Select Committee on Communities and Local Government Committee Eighth Report

1  Introduction

The national policy context

1. Council tax is the only locally levied tax on households in England and the only tax whose rate is determined by local authorities. It is "an unusual hybrid: both a property-based tax, and a charge on local service users".[1] Council tax was one of the issues examined in Sir Michael Lyons' final report, Place-shaping: a shared ambition for the future of local government, which was published in March 2007. Sir Michael was appointed by the Government to undertake an independent review of local government finance. His remit and timescale were extended in 2005 to include the role and function of local government. Sir Michael concluded that council tax "was not broken" and should be retained on the grounds that it provided a stable source of income for local government.[2]

2. Sir Michael did, however, find that there were significant shortcomings within the council tax system. He concluded that reform was necessary and, in the short term, that council tax benefit reform was needed to address the perceived unfairness of the tax for the poorest households in particular.[3] Calls for reform of council tax benefit are not new—our predecessor Committee examined issues around council tax benefit as part of its inquiry on local government finance in 2004—but have largely gone unheeded by Government.[4]

3. In response to a question on council tax, the Secretary of State for Communities and Local Government, Rt hon. Hazel Blears MP, told us recently "what people want is a sense that taxation is fair and transparent".[5] We agree. Sir Michael argued that, rightly or wrongly, public dissatisfaction with council tax centres on various perceptions of its fairness. A common criticism levelled against the tax is that it is unfair because it does not take sufficient account of ability to pay, placing a higher burden on those who are, for example, asset-rich but income-poor.[6] On the other hand, others argue that council tax is fair precisely because liability takes into account the value of property as well as income.[7]

4. Public discontent with council tax is also influenced by the perceived unfairness of above-inflation increases in council tax rates and their impact on low-income households, with most public attention being focused on pensioner households. In part the sharpness of recent increases has been caused by reforms in the early 1990s which reduced the proportion of local authority revenue raised locally to around 20 per cent. Although this has since increased slightly there is still a significant gearing problem for local authorities: each one per cent increase in expenditure leads to a council tax increase of four to five per cent.[8] Over time local authority expenditure has risen more sharply than the central government funding supporting that expenditure, meaning that the revenue required from council tax has risen far more steeply than spending.

5. Sir Michael was struck by the strength of public feeling provoked in response to property taxes; a feeling which is exacerbated by the council tax's highly visible nature.[9] Experience with the short-lived community charge (also known as 'the poll tax'), in place between 1990-1993, indicates the political risks inherent in allowing public perceptions of unfairness and disquiet over local taxation to persist. The high-profile nature of campaigns against council tax, particularly from pensioner groups, indicates the continuing significance of such concerns.

6. The credibility of the council tax as a fair tax is based on having effective mechanisms in place to alleviate the financial burden on low-income households. These mechanisms are currently provided through specific 'discounts', such as the 25 per cent reduction in council tax liability for single-adult households, and council tax benefit which offers some cushioning to those on low incomes. There is doubt whether in practice council tax benefit does this adequately, for two main reasons. First, the rules governing council tax benefit eligibility are too restrictive to provide adequate financial relief to low-income households and, secondly, even where council tax benefit applies, take-up is so low that relief is not reaching those it is intended to help.

7. A number of witnesses argued that council tax benefit is 'mean' and that the eligibility rules are inconsistent with other parts of the tax and benefit system. An estimated 1.4 million adults live in poverty and yet are still liable to pay full council tax. The Government's statistics show that there are around 600,000 children living in poverty whose families have to pay full council tax.[10]

8. Sir Michael's research shows that if there were to be full take-up of council tax benefit, liability would appear to be a "relatively constant proportion of people's income throughout the income distribution".[11] Yet council tax benefit has the lowest level of take-up of any means-tested benefit. In 2004-05, only between 62 and 68 per cent of those eligible to claim did so.[12] In consequence, the poorest 10 per cent of households are spending more than twice the percentage of their income on council tax as the richest 10 per cent. Increasing take-up could do much to reverse this position.

