The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
12 What the Evidence Tells Us
12.1 The present Council Tax arrangements do not relate to the ability to pay – whether measured against wealth or income – and have become widely discredited.
12.2 The present Council Tax Reduction scheme is a highly complicated system, does not provide sufficient support for people who we would consider to be on low or precarious incomes, and has a low take-up rate.
12.3 The ability of Local Government to make choices about how local taxes are raised and spent, and to be held accountable for those choices, is part of the democratic process and an important part of any reform.
12.4 Any change must support an enduring and stable tax base for Local Government.
12.5 There are, broadly, three alternative types of recurring taxes that could be applied annually at the local level to replace the present Council Tax – taxes on property, taxes on land and taxes on income. There are attractions to creating taxes that combine elements of each, especially because no one type of tax provides a perfect, readily implementable solution – all have advantages and disadvantages.
12.6 Opinions are divided on the fairness of each. There is strong, but not unanimous, initial public challenge to the idea that any tax based on property or land values – including the present Council Tax – is truly related to the ability to pay. The balance of opinion from the many organisations and professionals who have engaged with the Commission is that property or land taxation is an effective and economically sound basis for local tax, although some also articulated support for taxes on income. Ownership of property or land is taken by many to imply a degree of wealth that in turn indicates the ability to pay.
12.7 International examples are diverse and show that there is no one understanding of a fair local taxation system, and that almost all countries use more than one type of tax.
12.8 Property tax receipts tend to be more stable, but also less buoyant, than receipts from taxes on income.
12.9 Well-designed taxes on property or land are harder to avoid than taxes on income.
12.10 A fairer tax on property would be one that is more proportionate to property values. This would lead to relative changes in the liability of lower value properties in relation to higher value properties.
12.11 A property tax that is more proportionate to property values would still not be proportionate to incomes. A system of relief would therefore be needed for those without the income to meet their liability that is more effective than the current Council Tax Reduction scheme.
12.12 Property taxes are ideally based on regularly and frequently updated valuations. However, our analysis shows moving from the present 1991 values used for Council Tax would of itself change the liabilities for many. This, and the evidence from overseas, indicates that whilst desirable, an initial revaluation of properties would be politically challenging to deliver.
12.13 The public attaches a strong importance to income in its definition of fairness, perceiving it to connect to ability to pay. It is this factor which underpins the opinions and evidence received advocating a local income tax. In order to meet this test of fairness, local income taxes would need to apply not just to income from earnings, but also to income from dividends and investments, which would be an administrative challenge. This illustrates that it is difficult to achieve both fairness and administrative efficiency in any one single tax instrument.
12.14 Existing HMRC income tax collection systems might provide a basis for collecting a locally determined income tax, but this would be a major undertaking, could not extend to income from savings and dividends and would need the support of the UK Parliament. The alternatives include a Scottish collection body or individual local collection arrangements, both of which present challenges to operate.
12.15 Any change will affect household or individual tax liabilities. There is strong support for a system of transitional relief operating over several years to protect households from sudden major changes to their tax bills. Structural changes create particular issues. For example, income taxes are generally based on individual incomes and the Council Tax is charged to households.
12.16 Changing the fundamentals of the local tax system would require primary legislation. It would be hard to pass an Act before the Local Government elections in 2017. Changing tax collection and administration systems following the enactment of a new tax may take perhaps two years or longer, depending on the scale of the change.
12.17 A revised tax on property is the most readily administered alternative tax system. A move to a land value tax would require better knowledge of land ownership and values to be developed over a number of years.