Moving to a Proportional Property Tax: Implications for Local Government Finance

Addressing the impacts on council revenues, resources and residents

Summary

The Fairer Share campaign proposes replacing the regressive Council Tax and unpopular Stamp Duty with the Proportional Property Tax (PPT). 

Many of our supporters have asked us the following important questions on local government finances: 

• How would PPT revenue be managed between local and central government?
• What impact does the PPT have on council finances?
• What impact does PPT have on council residents? 

Each of these topics are discussed in turn, below:

Managing PPT revenue between local and central government  

Currently, Council Tax revenue goes to councils. Stamp Duty revenue goes to central government.

The move to PPT would create a new source of revenue. 

There are three arguments in favour of councils receiving a direct share of the PPT revenue raised in their area. It would mean that:

• voters could hold local councillors to account for local tax and spend decisions;
• councils do not give-up revenue-raising power to national politicians; and,
• councils have incentives to pursue local growth so as to increase local tax revenues.

Significantly, with revenue based upon annually updated house prices, councils would retain a share of the uplift in house prices that their policies create. 

The key argument in favour of central government receiving a direct share of PPT revenue from every council area is that it would offset the Exchequer’s loss of Stamp Duty receipts. This centrally- collected revenue could potentially be redistributed to local areas that have higher local spending needs and / or greater need for local economic investment.        

These arguments can all be recognised within the design of PPT, along the following lines:

• PPT revenues split into a council allocation and a central government allocation. A council and central government would each “own” a share of the PPT rate. The council allocation would ideally be large enough to encourage councils to pursue local growth initiatives.  
• Councils given power to flex the rate of PPT that gives them their PPT allocation. Councillors could make decisions to increase or decrease the rate on their PPT allocation, much like councillors can make decisions to vary Council Tax now. 

Stability in PPT revenues would be desirable at both a local and national level. Should there be times when revenues from PPT drop significantly, the Government could step in with grants to fill the gap.

The impact on council finances

Upon introduction PPT would raise the same amount of revenue as Council Tax does now. 

But because PPT is linked to local property prices, the amount of PPT revenue raised in some council areas would be significantly different – much larger or much smaller – from the revenue they currently raise from Council Tax. This is because Council Tax is based on valuations from 1991 and does not adequately reflect the substantial change in regional house price growth or generational imbalance that house price growth has created.

For those councils that would raise less from PPT than they currently do from Council Tax, the difference would have to be made up with central government grants or from funds redistributed from councils that raise relatively large amounts of PPT revenue (or both). 

This type of arrangement is not new. It has been a feature of local government finance in England for decades. It could be incorporated seamlessly into PPT with the following principles: 

• Government should fully recognise how council revenue raising capacity is changed by PPT in its arrangements for funding local government. In other words, the ways in which the Government decides how to direct funding across all of local government should consider the individual capacity of councils to fund themselves. 
• Councils could be given new powers to generate more revenue independently. Given that some revenue raising capacity could be lost by councils, there are opportunities for new revenue raising powers to be introduced. One example, would be to give councils the power to implement a levy on overnight tourist stays. Another example would be to reform planning permission to allow councils to build more houses. 

It would be understandable if some councils were sceptical about transitioning to PPT if they have less capacity to raise revenue. But it is important to note that those council areas that see the biggest reduction in revenue raising capacity are also the areas where the greatest proportion of residents will see a reduction in their property tax bills or experience no change in their tax liability as a result of PPT. The policy would also introduce incentives for companies and individuals to relocate to areas with lower PPT, which in turn would benefit the community. In time this would lead to higher PPT revenues for the community. 

The impact on council residents

Unlike Council Tax, the obligation to pay PPT would be on the property owner, not the property tenant. 

Overall, there would be far more winners than there are losers from PPT – 76% of England’s households will see a reduction in their property tax bills. 

But due consideration needs to be given to those residents that may not benefit from PPT. 

Some homeowners – predominately in London and the South East – would pay more in PPT than they currently do in Council Tax. This increase is ameliorated by the abolition of Stamp Duty Land Tax which is particularly punitive in this region due to the higher property prices. 

Other residents who may not benefit are those currently receiving some form of assistance – by being exempt or paying a reduced rate – in paying Council Tax. How these residents are affected by PPT will depend upon how much help they have been receiving, and if they are homeowners or renters. 

Fairer Share proposes a revenue neutral system retaining the same total quantum of funding provided by the current Council Tax Support scheme. In many areas the savings under PPT compared to Council Tax would be equal to (or larger) than the value of benefits received through the Council Tax Support scheme.

Mitigating action could be taken to support residents who pay more under PPT. 

Fairer Share has already outlined some plans: 

• At the point of transition to PPT,  any increase in local property tax would be capped at  £100 a month for primary residences. The transitional protection would disappear at point of sale but such buyers would have benefited from the removal of the punitive Stamp Duty.
• For those unable to meet the £100 a month increase under transitional protection, or in the longer-term, the full costs of PPT, there is a deferral mechanism until point of sale.

These mitigating actions are purely financial, but there are other options to consider, including: 

• Giving councils the power to design their own systems for supporting low-income residents through PPT, i.e., not having centrally designed restrictions.  
• Central government could offer councils financial resource for those negatively affected by PPT by increasing funding for Discretionary Housing Payments. 
• The Government could offer generous PPT discounts for socially rented homes that meet the highest level of energy efficiency, moving from a system of grants and loans to one of market incentives.

Conclusion

The design of PPT can support council independence through a split of revenue allocations between councils and central government.  It can fit into the current system of local government finance so that the revenue-raising resources and spending needs of councils are recognised. It can protect those who are asset rich / cash poor and / or are currently exempt from Council Tax or are eligible for a discounted rate.

This is all in addition to the other arguments in favour of PPT, such as working international precedents and a coherent approach to valuation.