SNP’s Council Tax reform: timid, unfair and ill-thought through

Back in December, the Local Tax Commission in Scotland published its report which looked at various ways of raising local taxes. Political parties were urged to bring forward their own proposals. Scottish Conference had a consultation on a well-researched and thorough document. An indicative vote at the end favoured a progressive, fair property and land based tax, which, if formally adopted, would replace our proposal for a local income tax.

The basic principles that you would expect from a local tax is that it’s fair, progressive and takes into account the ability to pay. I have to say I’m not entirely sold on the idea of a property tax, although I can see the arguments for taxing property as opposed to income.  The proposals outlined in the Scottish Lib Dems’ policy document do mean that those in the least valuable properties paying significantly less.

The SNP announced their preferred solution yesterday. They have the choice of so many new powers and all they did was tinker at the edges, putting up the rate for the four highest bands.  Is this really the best they can come up with, embedding the inherent unfairness of the Council Tax yet further?

Let’s look at my street as an example. Under the SNP’s plan, a professional couple in a band D house earning two substantial incomes would pay no more yet a family in a slightly larger property up the street with one worker on a much lower income would pay more. That doesn’t make sense. There has to be a way to deal with that sort of anomaly.

Secondly, the Council Tax is based on property values that, by 2021, will be 30 years old. This is not the fundamental reform that the SNP promised. 

Thirdly, and most egregiously, this proposal comes just a week after the SNP’s budget imposed £500 million of cuts to local authorities, affecting schools and local services. The SNP had the power to make the change they are currently proposing for this year, yet schools will have to wait a further year for it to come into effect.

In fact, the SNP has had the power to make this change for the 9 years that it has been in power,  9 years is also the length of time a child spends at nursery and school and when investment in their education is most effective.

The Scottish Parliament is in the process of getting huge new powers, not just the Calman Commission recommendations done via the 2012 Act, but the new powers recommended by the Smith Commission. Liberal Democrats and Labour have proposed a penny on income tax. We have also proposed a zero rate of tax to help the lowest paid. The SNP have come up with rearranging the deck chairs of a tax that they once said needs to go. I’m not going to hold my breath expecting much in the way of radical reform from them on the rest of the tax system. It’s like they’ve been given a Ferrari but drive so slowly that they can’t get it out of second gear.

Willie Rennie was pretty scathing:

The SNP policy today does not tackle the problems in education. It falls far short of what is required.

The SNP have cut colleges for five years. Education in schools is slipping down the international rankings. Early education for two-year-olds has stalled. So it is utterly insulting for the SNP to bring forward a policy today that they have had the power to bring in for nine years.

If they had acted sooner, they could have stopped the heartache and cuts in Scottish education.

Half a generation of young people have missed out on skills and life chances because of the timid SNP.

Scottish Liberal Democrats will set out our proposals on local tax reform in due course. We will be progressive, fair and give councils the flexibility to deliver good public services.

The SNP have bottled a chance to radically reform our system of local taxation and that is typical of them and regrettable. They have to take full responsibility for that. There is nobody else to blame.

UPDATE: Here is Willie pressing Nicola Sturgeon on the issue at First Minister’s Questions today.

FMQs – 3 March 2016

Today at #FMQs I pressed the First Minister on why she wants to wait to invest more money in Scottish education. Answers to Parliamentary Questions show that spending per pupil has been cut in real terms for primary school pupils, secondary school pupils and college students over the last few years. In the meantime, we have fallen down international education league tables.We need urgent investment now to get Scottish education back to being the best in the world.

Posted by Willie Rennie on Thursday, 3 March 2016

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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18 Comments

  • Peter Watson 3rd Mar '16 - 12:13pm

    I’ve not followed this in detail, but am a little confused. Haven’t recent articles on LDV criticised the SNP for not increasing Council Tax, especially those in more expensive properties?

  • Caron Lindsay Caron Lindsay 3rd Mar '16 - 12:23pm

    No, that’s Income Tax. Lib Dems plan to raise income tax by 1p to raise £475 million to pay for an investment in education.

  • Peter Watson 3rd Mar '16 - 12:43pm

    @Caron Lindsay “No, that’s Income Tax.”
    Really?

