Election campaigning can reveal more by what is left unsaid than by the pledges that are made. No serious strategy towards taxation is disclosed by the Conservatives' pledges not to raise the rates of the main revenue-raising taxes; nor are all three major parties' commitments to raising substantial extra revenues from a clampdown on tax evasion and avoidance a coherent and credible account of how future revenue needs will be met. Likewise, the campaign discussion of housing policy has thrown up soundbite promises—additional new housebuilding, promised help for first-time buyers, an extension of "right-to-buy" to housing association tenants—without giving a clear sense of how Britain's deep-seated problems in the housing market will be addressed. One area which links the two areas of policy is property taxation, and the lack of long-term strategy is perhaps even more evident here than elsewhere.
Reform of council tax will be an urgent issue which any new government will need to address after 7th May. The tax was designed and implemented hastily in 1991 after the three-year poll tax fiasco. The house values on which the tax is based have been unchanged since its introduction, and are increasingly out-of-line with changes in the housing market in different parts of the country.
A revaluation will no doubt stir up a storm of protest from those who end up paying more, but it cannot be postponed indefinitely. There is no better time than the first year of a five-year parliament to tackle this issue, and if the chance is passed up now, we will surely still be paying council tax in 2020 on the basis of values that by then will be 30 years out of date.
The final days of the election in pictures:
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Fear of the political consequences of a revaluation was, of course, one of the motivations behind the Thatcher government’s search for an alternative to domestic rates that ended up with the ill-fated poll tax, riots in Trafalgar Square and Margaret Thatcher’s political demise. But the out-of-date taxable values that caused such concern then dated only from 1973, and prior to that, the political process had somehow managed to ensure that the gap between revaluations was never more than ten years.
Council tax bears the marks of its political origins and rough-and-ready implementation. It really is the most peculiar tax, with an arbitrary structure of house-value bands and a regressive relationship between house values and tax payments, so that the amount paid on higher-value properties increases less-than-in-proportion to their value. This means, for example, that a house in the middle of Band G (worth 240,000 in 1991 values) pays less than twice the tax of a house in the middle of Band C (roughly the median property, with a value of £60,000), despite being worth three times as much. The top band, Band H, begins at a value of £320,000 in 1991 terms, a little over £1 million in current property values, and the band is open ended. No property, no matter how large and valuable, pays more than three times the tax paid by the lowest-value band.
This feature of the tax has, of course, fuelled the Labour and LibDem proposals for a “mansion tax”, to be levied on very high value properties. Labour, in particular, plan to introduce this tax rapidly, within the first 100 days after the election, in order to raise an additional £1.2bn in funds for the NHS. But there is a case for embedding any change in the taxation of high-value properties in a more fundamental re-think of property taxation and the tax powers of local government, which could potentially produce a more durable reform, with wider benefits for the housing market on the one hand, and local democracy on the other.
Last year the European Commission urged the UK government to take action to stop the property tax boom getting out of control. Wise advice, though it met with a predictable dusty response. The housing market lies at the heart of many of the UK's ills, and a systematic reform to housing taxation is surely one of the steps that will be needed to rebalance a market overheated by excessive consumption and investment demand. Adequate housing is a necessity for all, but housing over-consumption places great strains on the availability and affordability of homes, both in the crowded south-east and in many rural areas. Additional housing supply will be important, but so too will be restructuring property taxation so that it provides less encouragement to high levels of housing consumption, and so that the capital gains made on housing are not excessively privileged in relation to other forms of household income.
What would a more systematic taxation of property values look like, compared with the present council tax regime? Recent work for the Joseph Rowntree Foundation by Chris Leishman and colleagues at Heriot-Watt University shows that a flat-rate tax on property values would need to be applied at a rate of about 0.6 per cent to raise the same revenue as council tax, and that such a tax would have a dramatic impact on the tax-take in different parts of the country. Revenues from London and the south east would rise by about £3bn, about 30 per cent more than with council tax, and there would be a corresponding £3bn fall elsewhere (amounting to a 15 per cent cut in bills). This is a measure of the current deviation of council tax from a straightforward tax on property values, and the fiscal benefit this peculiar tax design confers on the richest parts of the country.
Far from piling further pain on young Londoners struggling to scrape together the money for their first step on the housing ladder, higher property taxation is likely to help considerably more than the ineffective—and sometimes counter-productive—government schemes directed at first-time buyers. Housing costs for tenants should not rise, because market rents should adjust to offset any additional housing tax paid by tenants. The bulk of the impact of the tax reform will be felt by owners—owner-occupiers who have benefitted from the massive property boom in recent years, and buy-to-let landlords who have priced first-time buyers out of much of the bottom end of the property market.
Just as important as the impact on the housing market is the impact on local government. The council tax is the sole tax instrument under the control of local government, and plays a key role in the finances of local government and in the processes of local accountability. With recent sharp reductions in central grants to local government, the council tax contributes more than half of local government revenue, compared with less than a quarter when it was introduced in 1991. As recent work by David Innes and Gemma Tetlow from the Institute for Fiscal Studies has shown, the cuts in grant have had the largest impact on the most deprived councils, as they have been more dependent on grant, but have faced the same percentage cuts. Much of the “equalisation” between areas which had been achieved through the distribution of central grants has now been abandoned, and a number of better-off councils are able to charge lower tax on high-value properties than poorer areas charge on houses in the lowest value band.
A reform which increases the council tax revenue from high-value properties risks accentuating these trends. Allocating the extra revenue from the highest bands to central rather than local government (as Labour advocates with its mansion tax proposal) could of course cap the revenue advantage enjoyed by areas with the highest-value properties. But implemented on its own this simply looks like an arbitrary fix. Alongside a comprehensive review of property taxation, the next government needs to set out clearer principles to govern the allocation of central revenues to local government. The future health of local democracy requires stability, transparency and fairness in both taxation and grant revenues. Devising a durable system will be a major challenge, but one to which the next government must rise.
