The council tax is essentially a crude property tax. It was devised in a hurry in 1991 when the Government needed a quick replacement for the discredited poll tax. Despite mounting criticism and complaint, it has remained virtually unchanged ever since. There are many problems.

Problem 1: all property taxes are taxes on wealth. They can be amongst the most effective wealth taxes, simply because land and buildings are difficult to hide. This means property taxes are difficult to evade and most people have to pay them (unlike many other taxes which are routinely avoided by people rich enough to employ the cleverest tax accountants). But as a tax on residential property, council tax runs smack bang into the problem that a very large number of people may appear on paper to be well -off, when all they really own is the home they are living in. As there are very few (if any) fair and efficient ways of accessing the value tied up in their homes, and as their incomes are comparatively low, a very large number of people cannot afford to pay council tax from their current resources. They may (in theory) be ‘property-rich’, but they are income-poor.

Problem 2: this means there has to be an effective system of tax allowances or welfare benefits to help all these many people pay their unaffordable council tax. It is absolutely essential that the benefits system is fair and works efficiently to help all the people who genuinely cannot afford to pay. Unfortunately council tax benefit is the most inefficient benefit any Government has yet devised. One quarter of all the people entitled to it (but nearly 40% of older people who are entitled to it) do not manage to claim council tax benefit. More than 50% of all pensioner owner-occupiers do not get the council tax benefit they are entitled to. Moreover, many of those who do successfully negotiate the paperwork find that they are still left in hardship because of low, vicious and arbitrary cut-off points for entitlement.

Problem 3: council tax is not even a fair property tax. It was oversimplified to make collection easier, and this ensures that the richest people in the biggest houses pay proportionately much less. There are only eight broad bands of liability, which do not reflect the great range of wealth represented by residential property. If your house is worth £400 000, you pay only three times as much as somebody in a house worth just under £40 000 - though your property is worth ten times as much. If you live in a mansion worth £4 million, you still only pay three times as much as the person in the £40 000 house, though your property is worth a hundred times more. The poorest 10 percent of council tax payers are spending proportionately four times as much of their income on council tax as the richest 10 percent of payers. Under council tax, rich people in big houses are treated much more generously than poorer people in modest houses. People in the biggest (band H) houses pay just 0.6% of their income on council tax. Worse still, the bands are so wide that in some poorer parts of the country nearly everybody pays the same - it is a poll tax in all but name.

Problem 4: council tax is a very visible tax. Governments tend to prefer that local councils are not too popular. Local councils are dependent on the council tax. So the Government makes sure you get a nasty big council tax bill once a year, while the Government’s own tax income is collected by less obviously painful methods. Even though you can now pay council tax in instalments, the annual bill makes a profoundly negative impact. People are very much aware of council tax and how much they are being asked to pay. Compare for example, VAT, where people usually pay much more than they do in council tax, but, as it is hidden in the price of the things they buy, they don’t see it, and they rarely complain.

Another difference is that taxes such as VAT and income tax are said to be ‘buoyant’. This means they bring in more money year by year, without altering the rate and without drawing everybody’s attention to it. This is because they are essentially taxes on economic activity. If activity increases, so does the amount of money collected by the Government in tax. Council tax is about as buoyant as a lump of lead.

Problem 5: all property taxes suffer the problem that they are related to wealth and not to income (and to ability to pay). Because not all wealth can be readily accessed (especially if you are living in it), property taxes need to be used as part of a fair and balanced range of different kinds of tax which does (as a whole) reflect ability to pay. In this country there is now very strong resistance to possible increases in income tax; company taxation has been radically reduced; and there is also widespread evasion and avoidance of taxes on both income and wealth by those people who are rich enough to do it. All of this means that, in recent years, council tax has been used to raise a greater share of national taxation than it ought, or than is sensible, given its shortcomings. Council tax has been asked to do too much.

Problem 6: if council tax is very visible, is seen as unfair, and is very unpopular, it doesn’t make a lot of sense to increase it by substantial amounts, over and above the rate of inflation, for year after year. But this is what has been happening. Inflation since 1993 is about 35%. Average earnings are up by over 80%. But council tax has increased by over 120% in the same period. Every time council tax is increased by more than people expect, by more than they think is fair, the problems and unfairness inherent in the tax become more and more pronounced. It gets worse.

