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FRONT LINE FIRST-FINANCE

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Stephen Hughes warns of the risks in council tax revaluation ...
Stephen Hughes warns of the risks in council tax revaluation

It is an apocryphal story that the domestic rates revaluation so undermined middle Scotland's faith in the Conservatives they devised the poll tax as a solution to revive their electoral fortunes north of the border. The government will be desperately hoping nothing so radical will be needed following the recently announced revaluation of council tax in 2007.

There is no doubt there is a need to carry out a revaluation. There are serious practical difficulties in valuing new property at a 1991 value. There are anomalies between properties that need to be resolved.

However, a simple revaluation will create significant distributional results that can have seismic political effects.

If you are willing to make some heroic assumptions, some early estimates can be made. For example, assume that the limits on existing bands are increased by the average England house price inflation since 1991 and current tax weights are retained. The result is an increase in the tax base in London by almost 20%, in the rest of the south east by 11% and in East Anglia and the south west by between 5% and 6%. In contrast, the Midlands' tax base stays broadly the same, while regions in the north fall by up to 7%.

A higher tax base means less grant, so a higher council tax (or cuts in services). An increased tax base means, on average, properties will be in a higher band, adding to the increased personal bill.

The grant loss to London would be almost£300m, adding 13% to band D tax rates. However, the shift in bands means the average current band D taxpayer will face a 19% or£155 increase in their bill. The percentage increases will be higher in the lower bands.

Adding bands and increasing the difference in tax burden from the top to bottom band from 3:1 to 6:1 amplifies relative movements in the tax base and distributional changes.

Northern councils may be able to justify changes on such a scale, despite the affordable housing crisis, the higher share of housing costs in household budgets and the higher ratio of house price to disposable income in the south. The key question is whether any government can allow these changes to happen and still hope to be re-elected.

The solution may lie in transitional relief, regional bands or even a different approach to resource equalisation in grant distribution. The threat is that significant resources will need to be diverted from investment in services.

Stephen Hughes

Director of finance, Brent LBC

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