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.

 

 

 

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.

ENDS