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Tuesday, March 20, 2018

Is it time to reform council tax?

The Guardian carries details of another interesting report by the Resolution Foundation in which they argue that Council tax is an outdated and regressive levy on households that should be scrapped in favour of a progressive levy on property. It is just a shame that they don't seem to understand that this matter is devolved to the Welsh Government and that it is not for UK Ministers to change the system this side of Offa's Dyke.

The thinktank argue council tax has become almost flat-rated in some areas to leave it resembling the much maligned poll tax of the early 1990s. Laura Gardiner, principal researcher at the foundation says that analysis shows that council tax has “only a very weak link to property values” which means that it is “highly regressive”:

“Someone living in a property worth £100,000 pays around five times as much council tax relative to property value as someone living in a property worth £1m. This is exactly the kind of result that opponents of the poll tax wanted to avoid and in stark contrast to income tax, which increases with incomes in a progressive way so higher earners pay a higher average tax rate,” she said.

The foundation say that the the 2017 reforms implemented in Scotland should be replicated elsewhere in the UK. That would involve increasing council tax rates in the top four bands, generating a little over £1bn. An alternative reform would be a “mansion tax” surcharge of 1% on the value of properties worth more than £2m and 2% on the value of properties above £3m, which would also generate just over £1bn.

These proposals very much mirror work carried out for the Institute for Welsh Affairs by Professor Gerry Holtham, which I reviewed here. In his paper Gerry Holtham described council tax as the ‘misbegotten offspring of political misjudgement and political cowardice’.

He argued however that because Council Tax is levied on property it is hard to avoid, it does not distort economic activity and it is easily understood. Its disadvantage is that it requires regular revaluations to remain relevant, something that only happened once in Wales and never in England due to the political fall-out:

As Gerry Holtham explains, property values, as assessed for these purposes are increasing at a much slower rate than house prices, so that the average council tax on the lowest band, whose properties are worth up to £44,000 amounts to nearly 1.9% of the value of the property. For properties worth over £424,000, the tax is just over 0.5% of capital value.

The solution proposed by the paper is not to throw out the tax altogether but to reform it so as to ‘smooth out the indexation’ and to consider introducing additional tax bands. Gerry Holtham argues that this would lead to gradual change and do away with the need for revaluation.

He argues that a fairer way to levy the tax would be to make it a flat rate plus a proportion of the value of the property, less a property allowance. That would yield similar revenue to the current tax where everybody would end up paying a fraction over 1% of the band value. In other words the tax would be rebalanced so that those in the most expensive properties would pay more.

He says that taxpayers in band D would pay a little more than a pound a week more, whilst those in band A would see their bills fall dramatically. This would lead to a fall in the cost of Council Tax benefit from £242m to just over £190m.

Gerry Holtham suggests that the increase in taxation for those in the higher bands could be ameliorated by other measures. These include removing the single occupant discount and increasing the tax on second homes, a measure already being proposed in the housing bill. In Gwynedd, 10% of the housing stock consists of second homes.

This solution is slightly more complex that the one mooted by the Resolution Foundation but seems to me to be more of a gradual change and one that has benefits both for those living in lower banded houses and also in helping councils and the Welsh Government tackle the rapidly increasing cost of Council Tax benefit.

Surely the time has come for a rethink of Council Tax.
I would be happier if 2nd homes had a 50% increase. this would deter 2nd homes from being removed from the housing stock. It would encourage more use of hotels and b and b and therefore increase employment
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