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.