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".
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. 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.
Calls for reform of council tax benefit are not newour
predecessor Committee examined issues around council tax benefit
as part of its inquiry on local government finance in 2004but
have largely gone unheeded by Government.
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".
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.
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.
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.
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.
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
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.
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".
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.
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
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
9. Citizens Advice states individuals on low incomes
who are entitled to council tax benefit can be placed in financial
hardship by not claiming.
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.
The Government says that council tax benefit "makes an important
contribution to the financial security of nearly 5 million people
on low incomes".
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
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
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
The Lyons Report, para 7.170 Back
The Lyons Report, para 7.121 Back
ODPM: Housing, Planning, Local Government and the Regions Committee,
Local Government Revenue (hereafter 'Local Government
Revenue'), paras 125-132 Back
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
The Lyons Report, para 7.16 Back
The Lyons Report, para 7.17 Back
CIPFA, Finance and General Statistics, reproduced in House
of Commons Standard Note SG 2648 Back
Lyons Report, para 7.15 Back
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
The Lyons Report, para 7.21 Back
for Work and Pensions, Income Related Benefits, Estimates of
Take-up 2004/5, (2006), p 62 Back
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
Memorandum from Citizens Advice, CTB 6, para 2.1 Back
Memorandum from Help the Aged, CTB 5, para 6 Back
Memorandum from the Department for Communities and Local Government
and the Department for Work and Pensions, CTB 15, para 4.4.1 Back