Consultation on a fairer Council Tax

The Royal Society of Edinburgh (2015, 2016, 2019 and 2021) has published Advice Papers on the Scottish tax system, the most relevant of which are cited here. It supports policies which would make the tax system more progressive but has cautioned against policies which pay inadequate attention to efficiency considerations and to the potential behavioural effects of taxation.

The title of the Consultation Paper is ‘Consultation on a Fairer Council Tax’. The Royal Society of Edinburgh would support measures which make the Council Tax fairer. However, we believe it is impossible to make the Council Tax fairer while valuations are based on 1 April 1991. Their use breaches the principle of horizontal equity as properties which would have the same 2023 valuation are in different bands. The Institute for Fiscal Studies has concluded that 50% of properties in England are now in the wrong Council Tax band (Adam et al., 2020). Restrictions on data access have prevented the extension of their analysis to Scotland.

The introduction of Council Tax was a solution to the political problem of the time, which was bringing back a domestic property tax to replace the Poll Tax, in a way that was not unacceptable to those in more expensive properties. This worked relatively well at the time. It addressed the “elderly widow in the large family home” problem by offering a 25% discount to single occupants, and it ensured that those in large houses did not pay “too much”, not just by using the banding but by making sure the tax liability was not proportionate to property values. Banding was useful as it militated against large numbers of valuation appeals which had become common in the 1970s and 1980s. Whilst Council Tax worked politically at the time, it no longer works.

This is in large measure a consequence of the failure of successive governments to undertake a revaluation, probably influenced by memories of the political reaction to the 1986 domestic rates revaluation which led to the introduction of the Poll Tax. In 2006 Scotland’s then First Minister (Jack McConnell) disowned on the day it was published the recommendations of the Burt Committee (2006) for a capital value tax and regular revaluations. In contrast, Wales revalued for Council Tax in 2003; Northern Ireland revalued for domestic rates in 2005, though this was done by the Secretary of State for Northern Ireland during Assembly suspension. Revaluation is never politically easy but becomes even more fraught as seriously out-of-date valuations result in large changes after revaluation. Those households facing higher tax bills complain while those having lower tax bills are silent, even if total tax revenues are held constant.

In the 32-year period since 1991, there has been a big shift of economic prosperity from the west of Scotland to the east of Scotland. This means that there is a geographical problem with 1991 valuations as well as an inter-household problem. Put bluntly, Council Taxpayers in the West are generally overpaying Council Tax and those in the East are generally underpaying.

Those now-flawed valuations cannot support changes to the existing multipliers in the name of vertical equity. The transition from Domestic Rates through Poll Tax to Council Tax deliberately narrowed the differential between the payment at the highest and lowest bands, now three times. The Consultation Paper notes that the capital value differential is now about 15 times. With up-to-date valuations, the Royal Society of Edinburgh might support a higher differential, while noting that attention should be given to possible behavioural effects, such as making Scotland a less attractive location than England for high-income households who contribute a large proportion of Scottish Income Tax revenues.

It is important to remember that what matters in terms of vertical equity is the effect of the tax system as a whole. Some taxes will be regressive, as are alcohol and tobacco taxes and some environmental taxes adopted partly to change behaviour. The lack of progressivity is not a decisive argument at the level of individual taxes, though a lack of progressivity in individual taxes may make it more difficult to achieve the desired level of progressivity in the tax system as a whole. There is also the question of whether progression should be measured solely against income and whether more attention should be paid to taxation of wealth, of which property is a visible part. The appropriate measure of progression for Council Tax is uncertain, as it is partly a tax on housing consumption and partly a tax on one form of wealth.

The proposals in the Consultation Paper are more likely to hinder future reform of the Council Tax than to help, for the reasons discussed below.

First, the motivation of the Consultation Paper appears to be to raise a relatively small amount of additional revenue. The Convention of Scottish Local Authorities (2021) has calculated that the £2.9 billion proceeds of Council Tax would be £600 million higher if local authorities had been allowed to make their own decisions. If Council Tax is now lower in Scotland than in England, this owes much to the nine-year freeze imposed by the Scottish Government. Moreover, the stated comparison in the Consultation Paper is invalid because the ‘anchor’ Band D relates to different 1991 capital values: over £45,000 and up to £58,000 (Scotland) but over £68,000 and under £88,000 (England). Properties in Band D in Scotland would be in Bands B or C in England while properties in Band D in England would be in Bands E or F in Scotland.

