Council tax is a farce – it’s time for a real property tax

It’s an open secret that council tax is a dog’s dinner. It was conjured up in the early 1990s as a half-way house between the hated ‘poll tax’ and the old domestic rates system, meaning those in top-band properties have much lower tax rates than those in cheaper homes. In England and Scotland, it is based on valuations that are 27 years out of date. And it allows local authorities with the highest property wealth to charge the lowest rates of all.

The result is that council tax only weakly relates to property values, and is therefore highly regressive. On average those living in £100,000 homes pay around five times the tax rate of those living in £1 million mansions. And a fifteen-minute walk in South London can take you from a £2.1 million flat with a £700 council tax bill to a £400,000 flat with a council tax bill 66 per cent higher. The ‘property tax’ label council tax gets given is a farce – it looks far more like the poll tax it replaced.

So why isn’t council tax a major political battleground? Politicians may be wary of touching it given it is used to finance local government. Or they may be scarred by botched revaluation attempts. Or maybe it reflects the national mood where wealth – of which property is a major part – is much less often discussed than incomes despite being huge and much more unequal.

But even if they ever did these excuses no longer pass muster, for two reasons.

First, Britain’s ageing population means that unless we want to start dismantling the NHS, the state is going to need more money in the coming decades, to the tune of £60 billion by 2040. Relying only on the usual mix of income and consumption taxes to plug this gap appears challenging – we’re talking 15p on the basic rate of income tax for earners emerging from the worst decade for pay since the Napoleonic wars. Taxes on wealth are an obvious candidate to share some of the burden, given they’ve stayed flat over the past 30 years while wealth has grown 2.5 times faster than the economy.

Second, because it treats big homes and second homes favourably and under-taxes property relative to other investments, council tax has pushed up house prices. This particularly hits members of younger generations, who are increasingly shut out of home ownership, live in lower-quality houses, and have longer commutes than predecessors. And to rub salt into wounds, younger households now pay higher council tax rates than older ones. With intergenerational fairness emerging as a hot political issue these inefficiencies and inequities can’t be ignored.

The good news is we know how to fix it. A range of experts agree that a proportional or progressive property tax in relation to current values would do a much better job than council tax on all fronts. New Resolution Foundation analysis shows that such an approach could create many more winners than losers; incorporate protections for asset-rich, income poor older households; and allow for reductions in the much-maligned stamp duty which gums up sales, as well as providing cash for the NHS. Big tax reform is never easy, but any politician looking for a cause to champion could do a lot worse than targeting the modern poll tax.

This blog originally appeared on UnHerd