SPTR has produced a briefing on the parties’ policies on domestic local taxation for the 2016 election.

The full briefing can be read here

The main points are:

  • The Council Tax was introduced in 1993 and is based on 1991 property values. It has been frozen since 2007.
  • Previous Scottish governments have abandoned attempts at reforming it.
  • It is widely recognised that the system needs reform and a cross party Commission concluded that a new system must include recurrent property tax, that it was desirable to widen the tax base to include income, and that land value taxes were “promising”.
  • The SNP favours reforming the Council Tax by increasing the tax on more expensive properties, but does not propose a revaluation. It also intends to reform the rebate system.
  • Scottish Labour wish to replace the Council Tax following a revaluation with a flat rate tax per property combined with a property tax set at a proportion of property value, and with a maximum bill.
  • The Scottish Conservatives, who did not participate in the Commission, support some changes to the top two Council Tax bands.
  • The Scottish Liberal Democrats support a land value tax in the longer-term.
  • The Scottish Greens favour a Residential Property Tax based on a percentage of property value paid for by the owners of properties, and leading to a land value tax in the longer-term.
  • RISE support a progressive “Scottish Service Tax” based on income, but would also like to see it combined with a land value tax in the long term.
  • UKIP wish to prevent councils from charging higher rates of Council Tax on empty properties.




In an interview published on the Sunday Post website on 14 November 2015, Nicola Sturgeon was asked about the future of local taxation. The interview was conducted by Andrew Picken and the relevant extract is quoted below.

A cross-party review of the council tax was meant to report back last month but is now not expected before the end of the year with all sides struggling to agree on a conclusion.

The council tax bands have now not been altered since 1991 and are now significantly out of kilter with modern house prices.

However, a revaluation would be highly controversial and electorally unpopular as a similar exercise in Wales put about a third of homes in a higher band.

Much more palatable in an election year would be to shake-up the bands without a revaluation, with the possibility of also introducing new bands at the top end of the market.

This would allow the SNP to follow the approach it took with stamp duty, maintaining the freeze or cutting bills for the lower council tax bands, which affect the majority of Scots and squeezing more money out of those in the higher bands who own more expensive homes.

Grilled about this scenario, Miss Sturgeon said her party had not taken a decision yet over whether the council tax freeze will appear in its 2016 manifesto.

Taking her time to formulate her sentence, she continued: “We will see what the cross-party commission says.

“I am not saying this is going to be our policy, but you could change the bands for council tax without doing a revaluation.

“You could change the proportions between the bands that doesn’t depend on a revaluation.”

Asked if her party’s approach to revamping the council tax will match that taken on the stamp duty changes introduced earlier this year, she said: “The progressive principle will run through all of the decisions we take on tax.

“That is true of stamp duty, it will be true or of council tax or any future proposal on local government finance and it will be true of any decisions we take on income tax.


by Mark Stephens (I_SPHERE, Heriot-Watt University
and Kenneth Gibb (Policy Scotland, University of Glasgow)

Briefing No. 5 pdf available here.


The Council Tax was designed to be unfair.

The cost of freezing the Council Tax grows each year and this year will cost £560 million.

Ending the freeze would allow us to build the social housing we need, reverse the Housing Benefit cuts and have money left over.

Local income tax would drive up house prices and could be avoided by the rich and mobile.

A fair system of property tax is essential to combat poverty and austerity – as well as putting local government finance on a secure footing.


The Council Tax was introduced in 1993 as a replacement for the Poll Tax. Properties are divided into one of eight bands, based on their 1991 value. It raises £2 billion every year, and funds about 12% of councils’ total gross revenue income.(1) The Council Tax has been frozen since 2008-09 and in Autumn 2014 the Scottish Government announced the establishment of a Commission on Local Tax Reform to find a fairer system.

The Council Tax is designed to be unfair

The bands are designed to tax more valuable properties less heavily than cheaper ones. Because people who live in more expensive and higher banded houses generally have higher incomes, this also means that people on higher incomes are taxed proportionately less heavily than people on low incomes. Introducing more bands can reduce this unfairness. But they cannot remove it.

The Council Tax freeze is expensive

The Council Tax has been frozen for eight years. Every year the Scottish Government has to set aside more money to pay for the freeze. Each year the freeze requires the cumulative sum of previous years’ freeze plus another £70 million per annum. This year, in total, the annual cost of maintaining the freeze is £560 million (8 times £70m), bringing the cumulative cost to £2.5 billion.(2)

Unfreezing the Council Tax could pay for the social housing we need….

Just one quarter of the £560 million that it costs to pay for the Council Tax freeze this year could help to increase the output of new social rented homes by more than 3,000 units a year – bringing the total to the 7,000 the Commission on Housing and Wellbeing3 says we need.

… and reverse all of the Housing Benefit cuts… 

A further £40 million of the freeze would be enough to reverse the main cuts to Housing Benefit since 2010 (4) … and still leave £375 million left over. That’s £375 million which could be used to reduce the impacts of austerity arising from cuts in the block grant from Westminster.

We can’t afford the freeze, but we need a fairer local tax

However, the Scottish Government does not want to increase the Council Tax because it is
unfair. So we need to find a new tax for local government which is fair.

Wouldn’t a local income tax be fairer?

