Scottish Government

Section 12: Current Council Tax

Introduction

1. Council tax was introduced in 1993, replacing the Community Charge which had been in force in Scotland for four years. Its introduction was received well by the public, being seen as considerably fairer than the Community Charge and easier to understand than its predecessor, domestic rates.

2. As indicated in section9, the council tax is a hybrid tax with property, personal and, through the operation of the Council Tax Benefit scheme, income-related components. The 2.26 million domestic properties are each allocated to one of eight bands (A to H) on the basis of the value of the property at 1 April 1991. There has been no revaluation of domestic properties since then. The distribution of the council tax burden amongst the eight bands is determined by a "multiplier" formula. Overall, the multiplier means that the tax payable by the highest band (H) in any local authority area is three times that for the lowest band (A). The bands and the multiplier between bands are shown in Figure 12.1 below:

Figure 12.1: Council tax band limits and multiplier

3. As shown in Figure 12.2, nearly 50% of all properties are in Bands A and B, while Bands G and H contain less than 4%.

Figure 12.2: Number of households by council tax band

4. A system of exemptions, discounts and disregards applies to the council tax. Some properties are entirely exempt from the tax. Properties occupied by certain categories of person are also fully exempt. Some categories of unoccupied properties are exempt on either a time-limited or indefinite basis. Reflecting the personal component of the tax, discounts are available for single person occupancy of a property and for second and long-term empty properties. The 25% single person discount applies to over 900,000 properties. Certain categories of persons are disregarded for the purposes of determining whether or not a single person discount is applicable.

5. To the best of our knowledge, the council tax system in Great Britain is the only banded property tax system in the world.

6. Our consultation produced very limited support for retention of council tax in its present form. As part of the representative sample survey undertaken for our Committee by MORI Scotland, participants were asked for their opinions on a number of types of tax currently in operation. Of these, 60% of respondents stated that they were dissatisfied or very dissatisfied with council tax. This compares with dissatisfaction ratings of 69% for petrol duty, 35% for VAT and 32% for income tax. ²⁰¹

7. Many responses to our consultation from members of the public have highlighted criticism about the scale of annual increases in council tax bills and their effect on certain sections of the community, especially pensioners and others on fixed incomes. Figure 12.3 below shows the average year-on-year percentage increase in average Band D council tax. As discussed in section7, many local authorities put this situation down to the "gearing effect" by which, because only a small proportion of local government funding comes from local taxes, even modest increases in overall council spending require large percentage rises in local taxes.

Figure 12.3: Average Band D council tax in Scotland 1996-97 to 2006-07²

8. The scale of discontent with council tax should be set in context. In their report analysing the results of the public survey, MORI Scotland commented that concern about council tax has never exceeded 4% in MORI's monthly "Most Important Problem" poll (in contrast, the community charge reached a peak figure of 52%). This is a relevant point for policy-makers, as it suggests that clear expressions of concern about council tax and council tax levels should not be confused with a general perception amongst the public that this is a high priority area for reform.

Assessment Against Criteria

9. We have assessed the effectiveness of council tax against the same criteria on which our consideration of other tax options is based.

Macro-economic criterion

10. Section9 discussed the potential effects of a property tax on the economy. Although commonly regarded as such, council tax is not a pure property tax. The non-linear multiplier gives a substantial personal element to the tax. For instance, a household in a Band H home worth £1 million today pays only three times as much as a household in a Band A home worth £40,000 today (25 times less). The personal element is further enhanced by the single person discount. As we discuss in section14, evidence suggests that a more proportionate property tax might have significantly more effect on property prices than council tax.

Fairness-related criteria

11. The principal reasons amongst the public for disaffection with council tax are its perceived lack of fairness (defined in section8) and its disproportionate impact for people with limited means. This was reflected in the MORI Scotland survey for our Committee. Of those respondents who were dissatisfied with council tax, 54% said it is too expensive, while 31% said it is unfair. It was also reflected in responses to our consultation paper, where perceived fairness was overwhelmingly the key issue.

12. Likewise, the GfKNOP survey identified "overwhelming criticism of council tax", ²⁰³ with comments that council tax is expensive and places an undue impact on pensioners and low-income households. Taxing property is seen as being inappropriate, as property values are not perceived to reflect ability to pay and because of the impact on "asset-rich, cash-poor" households. Unlike income, wealth tied up in property is not immediately accessible for the purposes of paying tax. Concern about the effect of council tax on pensioners is particularly strong (although this may have been influenced by topical news stories of the time from England about the conviction of pensioners for non-payment).

13. Help the Aged in Scotland also expressed strong concern about the effect of council tax on many pensioner households, particularly single pensioner households and other 'asset rich but income poor' households. Their submission stated that combined council tax and water and sewerage rates are usually the second biggest item of expenditure in a pensioner household (after food) - averaging 11% of net income (13% over the 10 months of the year when council tax is payable).

14. The fact that Help the Aged have chosen to link the separate items of council tax and water and sewerage rates together is significant. As we discuss in section20, there is considerable scope for confusion in that many people apparently see their "council tax bill" as the sum of their actual council tax liability and water and sewerage charges.