Chart 1: Council tax as a proportion of household income after housing costs, including estimated take-up in 2006-7[13]

Data source: The Lyons Report, Chart 7.9, p 250

* Note-the 'equivalised income decile' category used in this chart refers to household income by decile which has been adjusted to account for variation in household size and composition.

9. Citizens Advice states individuals on low incomes who are entitled to council tax benefit can be placed in financial hardship by not claiming.[14] The National Audit Office has estimated that for every 10 per cent increase in council tax benefit and housing benefit take-up, 100,000 pensioners would be lifted out of poverty.[15] The Government says that council tax benefit "makes an important contribution to the financial security of nearly 5 million people on low incomes".[16] We do not dispute this figure but many other households, because of restrictive eligibility criteria or low levels of benefit take-up, continue to experience greater financial hardship than they would if council tax benefit provided greater relief.

10. Public perceptions of the legitimacy of the council tax are likely to be further undermined if the mechanism designed to alleviate the financial burden it places on low-income households is not effective. Council tax benefit eligibility, entitlement and take-up must be improved.


11. The focus of this inquiry has been on examining the effectiveness of council tax benefit in sustaining council tax as a source of local government revenue. We published our terms of reference and issued a call for evidence in May 2007. We received 23 memoranda and held one oral evidence session on 18 June 2007. We would like to thank all those who have contributed. We are particularly grateful to our two specialist advisers for this inquiry, Rita Hale OBE, former Director of Rita Hale & Associates Ltd. and a local government consultant, and Professor Tony Travers, Director, Greater London Group, London School of Economics.

12. Most figures relating to council tax benefit take-up are based on 'caseload' comparisons. These are comparisons between the number of people entitled to the benefit and the number who receive it. It is also possible to use benefit expenditure as a measure of take-up but the figures we give in this report relate exclusively to caseload, except where a different measure is specified.

13. The Department for Communities and Local Government has overall responsibility for council tax. Policy responsibility for council tax however benefit lies with the Department for Work and Pensions (DWP), alongside its responsibilities for other benefits. Those local authorities issuing council tax bills are responsible for administering council tax benefit alongside housing benefit.

1   Sir Michael Lyons, Place Shaping: a shared ambition for the future of local government (hereafter 'The Lyons Report', March 2007, para 7.4 Back

2   The Lyons Report, para 7.170 Back

3   The Lyons Report, para 7.121 Back

4   ODPM: Housing, Planning, Local Government and the Regions Committee, Local Government Revenue (hereafter 'Local Government Revenue'), paras 125-132 Back

5   Minutes of Evidence taken before the Communities and Local Government Committee, Introductory hearing with the Secretary of State, July 2007, HC898-I, Q 2 Back

6   The Lyons Report, para 7.16 Back

7   The Lyons Report, para 7.17 Back

8   CIPFA, Finance and General Statistics, reproduced in House of Commons Standard Note SG 2648 Back

9  The Lyons Report, para 7.15 Back

10  Poverty is defined here as those with an income below 60 per cent of the national median income. Supplementary memorandum from the Department for Work and Pensions, CTB 21, para 2 Back

11   The Lyons Report, para 7.21 Back

12  Department for Work and Pensions, Income Related Benefits, Estimates of Take-up 2004/5, (2006), p 62 Back

13  Estimates of current take-up are based on latest published figures (which relate to the entitled recipients in 2004/5) as against income and council tax data for 2006-07.The estimates of full take-up are based on two data sources.The first is the number of recipients. The second is an estimate of the number of people who are eligible, but not receiving council tax benefit, derived from the Family Resources Survey. Back

14   Memorandum from Citizens Advice, CTB 6, para 2.1 Back

15   Memorandum from Help the Aged, CTB 5, para 6 Back

16   Memorandum from the Department for Communities and Local Government and the Department for Work and Pensions, CTB 15, para 4.4.1 Back

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Prepared 6 August 2007