Simon Pia: Taxing issue of property

POLITICIANS must begin to address the thorny problem of resolving an unfair valuation system that has shackled council spending on 
front-lines services, writes Simon Pia

Some would call it political cowardice, while cynics would say it’s more a case of political savvy, but that still does not shift the elephant squatting in the front room of Scottish politics.

This large and immovable object, currently squeezing the life out of councils, is the most basic public spending issue, relating to cuts to front-line services over the next couple of years. But fear of media headlines about tax hikes only ensures that this massive political problem is deadlocked and keeps the foot down on the accelerator as Scotland’s local services head towards a 
car crash.

Meanwhile, the council tax freeze remains lodged firmly in place for at least another four years. No-one dares say it is time to lift the freeze, even on the top bands. But despite it being, arguably, the most regressive and unfair policy introduced in Scotland since the poll tax, the SNP continues to get a remarkably easy ride from both its political opponents – afraid to challenge head on such a “populist” policy – and many of the liberal commentariat.

The Nationalists’ camp followers in the Labour-bashing pseudo-left wilfully ignore its inherent unfairness and turn a blind eye to it, undermining the Nationalists’ social democrat credentials. Even when the Conservatives adopted this Nationalist flagship policy south of the Border it raised little dissent or comment in Scotland.

But all parties, particularly Labour, were afraid during the housing boom to reform the tax and face up to the problem of property revaluation. The last revaluation in Scotland was conducted in 1991 and, as property prices have soared since, no-one has dared tamper with the sacred shibboleth of get-rich-quick speculation.

It should be noted, though, that there has been an honourable exception. Labour in Wales had the gumption to take it on, revaluing in 2005. Council tax on a top band house in parts of the principality are now higher than in some central London boroughs. Welsh Labour has lived to tell the tale and is still in government, unlike its Scottish counterpart.

By the time the SNP came to power in 2007, the council tax was already seen as deeply flawed and unfair. Labour at Holyrood had failed in its attempts to reband or reform it. Meanwhile, the SNP promised to get rid of it and an SNP Cabinet minister said to me: “It’s what got us elected.”

It didn’t matter, he said, that the SNP’s plan to replace it, the local income tax (LIT), would collapse. The job was done. A large lollipop has been dished out to the electorate, with everyone saving some money as this was one bill that would not go up. But the biggest winners would be the people in the biggest houses.

Still, it was widely recognised that it was a regressive tax, based on property valuations that bore little relation to actual or differential price. Even more shame, then, on the SNP, the most minimalist of governments, for having identified it as a bad tax but then failing to even try and reform it.

This lack of SNP action induced nostalgia for the old system of rates, where the ratio of lowest to highest house valuation was roughly 1:100 – making for more gradation in the system and a great differentiation between the most expensive and least expensive properties – whereas the formula for the spread of council tax bands was, in many cases, merely 1:3. Accepting that the council tax was already unfair, the freeze imposed then by the SNP only made it even more so, as the greatest savings went to those at the top, while the pressure and responsibility for savings and cuts were offloaded on to local government.

But what was even more remarkable was the low level of political or media outcry when the latest council tax statistics were published in May this year, which showed that subsidies from the council tax freeze to Scotland’s richest households were set to break the £100 million barrier.

The freeze was delivering excessive reductions for those at the top, despite the squeeze on local government. Top Band H homes were notching up windfalls of more than £1,130 each, while the smallest and poorest Band A homes save, on average, £373.

Indeed, one newspaper calculated at the time that the residents of Ann Street, a top des res in Edinburgh will have been subsidised to the tune of £56,750 by the end of 2012-13 because almost all the properties are in Band H. The SNP’s feeble response was the freeze benefits most – as a proportion of income – those on the lowest incomes.

However, all political parties, with the exception of the Greens and its land value tax, were aware of this regressive imbalance as they took part in an unsightly bidding war in the run-up to the 2011 elections. Both the SNP and Labour tried to buy votes that they knew they could not afford down the line.

In autumn 2010, appreciating the crisis facing local government, Labour had tentatively moved towards allowing councils – which complained that the SNP had tied their hands behind their backs – to decide whether to lift the freeze by 1-2 per cent to protect services.

But the party lost its nerve as the 2011 election approached and was seen by the media to have performed a U-turn as it offered at two-year extension of the current freeze. This panicked the SNP into upping the ante, with the promise of a five-year extension to the freeze, something finance secretary John Swinney may yet regret.

But short-term political opportunism won out, with the SNP set on maintaining its balancing act of pushing the hard decisions on cuts on to councils, while blaming Westminster for short-changing Scotland.

Such an abdication of responsibility by the SNP betrays a lack of either a long-term or mature political vision. But now at least Labour, under Johann Lamont, has realised that it is time to start facing up to the need for tough decisions. Hard choices have to be made as public spending comes under increasing pressure over the next couple of years and deciding who bears the brunt.

Meanwhile, what politicians of all parties must now wake up to is that property in Scotland is an under-taxed and over-priced asset that should be taxed properly. They should not be afraid to use property taxes to bear the weight of supporting public services. Unlike income and other assets, it is difficult to evade, avoid, dodge or push offshore. It is also as good an indication – if not a better – of wealth as any factor.

It has to be done properly. An immediate start would be rebanding at the top level, while alternative systems such as a land value tax could be looked at. Meanwhile, a freeze can be maintained on the lower band levels. Likewise, it is time empty and under-occupied property, as well as second homes, were identified as potential tax revenue.

But Scotland, and the rest of Britain, is stuck in a time warp, obsessed by property prices while failing to appreciate that a new generation is struggling to enter an understocked market.

We still expect to pay lower property taxes than any of our north European neighbours. Even some of our American friends pay higher property taxes. In New York, they are fixed at between 1 and 2 per cent of value. You will find properties in Manhattan paying far more than in Edinburgh’s Ann Street, while some of the well-off suburbs pay three times the rate of their London equivalent.

But with the SNP desperate to curry favour in the run-up to the independence referendum, there is indeed an irony in how it will continue to ignore such a long-term problem.

• Simon Pia is a former Labour media adviser and now a freelance commentator