Economics

Plucking the goose: Are the business rates hikes sensible?

Property taxes have long been a political minefield

February 24, 2017
©Chris Radburn PA Archive/PA Images
©Chris Radburn PA Archive/PA Images

The furore over looming steep rises in business rates in many parts of Britain has come late in the day but it was utterly predictable. More than three centuries ago Jean-Baptiste Colbert, Louis XIV’s finance minister, observed that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Nowhere are there more geese ready to hiss than in the treacherous patch of property taxes.

Margaret Thatcher brought about her own downfall when she abolished domestic rates, linked to property values, and introduced the flat-rate poll tax. Riots in central London in 1990 made the “community charge” a short-lived folly. Under her successor John Major it was replaced by the council tax, which restored an attenuated link to property values by varying payments according to bands of house prices, in effect capping tax for the richest property owners.

Unlike domestic rates, those levied on firms remained in place, raising £29bn—almost as much as council tax—in the current fiscal year (ending in March). Now Theresa May is learning that business rates can also cause an inordinate amount of hissing. Her government may insist there is no net gain to the exchequer but the angry geese are still chasing after ministers.

The anger has been sparked by a revaluation due to take effect in April of the rateable values—based on rents—used to determine business rates. In principle this is both necessary and fair. As rateable values rise in line with rents, so should business rates. If on the other hand they fall, so should rates.

But what may appear fair in theory can seem very unfair to those facing higher bills. And the longer the period between revaluations the more who are likely to be affected. Between 1990 and 2010 revaluations occurred every five years, arguably already too long. However, the revaluation scheduled for 2015 was postponed for two years, conveniently avoiding an outcry in an election year. That has stretched the interval too far, to seven years.

More important, the period has been one of extreme shocks. Revaluations are based on figures for rents two years earlier. As a result the current rateable values set in 2010 reflect the economy almost a decade ago, in the spring of 2008, at the very end of an extraordinary uninterrupted period of growth after the recession of the early 1990s. The financial crisis then came to a head, the economy collapsed into its deepest post-war recession and a subsequent lacklustre recovery has masked sharply diverging economic fortunes within Britain. London and the south have been far more resilient than central and northern regions in England, and Wales.

The new rateable values have broadly tracked these regional differences. As a result some businesses in particularly favoured areas where rents have shot up, such as in London, are facing huge increases. There is some cushioning from transitional relief over five years—concentrated in the next two—which is financed by phasing in the reductions for those businesses whose rates are falling. And 600,000 small businesses with low rateable values will be shielded altogether. Yet the pain is palpable and the cries of victims, such as writer Jeanette Winterson who is having to close her food shop in Spitalfields in east London because of the big rise in rates, heartfelt.

In theory, the higher rates bill should eventually lead to an offsetting fall in rents as landlords face reduced demand for premises. And although rates are jumping in some places they are also falling in many other places. That’s a rough form of economic justice. But it’s too rough for those facing the increases. And whatever the rights and wrongs, it is an iron law of tax politics that those who gain or are unaffected—the majority in this instance—stay quiet whereas the losers trumpet their grievance.

The toxic politics of property taxes explain why a form of taxation that appears desirable to economists is so dangerous for politicians. Raising taxes on property while lowering them on businesses and on workers is a sensible response to increasingly footloose firms and individuals. But property is an especially salient form of taxation unlike the stealthier revenues that can be raised for example through national-insurance contributions.

May and her ministers are now promising more help for small businesses facing the biggest increases. Yet the flak they are getting over business rates is as nothing compared with the uproar if it were homes that were being revalued, the more so since with the exception of Wales council tax has not been revalued since it was introduced in the early 1990s. Moreover, following extraordinarily steep rises in council tax in 2003, successive governments have shackled local authorities from raising it much themselves. Whatever their economic merits, property taxes remain a political minefield.