Council tax will cushion the cost of living crisis, but it accepts an outdated policy
With inflation soaring, people are becoming increasingly desperate. Inflation is at record levels, sitting at 4.8 per cent in December and expected to soar as high as 7 per cent by April. The repercussions of this will be particularly strenuous on the most vulnerable. Indeed, the price of essential items that make up a larger proportion of the least well-off individual’s expenditure is the biggest cause of the spike. With the average household expected gas bills to rise by as much as £693 after Ofgem announced a 54 per cent growth in the energy price cap, this problem will only grow.
At this point, one would ordinarily expect the entirety of the Government to redirect itself to mitigating the impacts of this disaster, and shouldering some of its worst impacts. Now, Rishi Sunak has come to the rescue by announcing that everyone living in houses in council tax bands A and D will be entitled to a £150 rebate on their tax bill.
This will be welcome to millions across the country. By using council tax to counteract rising energy bills, Sunak acknowledged this isn’t just a problem for the lowest earners; middle-income families up and down the country are facing significant pressures as well. Sunak has become a master of the short-term plug for economic crises. But he’s yet to show long-term vision. By using council tax as the mechanism to soften the cost of living crisis, he is also accepting one of the most regressive taxes.
As of May 2020, there were as many as 1.85 million people behind on their council tax bill, according to Citizens Advice. In 2020, as many as 280,000 households had bailiffs involved to reclaim this debt. To these individuals, the Government’s announcement will be a slight relief.
Council tax is based upon inaccurate and outdated valuations conducted in 1991, resulting in those in areas of low house price growth paying a much larger share than wealthier individuals in London, and requiring the least wealthy public authorities to tax the highest in order to meet their higher welfare costs. It is therefore no surprise that the effective tax rate in the north east is over 3.5x larger than it is in London.
Is it fair that a band D household living in a £800,000 property in Westminster enjoys a tax cut but a band E household living in a £400,000 home in Wolverhampton receives no such benefit?
The call to reform council tax is not a new one and has gained traction among MPs on both sides of politics.
This tax would abolish stamp duty and council tax immediately and replace them with a 0.48 per cent duty on annualised property values. It is revenue neutral, would result in 76 per cent of individuals being better off with an average tax bill reduction of £435 for low- and middle-income households, and result in a £3.27 billion increase in GDP. Around 600,000 additional homes would be released over the next 5 years thanks to the increased market activity this would generate, especially one and two bedroom homes.
It isn’t perfect. There will be a minority of households who will see their bills go up unfairly, especially in London, where property values are highest. These can be mitigated by deferred payments and caps on the increase of annual costs. The number of low-income winners, as a result of the policy, would far exceed those caught out, and would certainly outnumber those paying unfair council tax.
Rishi’s plan would mean that individuals save £150 for one or two years until its expiration date is reached. From then, we’ll be back where we started. Against the wider picture of a bizarrely regressive tax, it’s time to take another look.