Rising Council Tax bills and the spectre of the poll tax

Local government finances have long been desperately strained, caught between a sharp squeeze in grants from the centre over the austerity years, and rising obligations to social care and special educational needs. Something has to give, and in parts of the country at least it will be the established presumption against rises of over 5 per cent in Council Tax bills. At the start of this month, the Government declined Conservative-run Hampshire’s shot for a 15 per cent increase. But it gave the green light for Labour-run Bradford to raise the tax by 10 per cent and Liberal Democrat Windsor and Maidenhead by 9 per cent, after each had bid for an even bigger rise than they got.

Any tax rise eats into disposable incomes, but sharp rises in this particular tax will pose special threats to the living standards of middle and poorer Britain. And a long view on British local government finance – from the days of the poll tax on – underlines just how fraught the consequences could be.

The basic point is that, while most direct taxes are progressive – that is, charging proportionally more from those with higher incomes – net payments of Council Tax are regressive. The chart below confirms that richer households pay relatively more than poorer households in both Income Tax and employee National Insurance, while Council Tax works the opposite way: bills are eating up 5 per cent of gross income for the poorest bracket shown, a burden that declines as we move up the income scale.

Several basic features of Council Tax contribute to this skew. Bills depend on the value “band” your house is in, not your income; bands are translated into bills in a way that curbs payments from the priciest homes; and, bands are increasingly arbitrary, still being based on valuations from 1991. But none of these features is the biggest problem for the poorest families confronting growing Council Tax payments: that is, instead, post-2013 changes in the way that bills are rebated for them. What makes the large burden at the bottom-end so frightening on the chart is that it is capturing net payments, after allowing for discounts and support schemes.

From those with least: Council Tax eats up more of the lowest incomes

The long backstory to the Council Tax is pertinent context. In the late 1980s, the Thatcher government replaced Great Britain’s traditional Domestic Rates, which imposed large bills on expensive properties, with the flat-rate Community Charge, or ‘poll tax’. Its unpopularity sparked rebellion on the streets, and political chaos at Westminster, where it precipitated the downfall of the prime minister. But what mattered most to the public finances was widespread non-payment, which dry economists described as “fiscal anarchy in the UK.”

The Council Tax was, essentially, designed to make local government finance boring again. In this it succeeded even though, just like the poll tax, it under-taxed pricey and under-occupied housing. Instead, the sting was drawn in two ways: by reducing the overall take from local tax bills (which was substituted for bigger central government grants, funded by increased VAT); and, just as importantly, by properly rebating bills for the poorest. Under the poll tax, the government had capped such relief at 80 per cent of a supposedly “standard” bill, leaving the poorest families to find more than 20 per cent of the higher actual bills they faced. This had left councils tasked with pursuing a large number of poor people for sums which were big for them but marginal to the public finances. Under the Council Tax, all this changed: a comprehensive system of Council Tax Benefit offered 100 per cent relief of the actual bill to the very poorest, tapered away at 20p in the pound as incomes rose.

Over the last generation, both of the easements that smoothed the way for the Council Tax – lower bills and proper rebates – have been compromised. Average rates of the tax rose sharply through the 2000s. Then – in 2013 – nationwide Council Tax Benefit was abolished, and replaced with a variable patchwork of discretionary local schemes, for which only limited central government funding was provided.

The distributional effect of all this is captured in the next chart, which shows average Council Tax payments as a proportion of gross household income across the income spectrum at three points in time. Back in the early 2000s, even though bills had already edged up since the mid-1990s, the burden was generally lighter than today. It was also reasonably proportional across most of the distribution, except the top end, where it had always weighed less heavily. At the very bottom end (2^nd income vigintile), the combined effect of the tax and the benefit kept the average burden down to 2.4 per cent of gross income. By 2010-11 bills were higher across the range (up by nearly a quarter in real terms in England on 2002-03), but this basic distributional pattern remained unchanged.

By 2020-21, the story was different. Average bills had stabilised – indeed they’d actually edged down relative to average incomes, particularly for many at the top end. One reason was a new requirement, introduced by the Cameron-Clegg coalition government, that councils wishing to raise bills by more than a low percentage (currently typically 5 per cent) had to fight a local referendum. But because of the abolition of Council Tax Benefit, net payments for the poorest families now soared. Look at the lowest income bracket shown on the chart (the second income vigintile): its net Council Tax payments merely edge up from 2.4 per cent of gross income in 2002-03 to 2.8 per cent in 2010-11, but then surge to 4.6 per cent of gross income by 2020-21.

Put all this together, and the story is worrying. Where 20 years ago the Council Tax was relatively low, and broadly proportional below the upper reaches of the income spectrum, today it is notably higher and regressive across, right the way down to the bottom. The burden on the poorest families is almost certainly now closer to that they faced under the poll tax than under the early Council Tax. (Contemporary estimates of notional net poll tax liabilities for the bottom income bracket were only around 2 per cent of disposable income, although  the real tax burden was somewhat higher, because not everyone who could have claimed a rebate actually did so). The picture continues to darken, with some individual town halls who used to offer full rebates to the very poorest having very recently moved to requiring them to stump up for a quarter of the bill.

Can’t pay, will pay: the Council Tax burden over the last 20 years

The bizarre nature of the Council Tax’s base of 1991 property values is rightly ridiculed. What’s less appreciated, but perhaps even more important to the most vulnerable as bills in some places begin a fresh rise, is the way that the system has slowly recreated some of the issues that undid the poll tax.