Section 13: Reforming Council Tax
Introduction
1. This section considers whether or not the council tax can be reformed in a way that would significantly redress the problems identified in the previous section, primarily the regressive nature and poor apparent correlation with ability to pay.
2. Previous reviews on this subject, including the 2002 Review of Local Government Finance by the Scottish Parliament's then Local Government Committee and the ODPM Balance of Funding Review group, have argued that there are important advantages in retaining council tax in updated form.
3. The Committee received many submissions arguing that the council tax could be reformed by one or more of the following changes, which are considered below:
- Increasing the number of bands;
- Changing the multiplier between bands; and
- Revaluation.
Increasing the Number of Bands
4. Nobody suggested the complete removal or restructuring of the banding system. There is widespread support for additional bands to be inserted at the top and bottom of the scale, to enhance fairness. Such calls have been made by most of the local authorities that responded to our consultation, as well as the Scottish Labour Party, CBI Scotland and UNISON.
5. In terms of public support, participants in the deliberative focus groups led by GfKNOP liked the idea of an increase in the number of council tax bands. However, this change, even if combined with a steeper multiplier, was not enough to overcome their deeper concerns about the regressivity of council tax.
6. At the bottom of the property ladder some 50% of properties currently lie in Bands A and B. It was suggested that the spread of households within each band should be evened out. Additionally, some witnesses (including the SAA) have pointed to properties of greatly different value that lie within Band A: for example, static caravans and some social housing have very low capital values. Proposals for change have focused on splitting Bands A and B into three or creating a new band amongst the lowest value properties in Band A.
7. While some properties do have a very low capital value, the peak of numbers of properties within Bands A and B is largely a reflection of the fact that there are many homes of similar value within those bands. To try to create additional bands within this group might be perceived to be arbitrary and to represent unfair treatment towards those householders who would have a higher tax liability related to the "benefit" of residing in a home with a marginally higher value than others.
8. The rationale for extra bands at the top of the property ladder is to make the system more progressive and to enhance the perception of fairness between individual households. One method of doing this would be by splitting Bands G and H into three. However there is also a view that more bands should be added to reflect the very broad spread of properties at the top of the ladder.
9. The University of Stirling's modelling work concluded that "introducing additional council tax bands has virtually no effect on the burden of council tax", as Figure 13.1 shows.
Figure 13.1: Effect of increasing number of council tax bands from 8 to 16 by income decile
10. These results are consistent with the outcome of research by Heriot-Watt University for the Scottish Parliament's former Local Government Committee. Although the results appear to be counter-intuitive, we also note that Sir Michael Lyons was surprised to find that adding additional bands would not appear to have a significant impact in making council tax relate more closely to ability to pay. 215 This seems to be due largely to the fact that households with diverse levels of income can be found in every council tax band in England.
Changing the Multiplier Between Bands
11. As explained in section12, at present council tax has a multiplier of three. This is a shallow multiplier, as the difference between the respective values of properties in Bands A and H is substantially more than three times.
12. There was strong support amongst local government interests for making the council tax multiplier steeper to enhance fairness. Figures of up to 10:1 were proposed in submissions.
13. In terms of public support, participants in the deliberative focus groups led by GfKNOP liked the concept of a steeper multiplier. However, while they welcomed this and other suggested reforms to council tax, they were not satisfied that these changes were sufficient to address their deeper concerns about the regressive nature of the council tax.
14. As part of the modelling work undertaken for us, the University of Stirling undertook a series of experiments, to test the effects of changing the multiplier between Bands A and H. Although the number of scenarios that could have been considered were limitless, the scenarios tested were as follows:
- Scenario 1 - increasing the multiplier from three to seven. In this scenario, the tax payable at each band was changed from ninths to fifths.
- Scenario 2 - increasing the multiplier from three to 14. In this scenario, the multiplier approximates the difference in the capital value of houses in Bands A and H. Data on house prices from the Scottish Assessors Survey suggest that the ratio of the price of Band A and Band H houses sold in 2005 was 14.2 (with the average Band A house in Scotland selling for £45,000, while the average Band H house sold for £645,000).
- Scenario 3 - increasing the multiplier from three to 42. In this scenario, the multiplier approximates the ratio between the annual income of a single person on income support and someone earning £100,000 per year. This is around 42.
15. The ratios between each of the eight bands at present and under each of the above scenarios is shown in Figure 13.2.
Figure 13.2: Ratios used under experimental changes to the council tax multiplier
CT Band | A | B | C | D | E | F | G | H | Multiplier |
|---|
Current | 0.67 | 0.79 | 0.89 | 1 | 1.22 | 1.44 | 1.67 | 2 | 3 |
|---|
Scenario 1 | 0.4 | 0.6 | 0.8 | 1 | 1.4 | 1.8 | 2.2 | 2.8 | 7 |
|---|
Scenario 2 | 0.25 | 0.5 | 0.75 | 1 | 1.63 | 2.25 | 2.88 | 3.5 | 14 |
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Scenario 3 | 0.125 | 0.375 | 0.625 | 1 | 2.06 | 3.12 | 4.18 | 5.25 | 42 |
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16. The results were adjusted so that the same yield was achieved in each scenario.