Second, increasing the multipliers on Bands E to H, in a situation where many properties will be in the wrong band, would provoke justified opposition and further damage the credibility of Council Tax. These changes are estimated to affect 28% of all properties and to raise an additional £176 million (6.1% of the estimated 2023-24 yield of £2.9 billion) before any extension of existing reliefs. Changes to the multipliers raise issues about the legitimate expectations of households when they made their housing-choice decisions in the context of frozen levels of Council Tax and the existing multipliers. Rather than tweak the existing system, the Scottish Government should engage with political parties and civil society to build a consensus on what should be done about local authority funding and taxation.

Third, residential property taxes encounter the problem that some households are asset-rich but income-poor. Given no revaluation since 1991, a revaluation, whenever done, will result in a significant redistribution of the tax burden even if total revenues are held constant at the Scottish level.

There are two ways of addressing this problem. The Council Tax Reduction scheme currently costs £370 million. In Scotland, unlike in England, local authorities are not penalised for having a higher proportion of Council Taxpayers in need of such support. Such a scheme is devised to offset low incomes. Also, there are strong arguments for having a deferral scheme (at least for owner-occupied properties) under which tax payments can be deferred until the property is sold or the householder dies at which date it becomes a claim on the estate. However, such a scheme should only be introduced in the context of revaluation or a comprehensive reform of property taxation. Detailed work would be needed on a scheme. It would require borrowing, secured on housing assets, but the revenue borrowing powers of the Scottish Government are restricted, and local authorities are obliged by law to balance their revenue budgets taking one year with another. Questions also arise about any interest rate charged on the deferred liability: the liability, for example, could be simply a percentage of the capital value at the time of realisation, and perhaps discounts for cash payment. There is also obvious political sensitivity about taxation at death.

Fourth, property taxation is fully devolved to the Scottish Parliament. The Land and Buildings Transactions Tax (LBTT) is an improvement on Stamp Duty Land Tax, not least for having removed the ‘slab’ system. However, transaction taxes such as LBTT damage the efficiency of the property market, inhibiting moves. In economic terms, it would be preferable to raise the combined amount of money from a higher residential property tax and a much lower transaction tax linked to property registration. The political obstacle is that voters are much more sensitive to the highly visible and annual Council Tax than to the periodic (and avoidable if one does not move or invisible if one privately rents) LBTT.

Fifth, there is no mention in the Consultation Paper of the way in which Council Tax bands are used for water charging in Scotland. When the multipliers were changed for Council Tax in 2017, Scottish Water continued to use the pre-existing multipliers. Scottish Water charges an unmetered Band D household £502.29 for combined water supply and wastewater treatment (multiplier of 1) and a Band H household £1,004.58 (multiplier of 2). If the proposed Council Tax multiplier (3.00125) were to be used for water charges Band H would pay £1,507.50. This calculation shows the irrationality of the present basis for what is supposed to be a charge for water as opposed to a local tax. The combined billing makes the Council Tax seem larger than it is. Those in higher bands have incentives to opt for water metering, meaning that the relative burden shifts to those in lower bands or whose property is more difficult to meter.

What is required in local authority taxation in Scotland is a consensus between major parties on how the deficiencies should be addressed. The present situation reflects badly on the devolved government, particularly when it seems that policy change in Scotland is impossible without parallel change in England. It might be tempting to suggest the appointment of a committee to investigate local taxation, but the existing problems are well understood and the report of such a committee would most likely be discarded.

Instead, it is for the Scottish Government and the Scottish Parliament to agree on a path forward which deals with short-term issues without prejudicing longer-term reform. Civil society organisations will have important contributions to make. The Royal Society of Edinburgh draws attention to the proposals by John Muellbauer of Oxford University for a property tax which incentivises households to contribute to the climate change agenda (Muellbauer, 2023).

A significant difference from 30 years ago is that there are now better data on house values and some of these are easily accessible to households. This would make regular revaluations, or indeed rolling valuations easier, so that valuations never became seriously out of date. Up-to-date valuations would avoid people facing steep hikes in their Council Tax, though the required catch-up following the first revaluation may require a longer transitional period which would have to be funded either by the Scottish Government or implicitly by those councils whose valuations have not increased as much as those of other councils.