Local income tax sounds like a fairer option because it is based on the ability to pay. But there are compelling reasons why abolishing the Council Tax in favour of an income tax would be a poor decision.

Abolishing the Council Tax would make buying or privately renting a house more expensive…

The Council Tax taxes property values – albeit imperfectly. If the Council Tax were abolished and not replaced with a fair property tax, it would lead to higher house prices and higher private rents. This is because property taxes reduce the price of property due to the liability to make ongoing annual payments. If this liability is removed potential owners and investors will be able to bid more for property, and house prices will increase.(5) Higher house prices would hit first time buyers and private renters, and would make the housing crisis worse.

What’s more, income tax revenues would have to rise by 17% to make up for the loss of current Council Tax revenues and by 22% to bring back revenues to their 2008-09 value.(6) In 2006, the Burt Review estimated that a revenue neutral local income tax would require an additional tax rate of between 5.7 and 7.9 pence in the pound (depending how broadly it was applied and at different tax rates) on top of the prevailing rate of general income tax.(7)

Income tax has other disadvantages

Income tax has other disadvantages. One of the most important of these is that unlike properties, people can move, so if income tax is higher in one council area compared to another, people can move to avoid it. Self-employed people could convert their income into dividends to avoid it. People with more than one home can juggle where they live. There is a growing international consensus that broadening the income-based tax base and increasing our reliance for revenue on it can have negative economic consequences such as ‘fiscal flight’, compared to widening and diversifying the tax base to other less productive sectors such as property.(8)

This is why we need a reformed property tax

Property has been used as a basis for taxation across the world for centuries because it is a fair and reliable way to raise revenue. A fair property tax is one which reflects the value of the property, and is revalued automatically and frequently.

What about the ‘asset rich but income poor’?

There are many ways that people with low current incomes, but who live in relatively expensive properties, can be protected. In Scotland, rebate systems have operated since the 1960s. Other options include allowing owners to defer payments, combining property tax with income tax, or even introducing a hybrid property and income tax.


A fair system of property taxation is essential – not only to replace the unfair Council Tax, but to combat poverty and austerity.


(1) Commission on Local Tax Reform, Council Tax Facts
(2) Don Peebles (Head of CIPFA Scotland) Council Tax in the Context of Local Government Finance
(3) Commission on Housing and Wellbeing (2015) A Blueprint for Scotland’s Future
4) Based on Scottish Government impact assessments.
)5 The last time property tax was abolished – when the rates were replaced by the poll tax – four separate studies found that long run house prices would rise by 5% (Department of the Environment, 1986, Paying for Local Government, Cmnd 9714), between 13-23% (Hughes, G, 1987 Rates Reform and the Housing Market. University of Edinburgh Discussion Paper – medium run figures), by 7-30% (Spencer, P, 1988 The Community Charge and its Likely Effects on the UK Economy, CSFB Economics. London: First Boston) or 10-17% (Rosenthal, L, 1999, ‘House prices and local taxes in the UK’, Fiscal Studies, 20(1)). In the event these effects were outweighed by the collapse in the housing market caused by the doubling of interest rates.
6) Calculated from GERS, Table 3.1
7) Sir Peter Burt (chair) (2006) A Fairer Way: Report of the Local Government Finance Review Committee, p. 98
(8) See Burt (2006); Steven Smith (2015) Taxation: A Very Short Introduction (OUP); also raised by Gibb, K and Christie, L (2015) International Literature Review for the Commission on Local Taxation.

By Dr David Comerford, University of Stirling

Recent figures released by Scottish Government and ONS have shown that the distribution of property wealth (GINI = 0.64) is more unequal than the, already skewed, distribution of income (post tax and transfer GINI = 0.31). Therefore, a revenue neutral shift from the really-not-very-proportional-at-all council tax, to a tax levied in proportion to property wealth would, all else equal, have more winners than losers. The broad outlines of the distributional effects are clear. However, as outlined in the Scottish Property Tax Reform principles, the case for taxing property wealth (and land in particular) is also expected to have beneficial effects on average and so the balance of winners relative to losers is even more favourable than a simple zero-sum distributional analysis would suggest. In this post I outline some of the mechanisms by which such a system of taxation could promote economic efficiency.

What is economic efficiency? Inputs are used efficiently if the maximum possible output is produced with these inputs. Economic efficiency is enhanced when labour, capital and land are used in their most appropriate ways; frictions or interventions (such as taxes or subsidies) which prevent their appropriate use (perhaps by shifting the incentives towards an alternative, less productive, use) will damage economic efficiency, though there may be cases where interventions are efficiency enhancing when they mitigate against some market failure.

The case for a shift towards property and land taxation being efficiency enhancing rests upon three main mechanisms which will be considered in turn: (1) the fixed (inelastic) supply of land means that its taxation is not distortionary, and these revenues could be used to reduce other distortionary taxes; (2) the impact of land as an asset class upon the macro-economy; and (3) the impact of home ownership upon labour mobility. The final section then considers the political economy that mitigates against a policy which should be a positive sum game, and which should be supported by the median voter even if it were a zero sum game.