    There are immediate steps the First Minister should take to reduce poverty and inequality in Scotland, including lifting the threat of financial penalties facing local authorities if they raise council tax even by £1

    (https://www.libdemvoice.org/snp-talk-left-but-act-right-says-willie-rennie-in-first-leaders-debate-49068.html)

    Like many other council services, education has been put under massive pressure after nine years of Council Tax freeze which predominantly benefits those in larger properties – e.g. the richest.

    (https://www.libdemvoice.org/why-classroom-assistants-matter-and-why-the-snps-pressure-on-local-government-harms-kids-education-and-attainment-48803.html)

  • Could not disagree more with this article. We need a balance of taxes that includes further taxation on property, which is far more unevenly distributed than income. Your hypothetical couple on good incomes may pay less council tax, but given that they will pay higher income tax and NI their tax will be far higher overall than the single income family, and are less likely to receive state support. Plus how is it fair that a person in a £400,000 home pays the same as someone in a £2 million home? We need to look at how the tax system works OVERALL, not look at individual taxes – and at the moment one of the major flaws in our tax system is the lack of higher bands reflecting the rise in property prices of the last 20 years.

  • Council Tax was a mess when it started and has become a time bomb. It was brought in to fix the immediate political problem of the Poll Tax with no thought to its regressive structure – you pay a lower rate of tax the more your property is worth (excepting the silly cliff edges) – or the absurdity that the lack of revaluations would create.

    Putting up the rates applied to the 4 highest bands is reasonable enough, but the lack of ambition is appalling – almost as bad as that in Westminster.

  • Actually the Commission made no recommendation on a replacement for the Council Tax so there seems to be no agreement even amongst experts on a way forward. And Caron rather glosses over that the Scottish Lib Dems have abandoned their specific commitment to Local Income Tax and agreed a vague motion which could mean virtually anything. What specific proposals does the Party have now?

  • Caron Lindsay Caron Lindsay 3rd Mar '16 - 2:20pm

    Peter: That’s about giving local councils the power to set its tax at a level that works for their area.

    This is about the way we collect that tax. We had the chance to do something actually significant and not tinker at the edges.

  • @ caron Lindsay

    But what? It seems that the Party has jettisoned Local Income Tax but has no specific new proposal. So what should.the Scottish Government have done now?

  • Kay Kirkham 3rd Mar '16 - 5:03pm

    Adding new council tax bands does nothing to get over the problem that failure to revalue properties has created massive unfairness depending upon when an individual property was erected ( and hence when it was valued ).

  • …………………Let’s look at my street as an example. Under the SNP’s plan, a professional couple in a band D house earning two substantial incomes would pay no more yet a family in a slightly larger property up the street with one worker on a much lower income would pay more. That doesn’t make sense. There has to be a way to deal with that sort of anomaly………

    Again how would you solve this; Poll Tax?

    Yours…”the Council Tax is based on property values that, by 2021, will be 30 years old.” What is your solution, bearing in mind that a ‘property revaluation’ will massively increase tax and hit everyone, especially those on low incomes, very hard? .

  • I have seen a little more of the world than just Scotland, let me explain on how the property tax works in, say, North Carolina. The county sets its own rate, say, 1% of the current property value. If you happen to be inside the city limits, there’s an additional city rate (say, 0.5% – my numbers are close to what Durham County and Durham City charge). No silly “bands”, no jumps, no upper limit. There is no mansion tax, but those in mansions do pay more, which I think is fair, no matter what their income is now (why those working hard should subsidise those living better than they do?).

    Revaluation? Yes, every 8 years (so far as I remember). Nothing scary about it, as the county and the city adjust the tax rate, usually to be “revenue neutral” or close to it. So, unless your particular neigbourhood appreciated astronomically, you don’t get paying much more than before.

    Needless to say, unbuilt land is taxed on its value, just like any house. What’s wrong with that?

    And if you can’t pay… may be you can downsize or take in tenants? I mean people in houses I could never dream about here. Don’t feel like subsidising them. Our own chicken-coop is Band C – not having lived here when the prices were reasonable, we can’t afford more. The young people are in the same boat. Don’t burden them with even higher taxes – they will simply leave Scotland and leave a hole in any well-meaning socially-empathetic budget.

  • Peter Parsons 3rd Mar '16 - 10:23pm

    Igor, the fundamental problem IMO is that it that Council Tax, land value tax and other similar methods area taxation based on guesswork. It might be informed guesswork, it can sometimes be badly done, driveby guesswork (in the street where I live identical properties are distributed across 3 different council tax bands, and there is no mechanism for addressing such inconsistencies), but it is still guesswork nonetheless. The only time properties and land have a concrete, actual value is the point at which a transaction takes place. This fundamental dependency on guesswork and assumption is why I prefer Local Income Tax to property-based taxation.

