Council tax fails every rule of good taxation and is blowing back holes in local government budgets
It won’t surprise anyone to hear local governments are in crisis. A decade of austerity has forced councils to cut essential services to the detriment of ordinary people across the country. The pandemic took that gap in funding and turned it into a black hole — one with the potential to force the Government to rescue more councils from bankruptcy like they have already done in Northampton and Croydon. Previously, these events were unthinkable, but now they are becoming commonplace.
Recent figures from the Ministry of Housing, Communities & Local Government have revealed the extent of this crisis— across the country over £500m worth of council tax has not been paid. To ensure services are delivered councils are forced into a conflict they should not have to make: do they cut services hurting the vulnerable; or do they increase a highly regressive council tax – also hurting the vulnerable.
The economist Adam Smith famously listed four principles of good taxation. The first and most important? Fairness. Any tax must not hit the most infirm the hardest, and any tax that does must be replaced. Of course, council tax checks all those terrible boxes. It’s based upon property valuations conducted in 1991—the areas with the highest levels of house price growth. Those areas also happen to be the wealthiest, and those folks end up underpaying. Those in the poorest areas with low house price growth are underpaying. That explains why just 11 per cent of councillors and senior officers believe council tax is fit for purpose.
Take the following example – imagine a 9 bed mansion in Westminster and a 3 bed former council house in Middlesbrough. In a fair system, obviously the Westminster mansion should pay substantially more tax. Under our current one the home in Middlesbrough actually has to pay £142 a year more. Although this example represents the extremes it remains the case that the typical £100,000 homeowner will pay five times more in tax as a share of property value than would a £1,000,000 homeowner.
Under a different model, known as the proportional property tax, a singular tax rate of of 0.48 per cent of property value would be set nationwide, rather than forcing poorer authorities to tax highly, it sets a singular tax rate of 0.48 per cent of property value nationwide. We have the technology to reevaluate property values annually; we simply choose not to do it. This fits into the current model of local Government funding and would split the revenue for councils by a mix of PPT revenue and central Government allocation to ensure that every council receives a fair allocation that meets the needs of the area.
This change should appear particularly appealing to the Government when they look at the impacts it will have on the levelling up agenda. Although some homes in the South East will see a small increase in taxation—the key seats the Tories will be targeting in 2024 will almost all see reductions. For example, 97 per cent of households in the old red wall will see reductions in their taxes and over 80 per cent will in marginal constituencies.
Local government funding has been a perennial problem for politicians for over a decade now, and the problem will not go away till council tax is abandoned. If the Government wants to avoid more regressive increases in council tax, then they must look to PPT as a superior model that will help deliver them victories in key marginal seats in 2024. If they fail to act fast then it is inevitable that council bankruptcies and higher taxes on our nation’s poorest people will become the norm.