The more a debate concerns Local Government, the further logic flies out of the window. Or at least so it seems this week. It’s a shame, because often there are some important conversations to be had, and the amount of heat generated obscured the possibility of getting some light into the bargain. I thought last week’s conversation about fairness and unfairness in a geographically-based electoral system was interesting, important, and involved useful contributions on all sides. This week, however, we have a “Council Tax bombshell” in the Sunday Express. This is a retread of classic old “revaluation” scare.
I will largely gloss over the question of whether we should revalue at all, and whether we should have property taxes in the first place (my personal view, by the way, is yes and yes, which is not to say that council tax is flawless). It would in theory be possible to assume property prices remain constant forever and slot in a notional historic price to any new property. This is what we have been doing since 1993, indeed it’s the situation in my current property, and we just about get away with it. It obviously isn’t sustainable forever – consider the relative value change of two houses in the last century, one in the Canary Wharf area and one in thriving industrial Newcastle. If you think that’s balanced out by them being in different areas, consider the impact of a train station moving from one part of a town to another.
All that aside, there are two separate issues which seem to attract interest.The first is what is included in the valuation of a property being taxed. The Sunday Express luridly suggests that “the number of bedrooms and bathrooms they have to whether they have outbuildings or a conservatory. Good parking, transport links and even “pretty views” are factored in“.
I’m not sure why the pretty views are in scare quotes. Pretty views are a major factor for a lot of people when buying a house! They certainly were for my parents, and I expect it will have a major impact on the resale value of their home, which would be a modest 4-bed suburban detached house, were it not for the rolling views of some of the finest scenery in England from the living room and two of the bedrooms (thanks to being built atop a disused quarry and former landfill, but let’s gloss over that). We could simply tax square footage, but we don’t. Obviously a balance has to be struck between simplicity and accuracy, but in principle if people are being taxed on how much their house is worth, surely they have the right to expect that to be determined as accurately as possible?
The second is whether a revaluation would simply lead to an increase in bills. Here the baton is picked up by Dizzy, who fears that revaluing today would push most houses into the top band and therefore lead to people paying more. Fair play to him, on paper this is understandable – the bands are very low, since they were designed for houses in 1991, and the value of homes has increased massively (unsustainably, as people began to recognise in 2007, but that’s an argument for another day) since then. Wales revalued and there was at the same time a slightly larger increase in the tax take than in the rest of the country.
However, firstly it would stretch credulity to anticipate that revaluation would happen without the creation of a new set of bands, and these would account for the fact that, whereas the current top band begins at £320,000 in 1991 prices, that is simply the price of a modest 2-bedroom flat in much of London and the South East at 2009 prices. Secondly, even if the valuation were not done on that basis, and most properties were crammed into the top band, it would not lead to an increase in everyone’s taxes, and it would certainly not lead to a hammering of the middle class. Bear with me, this is a little bit technical, but has to do with how Council tax is set. Obviously the politicians will have a view about roughly what they’re aiming for in terms of percentage increase or decrease, but finding the final number happens like this:
A Council, in determining the Council Tax rate, adds up everything they are agreed they will spend over the year. They then add up every source of income other than Council Tax which they anticipate receiving. This, sadly, leaves a gap. Suppose the numbers are £200m and £180m respectively. It is necessary to raise £20m from Council Tax. Next, this sum is divided by the number of “Band D equivalent” homes. This may be more or less than the number of homes actually in the area, since in much of the country the average is actually around Band B, though in some of London it is closer to E. Anyhow, let’s imagine that counting each house proportionately to the share of Band D tax it will pay, there are 100,000 band D equivalent homes. For simplicity, let’s assume this is because there are in fact 100,000 Band D homes in the area. This leaves us with an annual Council Tax of £200. Lucky people. If the houses aren’t all Band D, this is parcelled up as appropriate. Since they aren’t, it isn’t.
Now imagine a revaluation takes place on the old bands, and every house is pushed up to Band G, meaning they have to pay 15/9ths of the Band D Council Tax. At first sight, you might expect everyone’s Council Tax to leap to £333.33, but in fact this doesn’t happen. The Council still has £20m to raise, and the number of “Band D equivalent” homes rises from 100,000 to 166,667. So the new formula for Band D council tax works out at £120, and the Band G rate… £200. Everyone pays exactly the same. Of course in theory the Council could maintain the Band D rate and just spend more money, but no Council in the current climate would risk a 65% increase in Council Tax, nor would any national government allow it.