The fixed supply of land

Suppose land is untaxed, you own £100,000 worth of land, and you deem that the best use of your land is to rent it out for £4,000 per year. Sometime later, a land tax is introduced and you are liable for some amount of tax, say £2,000 per year. Whatcha gonna do?

The best use of the land is unchanged so there’s only really two options: continue to rent the land out for £4,000 per year, and receive only £2,000 net of tax, or sell up (the sale price would likely have fallen to around £50,000). The land owner cannot increase the rent to recover the tax as the rental level is set via supply and demand in the rental market – the only way the rent would go up in response to this tax increase is if some (other) land owners decided to take their land off the market and so reduce supply. But if they did this then they’d still be liable for the land tax and they’d now be getting zero rental income – so it is unlikely that the supply of land would be greatly affected by the introduction of the land tax, which means that rental rates would be fairly unaffected, which means that the incidence of the tax would fall almost entirely upon the land owners rather than the land users.

This is clearly a large loss to the land-owners but notice that the level of economic activity is unchanged – the land will likely continue to be used by those who can best use it, and in the case of our example, they are likely to continue to pay around £4,000 per year for the privilege. The loss of spending power by the land owner is a gain in spending power by the government without any direct impact upon the supply of the factors of production being taxed (here land). This is non-distortionary tax: its implementation has not damaged economic efficiency. Other non-distortionary taxes exist e.g. the poll tax is also not associated with any withdrawal of factors of production from productive use – but few would argue that a land tax falls as heavily as a poll tax upon those least able to pay.

In contrast to a properly implemented land tax being non-distortionary, the current system of property taxation is distortionary in a way that is damaging to economic activity. Currently second homes or unlet business premises pay less tax (council tax or business rates) than main homes or let premises. This is effectively a tax subsidy to remove land from the market i.e. the current system says to the owners of a valuable and potentially productive asset, that one of the most privately profitable uses of this asset might be to simply not use it. Given that society as a whole could be made better off if this asset was used in production, or if the empty house was used by a family who needed a house, this framework is clearly crazy from an efficiency viewpoint.

Other taxes can be distortionary, for example the combination of income tax, national insurance, and benefit withdrawal, on top of the extra costs incurred when working like commuting, child care, etc, may cause potential low earners not to seek employment because they are no better off with a job compared with no job. To the extent that a shift in the tax burden towards land is used to reduce distortionary taxes levied in situations like this, we could see an increase in labour supply and so an increase in economic output from a revenue neutral but efficiency enhancing shift towards land taxes.

Land as an asset class

The current system of property taxation subsidises home ownership relative to renting a home. There are various ways in which the system does this including a capital gains tax exemption on your main residence, and no liability to pay tax on the income that you pay as rent from yourself as tenant, to yourself as owner. To see that these constitute a subsidy, consider the same property either owned by the occupants or rented to different occupants. It could be that ownership relative to renting just changed the timing of paying for the housing services that the property provides (e.g. perhaps ownership is more expensive initially but cheaper later on) – in which case there is no subsidy. However, in reality, the government earns more if the property is rented out: receipts of capital gains tax when the non-occupying owner eventually sells; and income tax on some of the rental income that this owner receives whilst in receipt of these rents. A situation in which government income is higher when the property is rented out, can equivalently be viewed as a situation in which government expenditure is higher when the property is owner occupied i.e. the government is paying a subsidy to home owners.

This is a regressive subsidy as it is disproportionately paid to the wealthy who are more likely to own their property. But does it also distort the market in ways that damage efficiency? One way in which it might is by shifting the portfolio choices of individuals: suppose you have savings of £20,000; in the absence of this subsidy you might choose to rent your home and hold these savings in a diversified portfolio of assets; when home ownership is subsidised, you instead use the money as the down payment to obtain a mortgage. This distortion in asset allocation decisions has two obvious costs.

The first is that you are more likely to put yourself into a leveraged position by taking out a large debt that is fixed in nominal terms and secured against a volatile asset (the value of the property). The gross value of the debt is likely many times the net asset position (e.g. 20 times for a 95% mortgage). This has macroeconomic consequences by encouraging individuals to behave in a pro-cyclical manner i.e. it increases the correlation between individual behaviour (we all experience similar house price movements) such that everyone feels wealthier at the same time (when house prices rise but mortgage debt stays constant) or poorer at the same time (when house prices fall but mortgage debt stays constant). To the extent that consumer spending is related to net wealth, this means that economic activity becomes much more cyclical, with all the costs that come with boom and bust cycles. The government should not be subsidising home ownership and encouraging these cycles, and should perhaps be taxing home ownership and discouraging these cycles. To the extent that we are talking about land values overall, and not just land used for residential property, the cyclical movement of real estate values also affects business solvency, and business investment via its use as collateral, all of which adds to the pro-cyclical impact of land values.

The second cost is also related to risk and diversification, but at a less coordinated macroeconomic level. Suppose you live in a town in which your employer is the largest employer. The present value of your future wages constitutes a large component of your implicit “net worth”. An optimal portfolio choice for your savings would be to invest in assets which were not correlated with your own future wages – so that when one asset performs badly, the other performs well to provide some compensation. But if your employer were to go out of business, not only would this damage your future earnings, it would also likely have a strong negative effect on local property values. Therefore, investing in local property is a particularly bad investment decision in this case. Again, it is irresponsible and malign that government policy at present subsidises and encourages individuals to make such sub-optimal choices. (A similar argument pertains against government subsidy of schemes which encourage investment in your own employer’s shares.)