15. Available evidence suggests that there is a general relationship between income and property levels, although there are also a sizeable number of exceptions (see Figure 12.4 below).

16. Because the data from the Family Resources Survey and the only property valuation data available relate solely to the bands rather than the actual values, it is very difficult to get a definitive answer to the question as to how strong the relationship really is. The statistical correlation between income and band appears to be low at around 0.3. But it is not clear to what extent this is a function of the numbers of "outliers" and the fact that valuation calculations assume the mid-point of each band.

17. There is a clear association between households on low incomes and households living in dwellings covered by council tax Band A (72% of households in Band A lie in income deciles 1 to 5). Households in Bands B and C, and to a lesser extent Band D, are distributed across all the income deciles. Beyond Band C, households become increasingly concentrated in the higher income deciles. Recent research suggests that incidences of apparently low income in high valued properties were associated with fluctuations in income. ²⁰⁴ The question really is "How much of any household's income does council tax take?"

18. We have used this data to estimate the prevalence of "asset rich, cash poor" households, which live in relatively expensive houses despite having a modest income. The figures show that around 8% of households in income deciles 1 to 3 live in a property in Bands E to H. But they account for only 2% of all households in Scotland and in absolute numbers amount to around 50,000 households. We consider the position of "asset-rich, income-poor" pensioner households in section16.

Table 12.4: Approximate distribution of households by income and council tax band²⁰⁵

Figures in thousands (Percentage of all households in Scotland)

19. For council tax to be seen as fair, it requires the existence of an effective benefit system. The existing Council Tax Benefit scheme is extensive, and forms an essential part of the council tax system. Some 24% of households in Scotland receive Council Tax Benefit, roughly half of which include at least one person age 60 or over. Of these, among three-quarters receive full Council Tax Benefit. Some half of Band A households, and one-third of Band B households, receive Council Tax Benefit. Around 80% of recipients live in homes in Bands A or B. ²⁰⁶

20. Figure 12.5 was produced by the University of Stirling. It shows how the share of equivalised household income spent on council tax varies by income decile, after taking account of Council Tax Benefit and discounts. Among the upper deciles, there is a general downward trend in the burden of council tax, so that it is equal to around 2.5% of income for those in the top income decile. The burden of council tax appears to be high in the lowest income decile compared with the second decile. This is because of the Family Resources Survey contains a number of households with very low incomes which do not appear to be eligible for council tax benefit, perhaps because of income instability or self-employment. It then drops steeply at the second decile, where the effects of council tax benefit become stronger, then applies at around 4% for income deciles 3 and 4, around 5% for deciles 5 and 6 and declines thereafter.

Figure 12.5: Net council tax as a share of net household income before housing costs

21.ODPM's Balance of Funding Review group described a positive feature of council tax as being that its basic principles are easy to understand. Responses from the deliberative focus groups led by GfKNOP tended to echo this, although income tax was perceived to be simpler still to understand.

22. Council tax is a clearly comprehensible payment. While income tax under PAYE is deducted at source and VAT is hidden within a retail price, the council tax bill is a discrete entity, posted each year to each household in Scotland. Households have to take positive measures to ensure that they meet their liability to pay council tax, whether it is setting up a direct debit mandate, for example, or physically travelling to a council office to pay in person.

23. Most participants in the deliberative focus groups carried out by GfKNOP felt that the present council tax system is straight-forward. However, GfKNOP also reported that most participants found the property banding system for calculating tax liability unclear. It is not surprising that people should find it difficult to associate their property with a particular tax band, because of the arbitrary nature of the upper limit of each band and the fact that the bands are based on market values that are now 15 years out of date.

24. The MORI Scotland representative sample poll also suggested quite poor public awareness as to which band a respondent's home falls. Many people (35% of respondents) stated that they did not know what band their own property falls into. The distribution of other results was significantly different from the actual breakdown of properties by band in Scotland, as Figure 12.6 shows:

Figure 12.6: Comparison of perceived council tax bands and actual distribution of houses in Scotland across council tax bands

Assessment and collection criteria

25. Property-based taxes - including council tax - are difficult to evade, because they relate to people's homes which are immobile.

26. Some local authorities were perceived by our respondents to be poor at collecting council tax. Those who pay promptly argued that this is unfair because they are subsidising the non-payers.

27. The average in-year collection rate for council tax in 2004-05 was 92.7%, ranging from 85.6% of the income due for the year to 97.3%. ²⁰⁷ Audit Scotland reports that the variation between authorities in collecting council tax has diminished since 1996-97, due in large part to significant improvements in collection rates by several of the poorer performing councils. ²⁰⁸ A recently published research report for the Scottish Executive highlighted how the inclusion of water and sewerage charges alongside council tax bills is a factor that makes it difficult for local authorities in Scotland to match the collection rates of authorities in England and Wales. ²⁰⁹

28. However, the very same results can be interpreted in different ways, according to a particular view about council tax more generally. Local authorities argue that council tax collection rates are very good, and improving. Against this, a number of respondents to our recent consultation were critical of recent collection rates. Behind these comments tended to be views that there is little reason why collection rates could not be at or close to 100% and that councils are not trying hard enough to catch residents who are evading the tax. The Scottish Liberal Democrats and Scottish National Party also view collection rates as being low, although the SNP acknowledged in their submission to us that collection rates have improved in recent years.