Problem 7: older people are hit more severely by council tax, and by increases in council tax, than just about any other section of the population. Older people are more likely to be on low and fixed incomes, rising (if at all) in line with prices, rather than rising in line with average earnings. Older people are more likely to be overlooked by the ineffective council tax benefits administration. 75% of all those who are entitled to council tax benefit but don’t claim it are pensioners. Older people are more likely to have modest savings which put them outside entitlement to council tax benefit, even though they still can’t afford to pay their tax bills, and who, at the margin, may well be worse off than people who do get council tax benefit. And the older people are, the worse the problem seems to be. A study by the Halifax found that older people over 75 spent 6% of their total spending on council tax - compared with less than 3% for people under 50.

Problem 8: Council tax is becoming more unfair and more divorced from reality as each year passes. Any tax on property values must ensure that it reflects the current state of affairs and does not become a tax based on history, taxing what was rather than what is. This is unfair. In turn, this means there must be regular revaluations, so that people whose property is going up in value (relative to other property) pay more, and those whose property is going down in value (relative to other property) pay less. But this has problems.

In the first place, revaluations are expensive - even on the crude banding system of the council tax. Governments are reluctant to spend money to make the tax more fair.

Secondly, revaluations have inherently unfair effects. Because people in the lowest property band - arguably those in greatest need - cannot be moved down a band, they cannot benefit from the revaluation even if they deserve to benefit and ought to benefit from it. Conversely those in the highest property band cannot be moved up - because they are in the highest band already- so they cannot be worse off. It is the people in the middle who suffer the turbulence.

Thirdly, any revaluation means that some people will be better off (winners), and some people will be worse off (losers). At the outset, everybody understandably fears the worst, and people become very agitated. Then when the news really does arrive, those who become better off will take the money they have saved and keep quiet about it. Those who become worse off (even though there may be fewer of them) will scream blue murder and rush off to the newspapers. Governments understand this and accordingly they delay and postpone revaluations whenever possible. That is why we still have a council tax based on 1991 property values.

Finally, knowing they are on a hiding to nothing, Governments (and sometimes councils) load on extra increases in tax at the time of revaluation, increasing the number of losers and decreasing the number of winners. The argument used is that it’s going to be bad anyway, so why not?

Problem 9: most people think that council tax pays for council services, and that increases in council tax above the rate of inflation mean that the council has increased its spending proportionately. Neither of these beliefs is true. Twenty years ago, councils used to pay for about two/thirds of their spending from taxes collected locally, from council rates on homes and businesses. Since the business rate was nationalised and became a Government tax, councils have become more and more dependent on Government grants. These days some councils pay for as little as one/fifth of their spending from council tax, and hardly any councils pay for much more than a quarter of their spending from their local tax income.

A Government which is providing such a large proportion of a council’s total income, and which is also able to cap and limit the yield of the remaining income collected locally (council tax), will have little difficulty determining what that council will do and will not do - should it choose to exercise that power. In fact, there has been a huge shift of power and responsibility in the last twenty years, away from the local council and into the hands of the Government in London.

Because councils now raise such a small proportion of their income locally, any reduction in Government grant (or increase which is insufficient to cover unavoidable increases in costs) will plunge them into crisis. This is because of the problem of ‘gearing’, which is a bit complicated, but perhaps a simple example will illustrate the principle.

Imagine a baby council whose total annual income is £10. It covers its costs by raising £2 from the council tax, and it gets a grant of £8 from the Government. This year the Government decides it is hard up, and reduces its grant to £6 - a reduction of £2, or 25%. The council doesn’t want to cut its services, so it has no choice but to raise an extra £2 from council tax. It’s still £2, but because the council tax only raised a total of £2 in the first place, this rises to £4 - a rise of 100%. In other words, the headline percentages are much bigger, and the annoyance much greater, if more of the total costs are loaded onto a small part of the total income.

This is what has been happening for twenty years, as successive Governments have reduced their contribution to the cost of local services, knowing that council taxes would shoot up, but also knowing that few people would work out what was going on, and that most people would blame the local council rather than the real culprit - the Government.

