The council tax is unlovely and unloved. It was rushed into being as a replacement for the hated poll tax. Its structure has always been an uncomfortable compromise, somewhere between a charge for services and a genuinely progressive property tax. The property values upon which it is based haven’t been uprated for twenty years in England and Scotland and ten years in Wales. This means that, because local housing markets have traced out different trajectories, the relativities built in to the council tax bandings bear very little relationship to the current distribution of property values. The truncation of the council tax bands means that higher value properties are relatively lightly taxed compared to lower valued properties. The tax is, broadly speaking, regressive.
There are good reasons for reforming the council tax as a basis for gathering revenues to fund local authority services. But there is another aspect to the debate. The Joseph Rowntree Foundation’s Housing Market Taskforce argued a couple of years ago that property taxes may well have the potential to act countercyclically in the housing market and dampen housing market volatility. That is, as prices rise the tax burden will increases, and that puts a brake on further price rises. Such a property tax could take various forms, including creating additional council tax bands for higher value properties or moving to a flat rate or progressive property tax. The latter has the advantage of removing discontinuities, but brings greater informational demands in assessing property values.
These are ideas I have blogged about before.
Last week, Chris Leishman and colleagues produced a report that explores these issues empirically. It is based on an ambitious attempt to create a comprehensive dataset of property values for England and then model the impacts that changes to local property taxation would have both spatially and at household level. The researchers were interested in how alternative tax structures could improve fairness between places and fairness between people, and whether it is possible to detect any influence of property taxes on price volatility. [Read more...]