Figure 13.3: Ratio of new council tax bill to net equivalised household income by household income decile
17. As Figure 13.3 shows, increasing the multiplier makes council tax more progressive. As a result, the council tax payable by households in income deciles 1 to 6 declines in most instances, 216 while beyond income decile 6 the decline in the proportion of net household income accounted for by council tax declines more slowly than under current council tax.
18. The University of Stirling undertook further work on the effect these changes would have on different types of household. The results suggested that single adult households would gain from increasing the ratio of Band H to Band A council tax, because single adults are more concentrated among lower council tax bands. These gains would be greatest with Scenario 2. Scenario 3 would be less advantageous to single adult households, perhaps because the small number of them who live in dwellings that are in the higher council tax bands disproportionately affects the average council tax burden for this group.
Figure 13.4: Gains and losses for households relative to current council tax structure
19. Figure 13.4 shows that for all three scenarios, the majority of households either gain from the change in the multiplier or are unaffected (more than 50 per cent of the population either experience a gain or no change). The maximum gain is around 5 per cent of net income for Scenario 3 and, as we might expect, this scenario also generates the largest loss, of around 15 per cent.
20. The more progressive the council tax structure, the larger the share of households that are at least as well off. But as the structure of council tax becomes more progressive, the losses of those who are made worse off by the changed structure increase. Thus, the more progressive the scheme, the greater the proportion of the population who gain, but those who lose do so more heavily. This finding is quite consistent with any tax whose structure is being altered but whose yield is being held constant: the more who gain, the greater the cost to the losers.
21. All three scenarios were based on a continuation of the current 8 band structure.
22. However, a tension emerges about the optimum number of bands. As the council tax was made more progressive, so the variation of tax payable at adjoining bands would increase. This scenario, where a small increase in the value of a property can result in a substantial increase in council tax liability, is sometimes described as a "cliff-edge effect". The present difference between the average amount payable by adjoining bands is shown in the following figure:
Figure 13.5: Difference in amounts payable in 2006-07 between adjoining bands based on average Scottish council tax figures
Bands | Difference in amount payable |
|---|
A-B | £125 |
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B-C | £125 |
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C-D | £125 |
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D-E | £251 |
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E-F | £251 |
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F-G | £251 |
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G-H | £376 |
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23. The "cliff-edge" effect means that a small difference in the 1991 value of a property can make a significant difference in the amount payable each year in council tax. For example, a householder in a property worth £59,000 in 1991 (that is, just falling within Band E) has to pay just over 22% more each year than someone living in a property worth £57,000 in 1991 (that is, just below the upper limit for Band D). It is questionable whether this is fair to the Band E householder.
24. Increasing the multiplier between bands would widen the difference in the amount payable by adjoining bands - in the case of above scenario 3, considerably so - and accentuate the "cliff-edge" effect. The larger the multiplier, the greater the "cliff-edge" between each of the bands.
25. The position outlined in the previous paragraph could be mitigated to some extent by increasing the number of bands, so that the step-change between each band decreases. However, a large number of bands would be required before the "cliff-edge" impact of increasing the multiplier was offset and the more bands that are created, the closer a banded system becomes to one where properties are valued individually. Furthermore, throughout this debate, there is no reason why the thresholds for bands should be set at any one value over any other value - it is an arbitrary process with the potential to fuel further discontent.
Revaluation
26. Another way that has been suggested to improve council tax as a property tax is to update the property valuations on which it is based. The existing system is based on property values 15 years ago, in 1991.
27. For the purposes of our Report, we have assumed that the purpose of a revaluation would be to distribute the existing tax burden in line with up-to-date property values and not to increase the overall tax yield.
28. Both our Committee and the Scottish Parliament's former Local Government Committee ( LGC) (during its 2002 inquiry into local government finance) have received strong statements of support for revaluation, particularly from local authorities and professional organisations like the Chartered Institute of Public Finance and Accountancy ( CIPFA) and the Institute of Revenues, Rating and Valuation ( IRRV). Indeed, the LGC recommended (at para 49 of its Report) in favour of early revaluation.
29. The Committee strongly supports the principle of regular revaluation and considers the matter in detail in section14. However, we are not persuaded that a revaluation on its own (or in combination with changes to the bands or multiplier) would overcome the shortcomings of the current system.
Conclusion
30. The Committee has carefully considered the proposed reforms discussed above. We are not satisfied that any banded system can be improved sufficiently to overcome its inherent shortcomings.
31. We have therefore examined a different capital value option which is considered in the next section.