Options for Scotland’s council tax
By Donald Drysdale for ICAS
22 August 2019
A new report from the Resolution Foundation proposes possible options for reforming Scottish council tax, but Donald Drysdale finds that it makes some surprising omissions.
Housing wealth inequality
The Scottish Poverty and Inequality Commission has published a summary report on housing wealth inequality in Scotland.
This is based on two connected pieces of research:
- an international evidence review conducted by researchers at the University of Glasgow representing the UK Collaborative Centre for Housing Evidence and Policy Scotland; and
- empirical analysis of the most recent data, produced by the Resolution Foundation.
Taking stock
The Resolution Foundation (‘the Foundation’) is an independent think-tank focused on improving the living standards for those on low to middle incomes.
In its report ‘Taking stock’ published on 30 July, the Foundation examines the scale and distribution of housing wealth in Scotland and reflects on how policy makers could address housing wealth inequality.
Housing wealth
Housing wealth (the net value of dwellings held by households) has grown significantly in Scotland – from around £2.7 billion in 1968 to some £308 billion in 2018 – but this growth did not arise smoothly over time.
Average growth was around 1% a year from 1968 to 1980, 3.5% a year from 1980 to 2001 fuelled by the ‘right to buy’, and 23.4% a year as a result of much stronger house price growth from 2001 to 2008. Housing wealth fell from 2008 to 2013 and then grew again at 3.6% a year from 2013 to 2018.
This housing wealth growth comprised an increase in the number of dwellings in Scotland, a rise in the proportion of dwellings held privately by households – from 50% in 1968 to 80% in 2018 – and varying degrees of house price escalation over the period.
Income levels in Scotland are unequal, but few families have no income. By contrast, wealth is much less equally distributed. Among Scottish households today, 20% hold no financial wealth at all or have negative wealth (indebtedness), 23% have no pension savings, and a much larger proportion (35%) do not own their home.
Unsurprisingly, inequalities in housing wealth are largely responsible for inter-generational inequalities in overall wealth. Notably, young people in Scotland today own less housing wealth than previous generations at the same age.
The Foundation considers how best to increase home ownership rates and allocate housing stock more efficiently. It advocates re-balancing demand to own one’s home in the interests of younger generations and lower-income families through reform of the tax system.
Reforming property tax
Council tax is a tax on housing consumption and it raises revenues to fund local services. Like the poll tax it superseded, it is widely criticised for being unduly regressive, but as a wholly-devolved tax it is entirely under the control of the Scottish Parliament.
Other taxes on Scottish property wealth include land and buildings transaction tax, inheritance tax and capital gains tax. However, council tax is Scotland’s most significant property tax and the only one paid on a recurrent annual basis.
The report finds a strong case for reforming council tax, and considers four potential options:
- working within the bounds of the existing council tax regime, revalue all properties to current value and tax higher-value properties at a marginally higher rate (‘Revaluation-plus’);
- replace council tax with a progressive property tax based on up-to-date property values within multiple tax bands, with a tax-free allowance so that the lowest-value tenth of properties in each local authority pay no tax (‘Fully progressive’);
- introduce a proportional property tax of 1% on all properties, with a £10,000 tax-free allowance against the value of every home as currently advocated by the Scottish Green Party (‘Allowance and flat rate’); or
- levy a flat rate annual property tax set at just over 0.5% for every property, a level which is broadly revenue neutral (‘Fully proportional’).
These options (or aspects of them) offer wide technical scope to improve the current system, but the Foundation questions whether property tax reform per se would succeed in driving down housing wealth inequalities.
Missed opportunities
A shortcoming of council tax, shared by all the options for reform considered in the report, is that property owners may be discouraged from maintaining or improving their properties – otherwise they will be taxed on enhanced, improved values.
Perhaps a land value tax in its purest form, based on unimproved site values, should have been considered as an alternative to council tax. It would get around this problem, because property owners would not find their tax bills increased as a result of carrying out property improvements.
The report acknowledges that there would be many challenges in the wholesale reform of council tax. It refers, for example, to the particular difficulty of how to protect asset-rich but cash-poor households from unreasonable property tax bills.
Some other studies on the future of council tax have suggested introducing a local income tax as an element of any reform, or allowing the roll-up of unpaid council tax and interest until death, to reduce the burden on lower-income households – but such possibilities are not mentioned in this report.
Other suggestions
The Foundation does not concentrate exclusively on council tax. It refers to recent tenancy reforms improving the security of privately renting families. It suggests building more affordable homes, supplementing benefits to tackle housing affordability from the income side, and funding the energy-efficient retrofitting of housing stock to reduce energy bills.
In putting forward such ideas, it points out that most of its options for reform of council tax would generate significant amounts of new money, allowing the Scottish Government to spread housing wealth gains beyond the holders themselves.
The report recognises that political challenges must be faced when tackling housing wealth inequalities. But it argues that the case for reform is clear.
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