Property tax isn’t theft
4 November, 2005

Chris Leslie, Director, NLGN
Public Finance

The Chancellor’s Pre-Budget Report is a fragile early Christmas present for Council Finance Directors. On the one hand it probably contains extra goodies and interest; on the other it can mean extra work putting together the pieces. The normal demands from local authorities for extra revenue support are likely to be answered by the Treasury in the wider context of Sir Michael Lyons’ mega-Inquiry into the role, functions and finance of local government. Chief of the major political issues to be addressed are the genuine problems faced by capital-rich but cash-poor pensioners – the section of the population who prompt the biggest political predicament for local government finance. This is something with greater resonance than how to solve the perennial ‘balance of funding’ dilemma.

Retaining a local property as the basis for a large chunk of council revenue is by far and away the most fair and sensible approach. As well as offering a predictable and measurable foundation upon which revenues can be planned and collections almost guaranteed, taxing property is also a progressive and socially equitable way to raise a local levy. Yet, two main changes are required.

Council tax reformers should look first at how to improve council tax benefit. For those whose routine income is too disconnected from the relative worth of the capital asset in which they reside, this benefit has traditionally been the means of sweetening the bitter pill. But it has a worse take-up than any other benefit, offering nothing to those with quite modest savings. New technology, if properly executed, is capable of administering complex personal financial arrangements and, notwithstanding the overpayment difficulties encountered in the working tax credit and pensions tax credit systems, the time is ripe for a ‘local tax credit’ to come into operation.

The integration of tax and benefits is the cornerstone of a ‘progressive universalist’ approach, and the obvious next step is to integrate with local tax rates in a more personalised, considerate way. If a pensioner’s income (or indeed anyone else’s) is unable to stretch to the local property tax, it can be supported by an off-set of their income tax on a phased and tailored basis. A local tax credit would be a fairer way of helping those in this predicament, and would overcome much of the political obstacle so corrosive to council tax at present.

The second change is to improve the progressive nature of council tax. If personal income issues are taken better account of through a local tax credit, then the unfairness of the current banding structure stands out more starkly. While the value of a Band H property can be over four times that of a Band D property, those in Band H only ever pay twice that of the householder living in Band D. Additional bands should therefore be introduced below the current Band A to be fairer to those who live in the least valuable homes. There is also a very strong case for adding bands above ‘H’ to offset the revenue required to do this.

Neither change would fundamentally alter the ‘balance of funding’. But in my view this is a second-order political risk to local government. The ordinary member of the public is less bothered about the percentage raised locally or nationally than they are about the overall fairness of their local tax. If decision-makers overlook this issue in order to devise some grandiose rebalancing of local revenues, then local government will suffer as much as Whitehall. The scale of council expenditure at present means there is no easy answer to the balance of funding question. To solve it at the expense of local fairness and equity would only open larger more intractable problems with even more pressing consequences.

The annual shock at above inflation council tax increases can be removed if central government properly appreciates the nature of the ‘gearing’ ratio and does its share to lessen the impact. Inflation is a different creature in local public services than elsewhere in the economy, and this should be factored in more fairly. And councils should be given more credit for the efficiencies gained by back-office amalgamations and joint-working.

New trading powers might help rebalance the equation slightly, but these need exploring more radically. In the end, achieving a progressive and fair local revenue arrangement needs to be a higher priority than striving for an end to national involvement in revenue-generation. New Localism can cope with some national standards and oversight, as long as it is light-touch and proportionate and a positive influence for communities most in need. If the Pre-Budget Report breaks the cycle of urgent negotiations and places such issues in the wider context of functions and finance reform, so much the better.