  • @Peter Parsons Surely, adding more income tax burden is less guesswork. The only problem is, the income tax here is already quite high for those who actually bring the money in (i.e., not just spend the state coffers, providing rather lousy services). Any increase to this, plus the feeling of injustice about some people having been at the right place at the right time to get a decent home for a reasonable amount of money (and you now being forced subsidise them) will certainly drive a lot of of them (us) to leave the Land o’ the Fair. I will certainly pull up the stakes (again) Scotland will just lose the almost £3K in the taxes and NI I and my (American) empolyer pay every month. I’m old, and only have a few years to work, so that’s no real problem. But Scotland will have a huge brain drain of young people, and that is a problem.

  • @Kay Kirkham

    That’s not how the valuation system works. New house are valued by reference to what a similar property would have been worth in 1991.

  • Peter Parsons 4th Mar '16 - 8:55am

    Igor, Council Tax is a regressive system. Those at the lower end of the income spectrum currently subsidise higher earners. Someone paying the highest band pays, in cash terms, 3x what someone paying the lowest band pays (6/9ths for Band A, 18/9th for Band H). Therefore, someone earning £15kpa is guaranteed to be forced to pay a higher percentage of their income in Council Tax than someone earning £50kpa, £75kpa, £100kpa irrespective of what house they live in. A system where those on the highest incomes contribute the lowest percentage of their income (and the more you earn the lower your rate of taxation) is clearly regressive, and, in my view, wrong.

    A local income tax could be easily collected in parallel with national income tax simply by modifying each individual’s tax code (HMRC do this for many other elements already, so the systems are already in place). The money local authorities currently spend on collection departments could be redirected into front line service delivery (thus improving efficiency). Many of the current exemptions and exceptions could disappear e.g. pensioners, armed forces members, students, as they would become unnecessary by default. There are a lot of benefits to change. I suspect the biggest reason is political as a Local Income Tax includes the two words “Income Tax” and is probably seen as a vote loser, even if a fairer and more progressive system.

  • Peter Watson 4th Mar '16 - 10:54am

    How do we ensure that money raised by a “local income tax” is fairly distributed? It seems that more money would be raised in affluent areas that have less need of it to provide important services, and vice versa. If we have to redistribute money from the centre or define large regions with representative population, it sounds a lot less “local”.

  • Peter Parsons 4th Mar '16 - 11:26am

    Peter Watson, it could be a straight replacement for Council Tax, with each local authority setting rates and receiving the exact sum of money raised from those local income tax rates. HMRC have addresses for everyone on our tax records, and it is already known information as to which local authority each address falls under, so working out which rates apply to an individual is easy, as is working out which local authority each contribution gets sent to.

    I’d also point out that we already “redistribute money from the centre” – that is how the central government grant element of local authority funding operates today, with different levels of central government funding allocated using a formula which is intended (as I understand it) to reflect the level of demand in an area for various services irrespective of the level of affluence.

  • Why in the hell would you want to tax people on what they produce? That penalizes behavior that benefits the whole community.

    I mean, does anyone think that people should pay different prices, for the same goods and services because they earn more income? Perhaps only the most extreme Marxist, yet taxing people income is deemed normal. And progressive Income Taxes as “the right thing”.

    Because taxing income/capital is immoral, it distorts behavior and leads to deadweight losses. That is, we all end up collectively poorer.

    The only fair way of paying for services we share is from scarce natural resources we exclude others from using and other negative externalities like pollution.

    This aligns incentives, so aids efficiency. Which is why a Land Tax has negative deadweight losses. And because Land by rental value is more concentrated than income/capital, such a shift reduces inequality.

    By definition the incidence of a Land Tax on falls on the factor of production Land. Not income, capital or transactions.

    The incidence of Council Tax, because it is fixed into bands is 100% on Land. As such it is probably the most efficient form of tax that exists in the World.

    The only trouble being it is regressive, that is a % of land tax is charged the lower the value of property.

    This can be easily remedied using existing valuations and the existing structures.

    See Mark Wadsworth page 5,

    http://localtaxcommission.scot/submissions/

    Simple.

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