In reality, there’s a particular irony here. If you did do a revaluation on the old bands, the outcome would be that people in what are currently lower banded houses would rise further up the scale, and their council tax would increase, whereas people in higher banded houses have much less far left to rise, and would therefore end up paying less tax. Far from hammering the middle class, the theoretical situation would in fact hammer the working class, and amount in practice to the reintroduction of a type of poll tax, though a habitation based one rather than capitation (advantaging people who live quite densely – one of the groups who suffered most from the poll tax, families with grown up children still at home, professional sharers, etc).
Sorry, I have gone on rather, but I thought it was interesting.
The Local Government Officer 
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All understood about the bandings being based on relative property values; band D equivalents, and that a revaluation should not result in increases, etc. but :-
The govt. said the revaluation in Wales would be revenue-neutral, that 25% would move up the bandings, 25% would move down, and 50% would stay in the same band.
What actually happened was that the revaluation alone resulted in an increase of 9% in the council tax “take” – before anything was added on for the usual annual increase. Also, only 8% moved down the bands while 32% moved up – some by two or more bands. That is why a transitional relief scheme had to be brought in which, for those affected, bumped up the council tax demands by one band each year until they were in what was considered to be the “correct” band.
You say that the council tax system is not flawless. I, and many others, agree wholeheartedly. Even the Audit Commission, in their report in 2003 (Council tax increases 2003/04 Why were they so high?) stated that “fundamental flaws” in the system needed to be addressed.
Also – and I know it isn’t mentioned in the article – but with regard to council tax benefit – surely, there must be something seriously wrong with any system of taxation if significant numbers of people have to rely on benefits to be able to pay it (?)
Take a look at http://www.isitfair.co.uk if you are concerned about council tax and want to help to get it reformed.
Thanks. I think Wales did get the bands wrong, but the core issue is that at a time of high general council tax increases, the revaluation was used to hide what would otherwise simply have shown up as a greater percentage increase in the Band D rate. A 9% increase in the take due to revaluation, and, say, a 4% increase in the Band D rate is not much different to no revaluation and a 13% increase in the Band D rate, which was not unheard of. Wrexham, for example, increase Council Tax by less than 2% in the year of revaluation, far below the average rate in England.
I remember that series of budgets between about 2003-5, and much of the country saw tax increases in excess of 10%, for a variety of reasons. There is an issue about redistribution of money around the country, and how the Government would apply the formula grant, since there is an element in there – but overall it’s a Peter and Paul political issue, not a necessary one.
As to reform of Council Tax, I don’t see why it has to be a national issue. It’s the idealistic localist in me, but I would prefer local councils to have flexibility in their area to determine the balance between property, sales, income taxes for the local democratic slice of spending, and take the economic and political brickbats and bouquets locally too.
It should be noted, of course, that lots of people “rely on benefits” to pay VAT, just in a far less obvious way! To an extent the same’s true of income tax in the era of tax credits.
It is, it would seem, widely acknowledged that the current system of council tax is flawed. For example:
The current banding system is not geared to recognise the huge difference in property values across the country which, of course, means that people in similar properties are paying vastly different council tax depending not on the services they receive, not on the efficiency (or otherwise) of their local council, but merely on where in the country they live.
However, the banding system should not be viewed in isolation. The percentage of budget to be raised by council tax varies enormously and depends not only on the amount a council is able to raise locally but also, overwhelmingly, on the generosity (or otherwise) of the government grant. This is far too open to manipulation by government and is used to favour certain areas over others.
Yes, the fact that a Band D property cited as “average” would be a small flat in central London, but a large house in Wakefield, is an issue I have covered here before.
To an extent it ‘comes out in the wash’ since the bands are then related to a base case for each authority – hence authorities serving areas of high house prices trumpeting their low Band D rate, and local authorities serving areas of low house prices trumpeting their low household average tax.
The local government funding formula is fiendishly complicated – I wouldn’t argue against the proposition that money should be moved around the country from areas of plenty to areas of need (apparently if this is to be believed nor would David Cameron any more, despite previous comments otherwise: http://liberalconspiracy.org/2010/01/18/how-the-tories-u-turned-on-nhs-plans/ ) but I do think firstly that rather more transparency would be welcome, and secondly that such a blunt instrument could be rather unfair on poorer people in richer areas, to the benefit of richer people in poorer areas.
