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The politicisation of council tax

Tony Travers
  • 1 Comment

Land value tax would lead to a redistribution of the local tax burden. This would produce winners and losers

Housing is becoming an ever-more important policy focus in Britain. The lack of access to capital for first-time buyers, caps on benefits and the possibility that mass house building could be a key element in boosting growth are among the reasons why there is an increased urgency to the study of housing reforms.

In a new report, the Joseph Rowntree Foundation has argued, among other things, for a revaluation of property for council tax purposes “with a view to gradually transforming it into a national land and property tax”. The Institute for Fiscal Studies, in a wider report on taxation, concluded council tax should relate more closely to actual property values. Do these reports pave the way for a radical change to local taxation?

The answer is almost certainly not. Council tax is the most toxic of all government revenues. Because it is perceptible (bills arrive every spring in brown envelopes) and virtually impossible to avoid, people feel its impact. The last Labour government abandoned a revaluation, while communities secretary Eric Pickles has sustained a freeze in virtually all authorities. In Scotland, council tax has been frozen since 2007. Only Wales has bravely undertaken a revaluation.

But by far the most important element in considering any reform to local taxation is the fate of Margaret Thatcher following the introduction of the community charge in 1990. National politicians fear that if they reform a revenue source as visible and unpopular as council tax they will be driven from office following riots in Trafalgar Square.

Land value tax may or may not be a good idea. But it would lead to a radical redistribution of the local tax burden without any likely increase in income to local government. This redistribution would produce winners and losers. Winners would keep quiet while losers (many of whom would be older voters in the south) would respond at the ballot box.

The politicisation of council tax has been a tragedy for local government. Councils’ sole locally raised tax source has become the least popular of all public revenues. Those seeking to improve the rationality of housing finance would do well to look elsewhere for a solution.

Tony Travers, director, Greater London Group, London School of Economics

  • 1 Comment

Readers' comments (1)

  • Our current tax regime acts to subsidise landowners. It is Government spending and economic activity that sustains land values, not the owners efforts. These unearned benefits are the cause of the mis-allocation of property resources. Empty homes, empty shops and offices, 25 million empty bedrooms and vast land banks. By recouping the wealth created by the community, not only does Government have a source of revenue without the associated deadweight costs of other taxes, it incentivises property owners to optimise their assets.

    Because Council tax in England stops at £320,000 band H, it is, like the community charge, highly regressive. If it were a flat % charged on all property, those who are currently in property worth less than £320,000 would be paying less if the tax take remained the same. If the tax take were to rise and there were a concomitant reduction in income taxes, it is likely that all property owners who pay income tax would be better off.

    The losers, would be large property companies, banks, landlords and the retired asset rich income poor. All of whom it should be noted have done very well from rising property values, >400% in less than 30 years. In the future, retirees would also find themselves better off as they would no longer have a lifetime in work paying taxation on their incomes. In the short term, they can release some of their substantial unearned capital gains and downsize, thereby freeing up much needed family size homes, and still be better off. Or a charge could be put against their property title to be settled upon change of ownership. This would be offset by abolition of inheritance tax, a gradual implementation of any changes, and perhaps time limited exemptions to pensioners.

    As far as local government funding is concerned, there are many formulations that would keep a link to electoral accountability. Whether that be keeping a % of the revenues or being able to offer rebates from a block grant.

    The point being, the implementation of a Land Value Tax or as some prefer the more accurate name, Location Usage Fee has many benefits compared with easily mitigated costs.

    As the author has noted, many economists agree, including the OECD. It's up to politicians to make the case loud and clear. The backing of the LSE might be a good idea too.

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