Problem 10 - we have had problems with the funding of local government for more than 30 years. The Wilson Government in the 1970s set up a commission to look into it and to make recommendations. The Layfield Commission reported in 1976. Its recommendations have never been implemented, and a never-ending series of botched, short-term changes since then have only made the underlying problems much worse. It’s the same old story. Any change will mean some people will be better off, and others will be worse off. Those better off will keep quiet about it. Those worse off will run to the newspapers.

There is also the very real danger that the introduction of a proper effective system of local government finance could empower local councils, so that they wouldn’t always have to do what the Government tells them to do. So naturally Governments have preferred to prevaricate, to mess about, to set up yet another inquiry to look into it, to appoint yet another hapless local government minister who hasn’t got a clue what he or she is supposed to be doing, and, ultimately, Governments do nothing. In this the present Government is no different from those that have gone before, excepting only that it has managed to do even less than most to address these problems after very nearly ten years in office.

There are other problems with the council tax besides these. But you would have thought that those listed here would be more than sufficient to make it a priority for any Government. We should be so lucky.

We now turn to the arguments about council tax, and to what can and ought to be done about it.

Argument 1: ‘These council tax increases are unacceptable. The Government should do something’.
This kind of response is understandable enough. But it is how we got in this mess in the first place. Governments have tended to act on council finance only when the political pressure has become unbearable, and when their opinion poll ratings start to dive. But their motive then is not to solve the problem, but merely to relieve the political pressure. People want a quick fix rather than a longer term solution, and that is what Government has given them. So we have had a series of short-term measures, one-off payments, meddling with benefit discounts and allowances, and so on. None of it has worked, and the problems always come back worse than they were before.

Argument 2: ‘The Government must sort out these spendthrift councils’.
This argument was much-loved by the Thatcher Government in the 1980s. The problem was viewed as one of inefficient, unaccountable and wasteful councils who were levying huge tax increases unnecessarily, at great cost to ratepayers’ pockets, and, (more importantly perhaps from that Government’s perspective), imposing unjustifiable cost increases on business.

For once a Government dared to make a decision on council finance. The solution was the poll tax - arguably the biggest political disaster in our recent history (except possibly for the Iraq war).

The idea was that local government should stop pretending it was part of a democratic political system, and should become more like a shop. And if it was a shop where everybody bought the services they needed, then logically these services should have a price. Furthermore, this meant there was justification for charging everybody the same price. After all, you don’t pay different prices depending on your income when you go to the supermarket. So why should this be any different.

The idea proved to be completely impracticable and unenforceable. It collapsed within eighteen months, and it took Mrs Thatcher with it.

Argument 3: ‘The council tax is inherently unfair. It must be abolished’.
The obvious point is that if we want local services then they have to be paid for, and the money has to come from somewhere. If we get rid of council tax the money will have to be raised by increasing other taxes. The argument then becomes one about which taxes should replace council tax.

A related problem is that if council tax is inherently unfair, does this mean - as appears to be implied - that all other property and wealth taxes are inherently unfair, because they do not relate directly to immediate ability to pay?

For example, if a person has managed to accumulate great wealth by fair means or foul - say, about a billion - does this mean they must always be completely excused from making a fair contribution to the costs of our public services simply because they are now inactive and their current income happens to be low? This would be the situation if we had no taxes on property and wealth. It is difficult to accept that this would be equitable.

Equity requires that we have appropriate taxes on income and wealth. The issue ought to be about how we can devise property and wealth taxes which are fair, effective and practicable, rather than how we get rid of them altogether.

A basic prospectus for a fair property tax might be:

- that it is devised to be as fair and as practical as possible in itself;

- that it is part of a fair and balanced system of direct and indirect taxation;

- that it is not required to carry more than an appropriate burden within that tax system;

- that there is an equitable system of rebates, benefits and exemptions;

- that it is not open to abuse or manipulation by Government to produce large, frequent, and unjustifiable increases in liability;

- that it is not the one and only source of tax income for a local government system which is under siege.

Argument 4: ‘We should replace council tax with a local income tax based on ability to pay, or by a combination of local income tax and higher VAT’.
Those who argue for the complete replacement of council tax generally argue that the replacement should be either a local income tax, or a combination of local income tax and higher VAT. Both of these would be more obviously related to immediate ability to pay than is council tax. But that is not the same as saying that these alternative taxes would necessarily be fair.

