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.

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.