Council Tax reform and Fairer Share were included in a housing policy report put together by the Fabian Society, providing policy recommendations for a next Labour Government. The Council Tax reform piece was written by Tom Spencer, Research Director for Priced Out UK.
REFORMING PROPERTY TAXES
We have wasted 31 years adopting regressive models of council tax argues Tom Spencer
Harold Wilson used the slogan ‘Thirteen wasted years’ throughout the 1964 election to signal that technological development and economic growth would be championed by his Government if they were to be elected. Thirteen years on from Labour’s last term in Government we are in a very similar place. Under successive Tory Governments, growth has been slow, and as such our living standards relative to our neighbours have declined. Channelling his inner Harold Wilson, Keir Starmer has unveiled his five missions for a better Britain that seek to make the UK the fastest-growing economy in the G7.
We are yet to have visibility on the concrete plans, but ideas have been put forward. Michael Saunders, former member of the Bank of England’s monetary policy committee (MPC) and now senior policy adviser to Oxford Economics, has outlined a seven point ‘Plan for Growth.’
Reforming UK property taxes is one of his key recommendations and Saunders writes, “both the OECD and IMF have proposed the UK should shift from the current Stamp Duty system to a tax based on property values (or a Land Value Tax) that is not dependent on whether people move home.” Similarly, David Smith, Economics Editor of the Sunday Times, has argued that “we should move away from Stamp Duty, a tax on transactions, to other ways of taxing property” in his own plan for growth. To its credit Stamp Duty is at least somewhat progressive since buyers only pay on purchases over £250,000, or over £425,000 if you are a first-time buyer.
However, the tax is a disincentive to moving home. It creates a barrier for young families in starter homes to move up the housing ladder, and is also a barrier for those in under-occupied homes who wish to downsize, creating a much less dynamic housing market where people are unlikely to move as often as they and their families would like This leads to under-occupation of property by older generations and over-occupation by younger generations, especially in many of our cities.
Yet Stamp Duty, which hinders growth, is not the only property tax in need of reform. Council tax has existed since 1992 and in theory taxes houses progressively based upon their value. However, the valuations have not been updated since 1991 and the bands are not sufficiently wide.
This means that not only does the tax fail to tax people proportionate to their wealth, it also insufficiently distinguishes
between different property values. This regressive system is designed so that payments increase slower than property values, and thus the greater the property value increases, the less the share of its value must be paid. To make things worse there are vast regional inequalities in how Council Tax is levied – for example, a £30 million townhouse in Westminster will be liable for less tax this year than a modest £120,000 home in County Durham.
Since its introduction the average household in Westminster has paid 2.5 times less Council Tax than the average home in Hartlepool.
Reforming the punitive Stamp Duty and the regressive Council Tax would be an easy way of creating growth in a way that helps the communities who need it most. Putting more pounds in people’s pockets supports local communities and improves health and educational outcomes.
It also encourages entrepreneurs to create businesses and facilitates the movement of employees around the country. This leads to greater economic growth, and a better chance of realising the goal of becoming the fastest growing country in the G7. However, simple abolition is insufficient. We saw from the turmoil that followed Liz Truss’ leadership that fiscal responsibility is essential. The best idea available seems to be Fairer Share’s Proportional Property Tax. This is a fully-costed plan that would introduce a 0.48% tax on annualised property values as a replacement for both Stamp Duty and Council Tax.
Fairer Share’s modelling reveals the enormous benefits for households across the country. Firstly, it would mean annual tax cuts for more than 77 percent of homes with the average household saving over £560 every year.
Moreover, this will be extremely positive for growth. By eliminating Stamp Duty, the IPPR estimates that GDP will grow by more than £3.2 billion thanks to increased market activity. This would go a long way, therefore, to both ending an exploitative and unfair form of taxation and also meeting Labour’s target of becoming the fastest growing economy in the G7.
Finally, the polling suggests this would be electorally advantageous for Labour. Whilst following polls is a poor substitute for governing, when good policy polls well it simply becomes more attractive as an implementable instrument. MRP Polling conducted by JL Partners revealed that should Labour introduce a Proportional Property Tax, it could help the party gain as many as 52 seats including 43 in the so-called ‘Red Wall’. They could also make gains in Scotland and would see their vote share increase by 15% among swing voters.
Keir Starmer’s focus on growth is a sign that, should Labour win the next election, we will finally have a Government dedicated to combating Britain’s relative decline over the past two decades. The last time Labour took advantage of this messaging they won dramatically.
Labour must use this approach today, and bring an end to not just 13 wasted years of the current Conservative Party, but to 31 wasted years stuck with an inequitable and regressive system of property taxation.