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Tony Travers: Euro tax intervention highlights need for devolution

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Tuesday’s news that the European Commission has recommended the British government should modernise council tax will have been received without warmth in Whitehall.

Just over a week after Ukip’s triumph in the European elections and while controversy rages about Jean-Claude Juncker as a potential commission president, along comes a proposal to reform a tax the centre has frozen and capped.

The commission has proposed that the UK should “remove distortions in property taxation by regularly updating the valuation of property and reduce the regressivity of the band and rates within the council tax system”. They have a point. The message, if not the messenger, is surely appropriate.

Given Britain’s tortured relationship with the EU, even well-intentioned advice about local taxation from a supra-national body is problematic. What the commission is pointing to is the reality that council tax is more than simply a local tax source. It is also, in economic terms, a regulator of domestic property prices.

Ministers know this. The introduction of higher bands of stamp duty was, in part, recognition of the relative low levels of tax on high-value property in Britain. The 1:3 ratio between bottom and top council tax bands means that many people in £10m+ homes pay little more, and sometimes far less, than those living in, say, £250,000 semi-detached houses.

If the upper part of the property market, particularly in London, is frothy, then taxation would be a way of moderating its inflationary impacts. But politicians of all parties are petrified of revaluing council tax or creating new bands. The only way to achieve the modernisation called for by the European Commission would be by localising the responsibility for the operation of local taxation.

This week has also seen the Conservatives in Scotland calling for income tax to be devolved to Edinburgh. As part of the broadening settlement for Scotland, there is widespread support for such a move. But if Scotland and Wales can be given powers to operate a suite of taxes, why not English city regions? Devolving tax powers to cities would also create an opportunity to start the process of improving the local taxation of property. This would be the right thing to do.

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

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