‘Regressive’ Council Tax system should be devolved to London and fundamentally reformed, says think tank report

Control over Council Tax in London should be handed to the capital by central government and the property tax system fundamentally reformed to make it fairer and a more efficient means of supporting local government, according to a new think tank report.

The Institute for Public Policy Research (IPPR) recommends that the government commits to devolving the Council Tax system to London as part of its forthcoming spending review and calls for immediate measures to protect low income households from what it calls an “increasingly regressive system”.

In the longer term, Council Tax should be abolished altogether and replaced with a London-wide property tax which is “proportional to the present day value of homes” and levied on the basis of ownership of property rather than its occupation, the IPPR says. It calculates that that a large majority of London households could benefit if this principle were applied.

Current Council Tax bands are based on property values as they were in 1991, when the tax was introduced by Margaret Thatcher’s government after the abandonment of its disastrous Community Charge or “poll tax”. However, massive rises in London residential property values since then mean that households in dwellings worth millions of pounds pay relatively little compared to those in the lowest band levels.

The IPPR finds that the system “takes too little account of ability to pay and is therefore unfair”. It calculates that “the burden of Council Tax on London’s poorest households is more than six times greater than on those in the highest decile [10 percent]”.

The report, compiled by Luke Murphy, also highlights the “spatial inequalities” within Greater London, with “substantial differences in what is charged in different areas” and its inefficient reliance on discounts and exemptions while, at the same time, the capital’s local authorities and, to a lesser extent, the Mayor are increasingly dependent on it as a source of revenue in the context of huge funding cuts.

It is recognised that there are “significant political barriers” to the reform of Council Tax, with many politicians afraid to tackle it the inevitable losers from any reform likely to offer conspicuous resistance. However, the report concludes from conversations with Londoners that there is support for a simpler, fairer and more transparent Council Tax that provides more protection for the most vulnerable.

The report describes as “a disaster” the government’s decision to reduce the budget for the Council tax benefit system, which has hit many Londoners on the lowest incomes and argues for a “capital-wide” one to be brought in as an interim measure. It recommends that exemptions for empty and second homes should be abolished except in some, limited circumstances, and the introduction of premiums on such properties instead.

In the longer term, the Council Tax and its bands would be replaced by an “annual property tax” described as “proportional to the present day value of homes” and subject to “regular revaluations”. The report says:

“This system would be an effective ‘flat-tax.’ It would not be regressive and, provided there were regular revaluations, would capture increases in house prices, that the current system does not. Our analysis suggests that a rate of 0.25 per cent would be fiscally neutral across the capital, while a rate of 0.3 per cent would raise approximately £631 million in additional revenue”.

Phasing in the changes and communicating the reasons for them effectively would be among the necessities for delivering a reformed system in practice.

Peter John, chair of London Councils, the cross-party body representing all of the capital’s local authorities, welcomed the report, saying, “It illustrates beyond doubt that our current council tax system does not work for Londoners or London boroughs and is having unintended negative consequences, such as increasing council tax arrears.

He added: “Basing taxation on property values from 1991, which are now hugely out of step with current house prices in the capital, will only become more regressive as time goes on. Fundamental reform of the local government finance system is required to put local government on a sustainable footing. We urge the government to consider this as part of the forthcoming Spending Review.”

Read the full report, entitled, A Poor Tax: Reforming Council Tax In London, via the IPPR website.

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