A poor tax: Reforming council tax in London

Key findings

Regressive

The council tax system is increasingly regressive with regard to property value and is therefore unfair

Devolved

Council tax should be devolved to London

Exemptions

For empty and second homes should be abolished

The current council tax system in London is unfair. The tax could be a sustainable means of funding local government services while also functioning as a progressive tax on property wealth. However, at the moment it is highly regressive in relation to property values as well as representing an unduly large burden in terms of income for poorer Londoners.

It is economically inefficient particularly because of its banding system, reliance on considerably outdated property prices and the inconsistencies between it, and commercial property taxation. Furthermore, it is increasingly unsustainable as a source of local government finance, a trend which is only set to continue.  

Key findings

  • The council tax system is increasingly regressive with regard to property value and is therefore unfair.
  • The council tax system takes too little account of ability to pay and is therefore unfair.
  • The council tax system is inefficient.
  • Council tax is increasingly unsustainable.
  • There is public appetite among Londoners for reform.
  • The political barriers to reform in England are high.

Recommendations

  1. Devolve Council Tax to London: The government should commit, as part of the comprehensive spending review, to devolve the council tax system to London.
  2. Protect those on low incomes: A capital-wide council tax benefit system should be introduced to support London’s poorest and most vulnerable. This could be funded partially by the revenue raised through additional council premiums on empty and second homes (below) and additional grant from central government.
  3. Council tax exemptions for empty and second homes should be abolished:  council tax premium should be introduced for a) all empty homes at a level of 200 per cent (twice the council tax rate), b) empty homes for longer than two years at a level of 300 per cent (three times the council tax rate), and c) second homes at a level of 200 per cent (twice the council tax rate). IPPR estimate this could raise over £200 million a year, which could be used to support the council tax benefit system.
  4. Fundamental reform of council tax in London: Council tax should be abolished and replaced with a property tax which is proportional to the present-day value of homes. The tax should be levied on owners, not occupiers. IPPR analysis suggests that a rate of 0.25 per cent would be fiscally neutral for London. In terms of distributional impacts, a fiscally neutral flat-tax rate would see around 79 per cent of households benefit from the reform, the majority of which would be in the current bands A to C. Properties in the top bands (around 21 per cent) would pay more under this option.

Delivering a reformed system in practice

Implementing reform of the council tax system will not be easy but there are several strategies that can help overcome opposition and potential issues that might arise

  • Transitional relief for council tax payers: changes should be phased in gradually with a limit applied to increases or decreases in rates each year.
  • Support for those on low incomes: there will remain a need for a reformed council tax support scheme or for developing a form of property tax credit, low-income housing exemptions, upper limit to the property tax or other intervention to support those on lower incomes.
  • Mechanisms for deferral: a scheme to allow the deferral of payment until a property is sold, the owner passes away, or financial circumstances improve should be introduced.
  • Payment at source: any system should include the capability for payment to be taken at source, as with income tax and national insurance.
  • Regular assessments of property value: revaluation should be carried out either annually or every three years using an indexing system to uprate in between.
  • Invest and reform: reforms to council tax should be coupled with rising investment and improvements in local public services so as to help build public support.
  • Redistribution measures for local authorities: a system to allow redistribution of the property tax revenues to occur between local authority areas within London will be essential.
  • Communicating any reforms: any reforms need to be communicated in an easily understandable form.

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A poor tax: Reforming council tax in London

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