Exclusive:Scrap ‘dysfunctional’ council tax, says leading housing economist
Proposal for ‘properly designed’ citizen’s assembly to debate local tax reform
Scotland should replace its current system of “poor quality” and “dysfunctional” housing taxes with a new proportionate property tax capable of boosting local government revenues and potentially reducing the Scottish tax base's reliance on income tax, according to a leading expert.
Ken Gibb, professor in housing economics at the University of Glasgow, said the need for housing tax reform was “long overdue,” and described council tax as a “seriously flawed” lever which was not good for local government, and failed to help balance in the housing market.
He warned that longstanding opposition to reform only led to “endless non-decision” on council tax, and said that an overhaul of the status quo needed to address failings regarding “unfairness” and the “structural distortions” that flow from a banded tax.
“A reform strategy based around a national recurrent tax on housing wealth would be more progressive and purposeful compared to that of the continuing burden of a value-based tax on transactions when considering moving house,” he said.
In a new book exploring future options for reform of housing taxes, Prof Gibb has called for the establishment of a series of “properly designed” citizen’s assembly events to debate local tax reform, and help build a “credible proposition that can be sold to cautious decision makers.”
The Scottish government has announced plans for a so-called mansion tax that would introduce steeper council tax charges for the most expensive properties in the country. But amidst longstanding debate over wider reforms as part of the biggest proposed shake up of local government in 30 years, Prof Gibb said ministers should go further.
Under his proposals, there would be an immediate general revaluation to provide individual capital values of all residential properties, a process repeated on a five yearly basis.
A new proportionate property tax, coupled with localisation of non-domestic rates, would increase local government revenue as a share of total revenue, Prof Gibb said.
The new tax would have its rates set and revenue retained by local government, while the national element replacing LBTT would return revenue to the Scottish government.
He explained: “The new tax combines features of a tax on ownership and a household tax. It is a wealth tax in that the national element is only levied on private owners of residential capital, not tenants; while the local proportionate property tax element is levied on households and owners but done so in such a way as to avoid double counting and to treat the tenant tax base as a housing consumption one rather than as a capital asset.
“This requires a split tax arrangement in the private rented sector and exemption for social landlords for both elements of the tax.”
He also pointed to the need for a “resource equalisation process” through the grant system to account for the big swings in taxable property value that have occurred since 1991. That process, he explained, required an “orderly redistribution of resources” across the country, in part to help compensate for the swings and scale of property value change over the past 35 years.
In his book, ‘Council Tax and Wider Property Reform’, Prof Gibb said that in order to smooth the passage of the new tax and mitigate cost on those less able to pay, the proposal would provide a “strengthened and more generous” national local tax benefit scheme, and a deferral scheme for older owner-occupiers.
The new taxes would be phased in over a period of five years in terms of tapered transitional support for those who lose out, capping maximum bills and losses on a declining scale over the period.
He stressed that the implementation of such changes would require a “willingness to drive this forward,” and called for a series of national citizen assembly deliberative democratic events on property tax reform..
“Overcoming the political barriers even with a strong set of proposals is clearly a major challenge that requires strategy, tactics and intelligence,” he said. “There needs to be rigorous and clearly communicated evidence regarding the distributional effects of the proposal, as well as the impacts of mitigation measures such as rebates and deferral schemes.”
He added: “Tax reform needs to be explained and sold to the public. It should be accompanied by demonstrably better local services. Active deliberative democracy schemes like citizens’ panels have suggested that once informed and with space to think options through, voters need not be set against tax reform - quite the opposite. A citizen’s assembly properly designed should debate local tax reform.”
Prof Gibb pointed out that similar reforms have been carried out in Northern Ireland, and while they were “not perfect,” offered proof that such a tax can be made to work, with the public buying in to the reforms.
He said council tax and the contentious LBTT were, for different reasons, “badly designed taxes that need to be reformed or even replaced.”
“Council tax is seriously flawed,” he went on. “It is based on property values from 35 years ago, and bills are regressive by income but also spatially - higher value areas tend to have lower average bills as a percentage of house value. There are arbitrary exemptions and discounts, and the banded system - disproportionately concentrated in the lower four bands A to D - is not a good property tax in terms of reflecting current value, which may be why only one other OECD country uses a banding approach.”
A Scottish government spokesperson said: “As set out in the tax strategy, the Scottish government has committed to exploring the appropriate balance between the taxation of labour, income and wealth within our restricted devolved levers.
“In addition, ministers have been clear that council tax reform is needed and the Scottish government will work to build a cross-party agreement on the future of council tax in Scotland.
“The introduction of a mansion tax will raise millions in additional funding each year for local public services by requiring those who have the most to contribute more.”
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