It is not clear that this government subsidy of home ownership raises investment in housing (we do not have an over-supply in the housing stock) but it does likely raise land values overall and therefore shift the proportional composition of wealth holdings towards land, which is an extremely long duration asset, and away from productive investment which has shorter durations. The consequences of this shift in duration is that a greater proportion of wealth is left as inheritances, with consequences for the intergenerational transmission of inequality, if not economic efficiency.

It may also be the case that a policy framework which subsidies home ownership and hence shifts the composition of household savings towards land, crowds out the absolute level of investment in productive capacity for the economy. This needn’t be the case (if you buy land from me, I have to do something with the proceeds – perhaps I’ll start a business or build a factory), but it could be the case if those in receipt of funds from the sale of land are disproportionately likely to consume rather than to invest. This could be the case if it were the old selling to the young and using the proceeds to fund consumption in retirement. This is the mechanism underlying the argument in Weale (2007) in which rising house prices reduce the need to save for retirement, which reduces overall savings, which lowers the rate of investment in productive capital.

Labour mobility

High levels of home ownership, and high land values, damage labour mobility. This is a circular process: suppose I have a potential move – a job offer in another location; if we are in a state of low labour mobility then it is likely that the number of potential homes near this new job are relatively low (low mobility means that their current occupants are also less likely to move); but this lack of availability means that I am less likely to take up this opportunity, rather I’ll stay where I am; and this decision to stay itself contributes to a lack of mobility. Low mobility means that people are less likely to do the jobs for which they are most suited because they are more constrained by location. To the extent that they are less productive in the jobs in which they are constrained to stay, this has an economic efficiency cost. A particularly egregious example of such an efficiency loss is where your present state is unemployment, and low mobility means you stay in a location where no jobs are available.

How does home ownership and high land values damage mobility? One way is in differential land values. If the entire land value were taxed away, then a home of equivalent build specification and quality would cost approximately the same, independently of its location. This means that if you have certain expectations and requirements based on your current home, a better job offer in a new location (such that the new wage net of land tax was greater than the old wage net of land tax) needn’t mean much of a change in your housing costs: the sale of your current house should fund the purchase of your new house if they are to approximately the same specification. Without the land component of the property price being taxed away however, property values in productive locations are likely much higher. It is highly likely that the better job offer received will be in a more productive location which means the sale of your current house does not fund the acquisition of a new house. It may be that a higher wage makes up the difference, but this is not necessarily the case. If it is not then you face a trade-off: move to the better job but take an effective pay cut because you cannot replicate the current housing amenity you enjoy; or stay put. Many will stay put – labour mobility has been lowered by differential land values.

Home ownership also damages labour mobility via higher transaction costs. The costs of buying and selling a property (including crazy additional policy measures like transactions taxes e.g. the Land and Buildings Transaction Tax in Scotland), whether measured in monetary, time or stress terms, are greater than the costs of exiting and entering rental lease agreements. The benefits of moving therefore don’t have to simply be greater than zero, they have to be bigger than some positive value that represents all the moving costs. This can be seen in commuting patterns: according to Oswald (1999) home owners commute more and further than renters, which could contribute to transport congestion.

Sounds good – let’s go

In this post I’ve outlined some of the mechanisms whereby a shift in the incidence of tax towards land raises economic efficiency. This means that we would expect average incomes to be higher as the tax burden is shifted towards land relative to the status quo. This is on top of the fact that a revenue neutral shift in the incidence of tax from income to land would benefit more than 50% of the population because of the concentrated nature of land ownership. Therefore there should be a large constituency in favour of this, and its implementation in a democracy should be straightforward, no?

In steady state, the only people who should prefer the status quo over an alternative with greater taxation of land, are children of the very wealthy for whom the inheritances outweigh any efficiency losses. But we cannot jump from one steady state to another, and the transition from the status quo to a policy regime with higher land taxes, mitigates against its implementation. In particular, a majority of the population (65%) are from households who own their own home, and these households will be adversely affected if property values fall. They may benefit on net, but the losses will be immediate and the benefits will accrue over time. There may also be adverse macro-economic consequences if households see their gross asset position hit, without any relief on their mortgages. Funding mortgage relief would add a large cost to the implementation of a shift to land taxes, and may prevent this shift being used initially to reduce other taxes (instead the land tax revenue would be needed to repay the bonds that were issued to fund the mortgage relief).

Although property ownership is concentrated in value terms among the wealthy (with a GINI coefficient of 64%), home ownership itself is widespread, which makes the political economy of the implementation of a shift towards land taxes difficult. However, if wealth inequality continues to increase (as hypothesised by Piketty (2014)) then the political economy of a shift towards land taxes, in terms of whether or not 50% of the population would be better off implementing the policy, transition and all, becomes more favourable over time.

A new briefing on property tax and housing affordability.

  •  A system of property taxation would increase the burden of taxation in high cost areas.
  •  However, we would expect house prices and rents to fall in response to this.
  •  Asset rich but income poor pensioners could be helped with a rebate system, or by deferring liability.
  •  Ultimately, the solution to housing affordability lies in improving supply, decentralising economic activity away from London, and boosting lower-end incomes.

