Government response to the HCLG Select Committee report on local authority financial sustainability and the section 114 regime – a response from Fairer Share

The Government is missing a clear-cut opportunity to level up by refusing to consider the Housing, Communities and Local Government Select Committee’s suggestion that it should consider options for wider reform of council tax, including a proportional property tax. What’s more, the Government’s explanation for why it is sticking with the status quo does not stand up to scrutiny.

1. The Government states: “Council tax provides stable income for local authorities to deliver a range of vital local services, and predictable bills for taxpayers.”

With upwards pressures on spending forcing councils to raise ever more revenue through council tax, it is surely debatable as to whether the levy provides stable income for local authorities. Also, there is no reason why council tax would provide local authorities with more stable income than would be the case with a proportional property tax. To ensure stable and balanced revenues, we propose that in areas where proportional property tax revenue is higher than that raised by council tax, the extra will be used by central government to compensate councils which raise less in proportional property tax than they do in council tax. 

As for the claim that council tax provides predictable bills for taxpayers, the only predictable thing about many council tax bills is the unfairness that is baked into them. Based on property values that are thirty years out of date, council tax ensures that households in low-value homes must pay out a far higher share of their property’s value in tax every year than those in more expensive homes. It also hits renters saving up for a deposit just as hard as those who have made it onto the property ladder.

2. The Government states: “A revaluation would be expensive to undertake and could result in increases to bills for many households.”

At some point the Government will have to undertake revaluation. Using 1991 house values will just entrench and worsen existing inequalities and seem ever more outdated and ridiculous. Letting this problem slip into the future is short-termist and will be harmful to the Government and the Conservative Party’s manifesto commitment to level up.

We commissioned the well-respected International Property Tax Institute (IPTI) to write a 200-page deep dive into the issue of valuation. Other jurisdictions manage to provide accurate valuations of the capital values of their properties – Netherlands, New Zealand, British Ontario, New York. For a country that prides itself on data analytics and AI your concerns around valuation are insufficient. 

In IPTI’s view, the introduction of PPT poses no insurmountable technical or valuation issues. As we have already stated, much of the rest of the world operate similar systems and they have proved reliable and sustainable.

There are implementation costs to be considered but, in comparison with the potential revenue to be derived from PPT, they would appear to provide good value for money in terms of cost/yield ratio. The Government already collects the requisite data at the VOA. To undertake a PPT it is a case of using the data correctly.

One thing that we do know about households bills that would result from the system we propose it that most would go down. Around 19 million households in England (76%) would gain under a proportional property tax, seeing a reduction in the amount of tax they pay on their primary residence.

3. The Government states: “The creation of higher council tax bands, which in itself would require a revaluation, may penalise people on fixed incomes, including pensioners, who could face a substantial tax rise without having the income to pay the higher bill.”

While a minority of people in valuable homes would see their bills go up after a revaluation, the Fairer Share system has built in safeguards to ensure that there are no losers on day one of a proportional property tax being implemented. For those staying in a high value home and paying the new tax, losses would be capped so that, at the point of transition, no household sees an increase of more than £100 per month on what they currently pay. But to ensure there do not have to be any losers on day one, there would be a deferral mechanism until point of sale on a low interest rate, so that nobody has to pay out immediately if they cannot afford to do so.

It is true that some asset rich, cash poor homeowners in valuable properties would see their bills go up under a system of proportional property tax. But many more people would see their bills go down and the alternative is sticking with a system which penalises renters and hard-pressed families in lower value housing.

4. The Government states: “Given that council tax is retained locally, a revaluation would not address the disparity between strength of council tax base and need.”

Again, this is misleading. Following a revaluation, under the Fairer Share model councillors would be able to set their own rate within a nationally-agreed range, maintaining vital local democratic connections (see more here). This would leave councils in a stronger position than now. Currently, councils can increase council tax a certain amount set by government, with central funds making up a large proportion of council budgets. With a proportional property tax, councils will still have flexibility within a nationally-agreed range and central redistribution will continue to make up a large slice of budgets. 

The real difference with the new tax is that it will put cash in the pockets of the local people who are struggling the most, boosting local businesses and allowing councils to deliver better services.

 

What is perhaps most telling is that the Government’s 234-word defence of the current system does not mention the word fairness once. But perhaps we should not be surprised when we have such an outdated and unjust system. Nevertheless, the Government’s position is completely at odds with the its stated desire to level up the country. As council tax continues to rise, hitting hardest on renters and homeowners in lower value properties, we can clearly see that it has the effect of levelling down rather up. 

It is evident from the Government’s response to the HCLG Select Committee that excuses for sticking with the status quo are running out. As the “cost of living” crisis hits households up and down the country, now is the time for ministers to take action where they can. That must mean killing off council tax and stamp duty and bringing in a system of proportional property tax that we know would bring about lower bills for most households.