Of course I am aware that there are areas of the country which, for one reason or another, need extra help, of course there are and of course they should receive it, but this policy has been taken to extremes and in some cases appears to have fallen off the planet. Perhaps you can explain, heaven knows I have asked enough people and not received a logical answer, how it is that the London Boroughs of Wandsworth and Westminster receive grants so generous that they are able to charge their residents council tax at about half the going rate?
Even those who claim that the current system is fair to the majority admit that it is indeed unfair to a significant minority. The shire counties, for example, are regarded by government as “rich” areas; their grants are fixed accordingly. But of course not everyone in the shire counties is rich, any more than everyone in, say, North Tyneside, or Manchester, or, for goodness sake, Westminster, is poor. So surely, because of the skewed government grant and the one size fits all banding system, what is happening is that poorer people in “rich” areas are subsidising richer people in “poor” areas.
It needs sorting. Fast.
I’m afraid I don’t know the answer to the Westminster question either. I heard once that it was because at the time of the poll tax they were allowed to designate people staying in central London hotels as ‘temporary residents’ and claim the extra grant this attracted, and since then it has been politically impossible to take it all away (rather suggesting the system is not quite as easy to manipulate as might be assumed). But that may be an urban myth.
I think you may be right. The situation does without a doubt pre-date council tax. It is very odd indeed that no one challenges this state of affairs or, if they do, it gets no press coverage. They are given extra grant because of visitors and, apparently, commuters, but presumably they keep the millions they collect from parking charges. Something wrong there. And in any case, surely the extra grant is not awarded to keep their council tax down; it is there to fund whatever it is that the visitors and commuters cost them.
“I think you may be right.”
It happens now and again – law of averages.
One of the problems is granularity. “Money for visitors” is fairly simple to calculate – but the financial implications of different types of ‘visitor’ (student, tourist, transient asylum seeker, gypsy, traveller, seasonal migrant worker) will be very different for a Council.
However the cost and inconvenience of working this out without some sort of Passport to Pimlico set-up means it may be cheaper overall for the centre to accept that it will create some anomalies, unfairness notwithstanding.
But we are not talking about a difference of a few pounds, to which most would feel able to turn a blind eye, we are talking about hundreds of pounds. Something is not right here.
I feel as if I have hit a brick wall again!
Often the way – remember of course that while the benefit appears to accrue to a small number of places (at least in the cases it does not appear to be logical) the disbenefit is more widely dispersed.
In addition, the low apparent Council Tax in these central London boroughs is a little offset by the comparison being done at Band D, whereas (as per the above) very few residents of Westminster will be paying as little as Band D.
The average council tax per household in Westminster is actually around £800. Well below the average, but not insanely so. For example the average council tax per household in Doncaster is just over £850, despite their Band D rate being £600 higher.
Interesting responses from thelocalgovernmentofficer. Though I would ask, why do we need a property tax? He says he thinks we do but does not explain why. I take a contrary view and think that the council tax is a very inefficient taxation system. It is expensive to collect relative to other taxes, mostly down to the duplication of collection offices and is grossly unfair to those on low or fixed incomes where the benefit line is just out of reach.
On the subject of tax benefits, income tax needs no benefit system and the tax credits system is a very inefficient way of delivering help to working families struggling with enormous council tax bills and exhorbitant fuel duty costs. As for VAT benefits, now you have lost me! Surely if you are poor the greatest proportions of income after tax go on CT (VAT free,) rent (VAT free,) fuel (5% VAT) and food (VAT free.)
I would propose that a redifinition of “local service” is needed if we are to remain stuck with CT. Fire, Police, Education and social services should be funded from direct taxation. CT should only be a piffling sum to pay for parks and the like with the rest privatised so we could at least shop around for the best deals on bins and recycling etc.
Adrian.
Yes, in the case of VAT – the greatest proportion. I’ve made this argument too in the past, I think VAT is a less regressive tax than some people believe.
Property is a significant store of value, I think a sensible system of taxing it (not saying Council Tax is precisely the correct one) does some things of which I approve – it stops tax being overwhelmingly on the creation and acquisition of wealth, and puts a little more on the storage and accumulation of wealth, and it discourages the excessive shifting of wealth into property (of which we are short) and into other things (in which we don’t invest enough).
At the margins, it also discourages people from living alone in overlarge houses, and on our crowded island anything we can do to make it more appealing for people to share longer, buy houses of the size they need rather than stretch themselve unnecessarily, is something I think ultimately makes us all better off long-term.