See Briefing 4 on Resources page.

Professor Jim Gallagher argues that reformed local taxation will only be sustainable if it fits into reformed local finance, so that there is a clearer link between local taxes and local services.

The Council Tax is broken, and the Commission on Local Tax Reform has been asked to fix it. But they won’t succeed unless they consider the system as a whole.

Every government since the 1970s has struggled with the question of local taxation. The two commonest government responses have been to do the wrong thing, or do nothing. The Conservative government of the 1980s did the catastrophically wrong thing: the poll tax. Scottish governments have followed plan B: do nothing, postpone decisions, and freeze taxes meantime. That stokes up trouble for the future. So the Commission on Local Tax Reform is to be welcomed. Let’s hope that space on the shelf is not already being dusted for it.

The key thing about local taxation is that it is indeed local. Two consequences follow. First, the tax base should be something that doesn’t move around if tax rates change. That’s why taxes on real property, ie land and buildings, are the obvious and the main, if not the only, basis of local taxation. Second, local taxation has to be seen in the context of the system of local government and local government finance as a whole. Simply playing about with the structure of local tax on its own won’t do: you end up being drawn into changing other elements of the system in an unmanaged way.

So it would be a mistake for the Commission on Local Tax Reform to think it could discharge its responsibilities simply by polishing the council tax at the edges, though there are certainly some rough edges to be smoothed off.

 The big question

The first and biggest question is the one put very plainly by the Layfield Committee in 1976. (No analysis of local government finance since this committee has added much, so real anoraks should read that voluminous report. Go to an actual Library, with real paper books.) Should local government have the power to make its own spending and taxing decisions, or is it agent of central government? Government responded then by refusing to answer the question. Governments still won’t. But today in Scotland local government spending and taxation are decided in St Andrews House, and local authorities are routinely referred to as “delivery agents”.

We need to face up to that question more honestly than our politicians have been willing to do. My own view is that the reality is that for some local government services the public appetite for genuine local variation is small, and we should accept that reality, making councils explicitly agents; but for others, government should get off their backs.  For a fuller argument about this, see this report.

The Ladybird Guide to local government finance

But even that radical shift does not solve all the problems. We still have to fit local taxation into the wider system of local government finance. Each local area has different needs for whatever local services there are, and each has different taxable resources. Unless we are willing to accept that local services will depend on the accident of where taxable capacity falls (“full fiscal autonomy” for local government, if you like) we need a central system, mediated almost certainly through government grants, to equalise needs and resources. This takes us into deeply technical territory.

History gives us a few lessons, and I’m going to oversimplify them here. If you have a single local tax base (let’s call it “rates”) it’s reasonably straightforward to equalise for different local taxable resources. You simply give extra grant to those areas with weak taxable capacity; or if you’re feeling bullish take money away from those with lots. With more than one local tax base, this gets more complicated to do. (To equalise you have to make an assumption about the different tax rates each council might apply to get a single measure of taxable capacity; I will spare you the algebra.). That’s one reason why, when the poll tax was introduced, the government took the chance to nationalise the remaining property tax, non-domestic rates. It was a centralisation, but it also made the equalisation of resources much simpler.

If you want to equalise for different relative needs (say different numbers of old people, children, or levels of deprivation) as well as for different levels of resources, you can only do that if you set an expected level of spend. That’s why under the council tax, grant was calculated in such a way that if a local council spent what the government thought what was its fair share, based on relative need, of what the government thought should be spent in total, it would levy the government recommended rate of tax. Of course no council ever did, as each always thought the government total level spending was too low. But the result was that the differentials in council tax could be magnified: a council with low taxable capacity which went over the government spending level would find its council tax shooting up.

Now the technicians in government should understand all this, though for the last 8 years or more, since the council tax freeze, little account has been taken of present- day needs or resources in local government finance: last year’s budget has been the starting point for this year’s cuts.

The challenge for the Commission

But the challenge for the Commission on Local Tax Reform is not to do the sums but to craft a solution which is based on some understanding of the following interconnected questions:

  • How much spending and taxing discretion should local government have, and over what services?
  • how much equalisation is desirable for different taxable capacity and different spending need for those services.

What might this mean in practice?

First, we have to look at the local tax base in total: and that means not just the council tax, but also rates on non-domestic properties. We should compare the yield from these with the budget of those services which remain genuinely local, rather than run by councils as an agent of central government. (For the latter, government should simply pay 100% of the cost, as they are making the decisions.) We should find a rough and ready way of combining the two local tax bases into a single measure of taxable capacity to enable equalisation. We might well find that this revenue was more or less enough to cover local services. Then we should look at the degree of equalisation that was necessary and desirable for that mix of services, and devise a simple and robust grant equalisation formula to deliver that. Don’t try and make it perfect.

Don’t break the next local tax as well

Of course this doesn’t tell you how to change council tax itself: but it might create a system into which a reformed council tax could fit.

Council tax is not a perfect tax, but it’s not all that bad. It’s broken because it was asked to bear too much of the increase in cost of local spending for too long: it was carrying weight of these unanswered questions. Let’s try avoid breaking a reformed council tax in the way we broke the council tax.