For example, the lowest fifth (20 %) of taxpayers pay a higher proportion of their earnings as income tax than do the highest fifth of earners. When you add in the effect of national insurance contributions (a supplement to income tax in all but name), then the tax bias against low earners and in favour of higher earners becomes even more pronounced. A simple switch from council tax to income tax would still leave people with low incomes paying proportionately more than those with very large incomes.

Similarly with VAT. How much you pay depends on what proportion of your income you spend, and on what you spend it on. The correlation between the total of what you pay in VAT each year and your annual income may be no more than a very broad one, and may be very different between two people with identical incomes.

It is also important to remember that rich people have far more opportunities to avoid tax than do those on lower incomes. Those opportunities are much greater with income tax and VAT than they are with a property tax, and they are used extensively.

But there is another reason for concern about the implications of replacing council tax with income tax and VAT. It would be very difficult to collect these replacement taxes locally. The cost of each council setting up its own separate collection arrangements would almost certainly be prohibitive. This means that the replacement taxes would be collected by the Government, and this inevitably means that they would be controlled by the Government.

Any pretence of independent local government, of local democracy, would vanish. Because there can be no independence if you are completely reliant on somebody else for the whole of your income. There would be clarity about what many people claim is the situation already - local councils would have become mere agencies of Whitehall. The council would be nationalised.

Argument 5: ‘Do we really need local councils anyway?’
This argument is rarely voiced, but is implied by the logic of Argument 4. If the local council has no significant independence; if Government tells it what it must do in every detail, and tells it exactly how much money it can and must spend; then the local
Secondly, they claim that if different councils charged widely different business rates this would disadvantage businesses in some areas compared with others. This would amount to a distortion of competition, imposing arbitrary handicaps on some firms and awarding undeserved benefits to others.

These are of course the same arguments which were used to persuade the Government to nationalise the business rate in the first place. Many people believe they are wildly overstated. Business rates are a very small part of most firms’ total costs, so any competitive distortion would be small. While increases in local business rates could be limited to the same percentage as the parallel increase in council tax, just as happened prior to 1990.

Argument 7: ‘We can reform council tax to make it fair and workable’.
Those people who support the continuation of a property tax - though not necessarily as the one and only local tax - have suggested a number of ways in which it could be improved and more closely related to ability to pay:

extra bands could be added, one at the bottom and up to four at the top of the scale, to make council tax reflect the fullrange of property prices more closely;

the differential between what people pay in the top and bottom bands could be increased from three times, to ten times or even more;

the different bands could have different values in different regions or even sub regions, to reflect local differences in property prices;

a new benefits system could be introduced based on new exemptions, discounts and a national maximum liability for different income levels. The aim would be to substantially increase the proportion of low-income taxpayers who receive help;

council tax could be supplemented by the return of business rates to the local council, and by at least one other local tax - perhaps a local income tax, a sales tax, vehicle excise duty, or some form of environmental tax or taxes;

as the Government now insists on controlling all education and children’s services in great detail, dictating exactly what each council in the country must do and how much money it must spend doing it, we could face up to reality and redefine education and children’s services as national services which should be paid for from national resources. The council’s role should be clearly defined as what, in practice, it is already - consultative.

Government grant to councils could be limited to what is necessary to ensure fairness between localities with great needs and low income, and localities with lesser needs and high income.


Argument 8: ‘What we really need is an effective system of democratic local self-government and we must be prepared to pay for it’.
This follows directly from the reasoning set out in
Argument 7 above. The problem with council tax, as the latest Government inquiry under Sir Michael
Lyons belatedly realised, is that it cannot readily be divorced from the problem of overall council finance.

The problem with council finance is that it cannot sensibly be divorced from the problem of function -
what do we want the local council to do and what package of services do we want it to provide? The problem with function is that it is inextricably bound up with the issue of local democracy - which services should be under local democratic (council) control, and which should be provided by other means?

All of this takes us a long way from the problem of the immediate unfairness of council tax and the disproportionate effect of that unfairness on older people. These are big issues. Issues which successive Governments have wrestled with for nearly half a century, and which they are still no closer to resolving.

This country has one of the weakest systems of local government, and one of the most complicated systems of local government finance, in the western world. If you started out to establish a system which is beyond most human comprehension, you would have difficulty doing a better job than this.

If there is a lack of comprehension, then there can be no effective public accountability. If there is no public accountability, there can be no effective democracy. That is the scale of our problem.