Rather than go ahead with changing the multipliers the Scottish Government should commission a survey to establish just how inaccurate the 1991 banding now is, paying attention to the expectation that there will be geographic differences in house price changes as well as relative price changes by property type. Another issue to address would be to examine how social housing should be valued for Council Tax purposes, particularly in rural locations where construction costs can be high and where market values may be influenced by greater second home demand than was the case in 1991. A similar issue might arise in high-pressured locations in the cities.
The Royal Society of Edinburgh draws attention to the unsatisfactory nature of this consultation. The Consultation Paper is weak in data and analysis; the questions asked are in some cases badly formulated, for example, Question 3; and the automated system is not user-friendly for inputting responses which leads to unattractively formatted documents for citizens and external bodies who wish to view what has been submitted.
References
Adam, S., Hodge, L., Phillips, D and Xu, X. (2020) Revaluation and Reform: Bringing Council Tax in England into the 21st Century, Report 168, Institute for Fiscal Studies, London.
Burt, Sir Peter (2006) (chair) A Fairer Way: Report by the Local Government Finance Review Committee, Edinburgh.
Convention of Scottish Local Authorities (2021) Live Well Locally: Our Shared Ambition for Everyone in Scotland Made Possible with Fair Funding, Edinburgh.
Muellbauer, J. (2023) Why We Need a Green Land Value Tax and How to Design It, Oxford.
Royal Society of Edinburgh (2015) Independent Commission for Competitive and Fair Taxation in Scotland Call for Evidence: Response from the Royal Society of Edinburgh, Advice Paper 15-12, Edinburgh.
Royal Society of Edinburgh (2016) A Scottish Approach to Taxation: Response from the Royal Society of Edinburgh, Advice Paper 16-21, Edinburgh.
Royal Society of Edinburgh (2019) Devolved Taxes: A Policy Framework, Advice Paper 19-08, Edinburgh.
Royal Society of Edinburgh (2021) Response to the Scottish Government’s Tax Policy and the Budget Consultation, Advice Paper 21-13.

For the reasons stated in response to Question 1, there should be no change in the multipliers in the absence of a revaluation.

The RSE is Scotland’s National Academy, and our mission is the deployment of knowledge for the public good. To this end, we strive to provide the government with objective and evidence-based policy advice for the good of every Scottish citizen. Therefore, this response represents what we believe is in the best interest of all of Scotland’s residents.

The Fellows of the Royal Society of Edinburgh live in many of Scotland’s 32 local authorities. This response relates to Scotland as a whole and its constituent local authorities.

There used to be a very full resources equalisation as part of the grant distribution in which the central government stepped in as a proxy taxpayer which brought revenues per capita up close to those of the most affluent council. Resources equalisation is now less extensive. The Consultation Paper states that the Scotland-average Band D is £1,417, with a range of £1,261 to £1,515. It also states that: “We assume a standard Band D rate of about £911. Individual councils are currently able to keep all of their receipts in excess of this”. This illustrates how Council Tax interacts with the distribution of Scottish Government grants. In the grant distribution, the Scottish government is in effect assuming a level of council spending lower than in fact occurs: this puts greater pressure on those councils with a weak tax base.

Changing the multipliers in the way proposed would generate unequal amounts of extra revenue for councils, as the proportion of properties in bands E to H will vary, as will the proportion of properties within each of these bands. Some councils will have their budgetary position eased and others may not. Or, there will be changes in the grant distribution formula which take all, or a proportion of, these extra revenues from the councils with higher proportions of band E-H properties. For the comparatively small amount of forecast additional revenue (£176 million before any additional reliefs to Council Taxpayers or compensatory funding for councils which gain little extra revenue), the resulting controversies would be unhelpful. What is required is fundamental reform.

The island councils have a lower proportion of properties in bands E-H than the Scottish average and would be affected in the same way as mainland councils with similar property characteristics.

Residential property taxation is a well-established method of providing funding for local authorities. The degree of progressivity of the Council Tax, even after the proposed changes which are opposed by this submission, is far less than it was under Domestic Rates. Concerns about wellbeing could be addressed by extension of the Council Tax Reduction scheme.