29. On the related issue of how easy the methods to pay are, local authorities offer a range of options for paying council tax, including by post, telephone or in person at a range of locations, or by direct debit. It is possible to pay council tax bills in instalments. Usually this means ten monthly instalments between April and January, with no bill being payable in February or March. To the best of our knowledge, only a small number of councils provide residents with the option of 12 monthly payments. As we discuss in section14, having to pay a year's bill in a ten month period can make council tax bills more challenging.

30. Turning to the costs of collecting council tax, those members of the public who responded to our consultation who cited high collection costs also tended to link this to a perception that council bureaucracy is too great and that HMRC could collect the necessary funds more cheaply through income tax. A sizeable share of the cost of collecting income tax falls on employers, a fact often overlooked when collection costs are cited.

31. The cost of collecting council tax ranged in 2004-05 from £6.81 per dwelling to £24.99. The Scotland average was £13.23 ²¹⁰. In addition, the Scottish Assessors' Association ( SAA) estimates that the annual recurrent cost of maintaining the Council Tax Valuation List is around £1.2 million. SAA estimates that a revaluation under the current system might cost a further £4.7 million. The average administration cost per Housing Benefit and Council Tax Benefit case was £48.22 per application in 2004-05. ²¹¹

32.CIPFA in Scotland has quantified these administrative costs as mounting to around £30 million per annum across Scotland (or 1 ¹/ ₂-2% of council tax yield). ²¹² This is a benchmark figure against which we assess the cost of other options later.

Yield-related criteria

33. Council tax offers the stability and predictability of all property taxes. The taxbase is stable from year to year. Furthermore, the anticipated council tax yield can be known in advance, because households are charged a fixed and pre-set sum of money.

34. For households themselves, this means that they know at the start of the financial year precisely how much council tax they are going to have to pay during that year. In most instances, unless the household moves to another home, that bill will not change even if the household undergoes a major change in circumstances during the year ( e.g. redundancy). The council tax system relies on Council Tax Benefit being available to provide support for households whose ability to pay council tax diminishes in-year.

35. Council tax is not inherently buoyant. As Figure 12.7 shows, the council tax base rose by only 10.5% between 1993 and 2005. What buoyancy there is has been due largely to an increase in the number of houses. In the same period, mix-adjusted house prices rose by almost 90%. ²¹³

Figure 12.7: Indices of Band D Equivalents and ODPM Mix Adjusted Nominal House Prices in Scotland 1993-2005

Accountability and balance of funding criteria

36. The size of the tax base for council tax reflects the taxbase which applies to property taxes generally. As discussed in section9, there are an estimated 2.26 million households in Scotland in 2006. With the number of households projected to increase in the coming years, this is a taxbase that is likely to increase in size for the foreseeable future.

37. Council tax is clearly identifiable as a local tax: it is billed and collected locally. Tax rates are also set locally, which local government interests (including most local authorities, COSLA and SOLACE) argue is an important element of local accountability. As we explain in section6, we received no objective evidence to support this argument.

38. A key justification for council tax is that it is important that a tax on the continued enjoyment of property should feature as part of the overall basket of taxation. The corollary of this is that the extent to which a property tax, or any tax for that matter, can reasonably contribute as part of that basket is limited. In particular, the role of council tax is limited by the fact that it is based on wealth (in the form of property values) and not income. Consequently, council tax is not capable of responding flexibly and effectively to changes in the balance of funding. We note that the Scottish Parliament's former Local Government Committee concluded, as did the Institute of Revenues Rating and Valuation, that council tax ultimately should not make up any more than 25% of local government income. ²¹⁴

Implementation criterion

39. Any issues about changing to a new system of local government finance do not really apply to council tax, as the system which is already in place.

Conclusions

40. Council tax is a valuable element in the basket of UK taxes. However, its shallow, non-linear multiplier makes it more onerous on households with modest incomes than on higher-income households. In terms of its effect on the economy, the fact that the size of council tax bills do not differentiate greatly between homes of different value restricts its effectiveness in moderating fluctuations in property prices - potentially a key benefit of a property tax.

41. We believe that council tax in practice shares the administrative merits of property taxes in principle. It is reasonably simple and inexpensive to collect and provides a stable and predictable yield. For local authorities, its main limitations are that it does not inherently offer a buoyant yield and it would be unlikely to cope comfortably were the balance of funding to be weighted more towards local government.

42. For taxpayers, council tax offers the advantage of being easy to understand. However, we take the view that it has fundamental shortcomings. In particular, we are not satisfied that council tax is as progressive as it might be, nor that the link between it and households' ability to pay is adequate. In addition, we believe that measures would need to be adopted to make council tax easier to pay.

Recommendation 3: We recommend that council tax should not be retained in its current form.