanks to CTB, that claim is, in fact, false. Transforming
CTB in the way we suggest would make it much clearer that income
is taken account of. This would help restore confidence in the
council tax.
4 Paper 16: Options for Reform of Council Tax. Back
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