This blog is by John Muellbauer, Professor of Economics at Nuffield College, University of Oxford and senior fellow at INET Oxford. This is the unedited version of a piece published in the Financial Times on 6 April 2015 (alt pdf here).

By John Muellbauer

The UK’s Council Tax system is monstrous and unique. No advanced country has such an unfair property tax, and none uses the UK’s broad value bands. A family at the bottom of band H, where homes are on average worth perhaps £1.2m in 2015 (£320,000 in 1991) pays one quarter of the tax as a percentage of value compared to a family at the top of band A where the average home costs around £120,000 (£40,000 in 1991). A family in a £2.4m home pays only one sixteenth of the rate faced by a band A tax payer in a £60,000 home in the same local authority, while tax rates faced by plutocrats are derisory. Council tax relief, a sticking plaster to soften the burden on the poor, traps many in poverty.

From April 1 2013 hundreds of thousands of people became liable for council tax for the first time, after the government decided to cut by 10 per cent the amount available for relief and gave local authorities the power to set their own eligibility criteria. According to Citizens Advice, “Council Tax has overtaken credit cards as the most common debt problem in Britain” (FT Feb.16).

Labour’s only significant reform in 13 years in office was to make the 50% discount on second homes optional from 2004. In 2014 Labour took up the earlier Liberal Democrat policy of a Mansion Tax on homes worth £2m or more, while the Lib Dems now instead want to add higher tax bands. These proposals have generated many letters to the UK press. For every fifty shedding crocodile tears on behalf of cash-poor widows in expensive homes, perhaps one has expressed sympathy for the disproportionate burden borne by band A or band B tax payers. And it remains a mystery why the UK is uniquely attached to value bands that applied in 1991 when, in most countries, property taxes are just based on recent market values. Most owners can easily value their properties from Land Registry information processed by Rightmove, Zoopla and others.

Introducing an element of progressivity into Council Tax is simple enough, by borrowing features of income tax: an allowance for the first £50,000 of value would take hundreds of thousands out of the poverty trap. A higher tax rate for the excess of value above £5m would tap a little of the taxable capacity of the plutocrats.

At the nub of a successful reform is overcoming the lack of ability to pay of the cash-poor and asset-rich. Labour’s proposed means-testing of tax deferral is intrusive. There is a much better way, offering tax deferral for everyone for an equity stake, which would also make the single person discount redundant. Those able and willing to pay cash would be offered a small discount since managing deferral incurs costs, though these costs would be offset by the saving of not having to value the homes of the deferrers. Suppose the tax rate was 1%. For those choosing deferral, the government would register a 1% gross equity stake in the property to be paid out at the next transfer of ownership. After 10 years of deferral, the government would own a 10% equity stake. The combination of the discount and the prospect of having to share future capital gains with the government (i.e. other tax payers) would ensure that many would choose the cash option.

Such a property tax would encourage down-sizing, which with ageing and other reasons for turnover, would ensure that a regular supply of properties came on the market, generating tax revenue, though in the first few years revenues would be below their long-term levels. Central government should take tax deferrals on its balance sheet and supplement the annual rate support grant, which provides the great bulk of local authority revenue, with the annual cash equivalent of the deferred tax payments for that year. There is no reason why bond markets would increase the government’s cost of borrowing as a result of this property tax reform.

For the economy multiple benefits would follow. At the bottom of the market where pockets of negative equity and repossession risk remain, house prices would rise. At the upper ends of the market, prices would fall, inducing a temporary decline in the UK house price indices, making housing a little more affordable for the young. With lower prospective returns, many of the tens of thousands of empty up-market homes currently owned by foreign investors would either be sold or brought into rental occupation to restore returns. Upward pressure on rents in London would moderate. As some foreign speculators pull out, Sterling should fall, improving the balance of the UK’s recovery a little towards exports and away from consumption. More efficient use of the housing stock raises UK productivity.


The following blog reproduces written evidence submitted by Prof Jim Gallagher, Nuffield College, Oxford to the House of Commons Scottish Affairs Committee Inquiry – Land Reform in Scotland. The oral evidence provided by Professor Gallagher and Stuart Adam of the Institute for Fiscal Studies on the topic can be read from Question 743 here.

By Professor Jim Gallagher

This evidence suggests an approach to the reform of property taxation in Scotland.

Constitutional background

Most matters related to land reform and property taxation are devolved to the Scottish Parliament at Holyrood. The Scotland Act 2012, deriving from the (Calman) Commission on Scottish Devolution devolved Stamp duty land tax, based on the analysis that property taxation was the most suitable for devolution, for the simple reason that its geographical location was not subject to uncertainty. That is why council tax and non-domestic rates are already devolved, and the devolution of Stamp Duty Land Tax means that all property taxes (apart from capital gains tax to the extent that it relates to real property) are now devolved. This gives the Scottish Parliament unrivalled opportunity to mould taxation of land and property in a way which is sensitive to Scottish concerns, efficient to operate, and economically wise.

Taxation of land and property in Scotland

The present taxes on land and property in Scotland have grown rather than been designed. Council tax, applying to domestic properties, arose from the debacle of the poll tax essentially as a modified form of domestic rates. It embodies a number of pragmatic compromises, and is none the worse for that, but suffers from the increasing disability of the unwillingness of any Scottish government to sanction a revaluation. It is wholly absurd that the values on which council tax bandings are based still refer to 1991 property values. Something should be done about that, but such a change ought to be put in the context of a long term strategy.

Non-domestic, or business, rates do not suffer from the revaluation problem, but still have some serious defects. The most obvious is that they do not apply to most real property in Scotland, as agricultural land has been de-rated since the 1920s. Whatever the justification offered for that then, it certainly merits revision now.

Stamp Duty Land Tax, by contrast, is a tax on transactions based the value of the property, but does not recur. Its main advantage is that it raises revenue, and for that reason alone, caution is needed in amending it. However the economic arguments against a tax on transactions are quite strong – essentially that transactions, freely entered into, allocate resources more efficiently, and making them less attractive reduces utility overall.

A strategic framework

Property ought to be taxed. It is a convenient source of revenue, with very low collection costs compared with other taxes, and ought to be subject to taxation in the same way as other economic assets. Scotland, like the rest of the UK, fetishises home ownership (land ownership too) with the result that property is overvalued, and households over-borrowed in order to finance ownership. The causes of this are complex, and it will be very difficult to escape from the situation in which we find ourselves. In the long term, part of the answer will be a rational system of property taxation.

A rational system of property taxation would have as its broad general principle the taxation of all real property, principally on the basis of taxing the value of the land on which the property sits. This has two advantages. The first is that it reduces the disincentive to investment in new buildings (whether residential and non-residential) insofar as the value of the house, office or factory will not itself be subject to additional taxation. The second is that it recognises that much of the value of land is not intrinsic, but is created by the rules which apply to its use, enforced principally through the planning system: this is easily seen in land which has been redefined to housing rather than agricultural use which immediately increases in value: there is an argument of equity for some of that benefit coming back to the wider community through taxation.

It would, however, be unwise as well as politically impossible to abolish the present systems of property taxation and move immediately to a system of land value tax. The short term distorting effects could be great, and would produce winners and losers on a scale which would be politically very difficult to manage. That does not mean that the property taxation system could not gradually be shifted in that direction.

Such a system of property taxation would have a much smaller role for transaction taxes (though as suggested below, these should continue in the short run, and should have a long-term role) but a wider base, of all real property, which should, ideally, allow for a lower rate.

The direction in which to move

Three steps would be needed to move in the long term towards a more rational system:

1. The system of domestic property taxation – Council Tax – should be reviewed, with a view to assessing how much difference there is between present relative values and a system of relative values more closely related to land value. At this stage his should be a purely theoretical exercise, based on a sample: the aim would be to see what adjustments could be made to the valuation system to approximate more closely to land value, rather than match it exactly, and to devise options for phasing such a change in. It is quite possible that the relative tax burden on different domestic properties would not change markedly (land values are a significant element of total property value).

2. A similar exercise should be undertaken for nondomestic rates, with a view to ascertaining how significant a change values more related to the capital value of land would represent, and options for phasing such a change in. The main challenge will then be to what extent the tax rate on domestic and nondomestic land of similar value should be equalised. In principle it should, but a very long transition is likely to be needed

3. An exercise should also be undertaken to plan for the entry into the new valuation roll of land currently exempt from any property taxation, notably agricultural land, and an assessment made of the scale of taxable resource thereby created and the economic effects of gradually taxing it.

Taken together, these steps would enable approximations to be made to the size of change to a wider property tax, and the time needed to phase in such a change. (Politically, this would need to be a cross-party project, so that the temptation–seen in the experience of other countries–for individual parties to court popularity by promising to persist in irrational tax policies can be reduced.)

Implications for Stamp Duty Land Tax

In such a rational system of property taxation, recurrent tax would replace transaction tax. This has two advantages. First, it provides a more predictable stream of revenue, (from a valuation basis approximating to land value in some rough and ready way). Second, it provides no disincentive to economically efficient transactions, and indeed provides a strong incentive for land to be transacted so as to be brought into productive use.

One of the principal political issues raised by a recurrent tax on property is that it is a tax on wealth, rather than income. The UK is unusual in European terms by having little taxation on assets rather than income, and no doubt many people will think in principle this should be amended. But of course there is a problem: there will be a group of people who are property-rich, but income poor. (In the debate over domestic rates this was traditionally presented as an elderly lady living on a small pension in a big house, formerly the family home.) The way to deal with this is to allow the recurrent tax to accumulate so that it becomes a tax to be paid when the house is eventually transacted. Similar arrangements might be made for businesses or even agricultural land, though the rules would be more robust for nondomestic property, where there are much stronger economic arguments for requiring it to be sold and brought into productive use. This could mean that the transaction tax became paid by the seller, rather than the purchaser.

Until such a transition is complete, however, a transaction tax should remain, and it may continue to provide a small additional source of revenue, perhaps at lower rates, even once a comprehensive system of land taxation is eventually brought into effect.

October 2013

As the Scottish Government establishes its Commission on Local Tax Reform, a group of experts has come together to make the case for a fair system of property taxation, calling the Council Tax discredited and saying it undermines local democracy in Scotland.

Scottish Property Tax Reform (SPTR), which launches today, is a network of interested individuals and organisations who believe that a well-designed system of property taxation can and should play an important role in public finance, the economy and a fair society.

SPTR aims to inform and influence the work of the commission established by the Scottish Government to examine possible replacements for the Council Tax.

Professor Mark Stephens, who is the convenor of the new group and is Professor of Public Policy at Heriot Watt University, said: 

“We welcome the Scottish Government’s commission. The Council Tax is unfair, but politicians have been reluctant to reform it. It is based on property values that are almost a quarter of a century out of date. It is now so discredited that it has been frozen for years and this is undermining local democracy in Scotland.

“Members of the group are concerned about the lack of understanding about how property taxes work. It intends to provide information and briefings for politicians and political parties, as well as improving the quality of information and analysis available to the public through the media and other sources.

“The group argues that property taxes are very difficult for wealthy individuals to evade for the simple reason that, by their very nature, houses cannot be moved abroad. It also argues that they can help to improve housing affordability and to stabilise the housing market.”

Stephens added:

“We must move away from the idea that economic prosperity can be founded on artificially inflated house prices. It is time to shift the burden of taxation away from the real economy and and back onto unproductive assets.”

Members of the group include: Professor Mark Stephens, Professor Glen Bramley and Professor Mike Danson (Heriot Watt University), Andy Wightman (Author and Land Activist), Professor Richard Kerley (Queen Margaret University), Professor Ken Gibb (Glasgow University), Professor Jim Gallagher (Nuffield College, Oxford).

Notes to Editors:

Scottish Property Tax Reform principles:

We believe that a fair system of property tax should form the basis of local government taxation because:

  • Property is fixed and space, is immobile, and so is easy to tax. This means that, unlike many other taxes, property taxes can’t be dodged by wealthy people by moving themselves or their companies abroad. They have to pay their share along with everyone else.
  • Property taxes can help to make housing more affordable – reversing the trend that has priced more and more people being out of housing.
  • Property taxes reduce boom-and-bust cycles in the housing market. These cycles allow a few people to get rich, but at the cost of leaving thousands of people in negative equity and having their homes repossessed when prices fall.
  • Property taxes help society to recoup some of the benefits that some people receive because they are lucky enough to live close to new infrastructure or other amenities. They do this because the value of property rises when the area they’re located in benefits from public investment.
  • Property taxes encourage people to invest in the productive economy, ensuring a prosperous future for us all. We all know that ever more inflated house prices doesn’t make us any better off in the long run.

A well-designed property tax should incorporate the following principles.

  • Property taxes should be revalued automatically and frequently. One of the reasons the Council Tax is unfair is that it is based on property values that are nearly a quarter of a century out of date. You wouldn’t expect to pay income tax based on what you earned in 1991!
  • Property taxes can be designed better to deal with anomalies that have been found with previous forms of local taxes:
  •  Direct help toward low-income households
  •  Deferring tax payments for asset rich/ cash poor households
  •  Regular statutory revaluations
  •  Combining property and other taxes, as is common elsewhere, to raise the   same yield.

If you’re still not convinced, think of it the other way round – not taxing property will simply encourage more wealth holding and speculative activity in property simply because it is untaxed.  Remember it was lending on the property market that led to the Global Financial Crisis. Stoking it up again is not the solution.

The Council Tax

The Council Tax was introduced in Scotland in April 1993, when it replaced the Poll Tax, which in turn replaced the domestic rates in 1989.

Council Tax was intended to be a hybrid property tax and charge for local services.

Properties are placed into one of eight bands*, based on their 1991 value.

(*) The banding system is designed to ensure that the more expensive a property, the lower the proportion of its value is taxed. For example, a property in the middle Band D is likely to be worth at least twice as much as one in Band A, but is liable for only 1.5 times as much Council Tax. A property in the top Band H is likely to be worth at least five times as much as one in the middle Band D, but is liable for only twice as much tax.

Of the 2.4 million dwellings in Scotland, about 5% are exempted and 40% subject to a discount (mostly a 25% discount for single person occupancy).

Average Council Tax bills are £988, and have been frozen since 2007.

More than half a million households (533,980 in September 2014) receive a reduction in their Council Tax Bill under the Scottish Government’s Council Tax Reduction scheme, at an annual cost of more than £350 million.

Scottish local authorities spend about £11.6 billion per year (‘net revenue spending’ 2012-13) on services. These services include education and social work.  This averages £2,400 per person.

The Council Tax raises £1.9 billion per year (2012-13).

All figures are from the Scottish Government http://www.gov.scot/Resource/0044/00444846.pdf  andhttp://www.gov.scot/Resource/0046/00467191.pdf except (*) =  SPTR calculation

The Burt Report

The Local Government Finance Review Committee was appointed by the last Labour-Liberal Democrat administration under the chairmanship of Sir Peter Burt.

It reported in 2006 and recommended a form of property taxation.

Its findings were rejected by the then Scottish Government.

Local Income Tax

The SNP was committed to introducing a form of income tax to replace the Council Tax in its 2007 manifesto.

Its proposal to use the Scottish Government’s tax varying powers meant that this would have in effect been a national tax, and failed to gain the support of the Liberal Democrats which support a local income tax.

These plans were abandoned by the SNP when in government.