Fair Local Taxation for a New Wales

By Rhydian Fôn James

This article was inspired by a chat over the garden wall with a neighbour and good friend, leading to his complaint about his council tax bill and a request that I write something about it. Is there any basis to his complaint? Yes, without doubt – and we in Wales must work to ensure a fair and progressive system of local taxation. The difficulty lies in the fact that powers over taxation still lie with Westminster, and not at the Senedd. As we shall see, the battle for devolution of further significant powers to Cardiff is tied up with the battle over council taxes.

Many everyday public services are provided through local governments all over Wales – even ones so simple that we can forget that they are a service, such as driving on a local authority road and taking children to schools, libraries, or leisure centres. Part of these services are funded by local taxation, currently in the form of council tax. Bu this is about to change, in some UK countries at least – in Scotland, the SNP are pressing ahead with plans to discard the council tax system in Scotland. It will be replaced with a local income tax, also a Plaid Cymru policy for some years. At the time of writing, Plaid Cymru’s Fairness Commission is researching and considering the party’s policies on taxation, with local income tax being a focus of discussion.

The biggest problem with the council tax is quite simple: those on low incomes pay far too much, whilst the rich get away with paying so little that it is laughable. Similar arguments can be made about many taxes, especially UK income tax, but council tax is far more regressive than almost any other tax. In Wales, the council tax is paid for Bands A to I, corresponding to the historic value of a house. A Band I bill is about 3.5 times greater than a Band A bill, but the typical Band I house is worth around 10 times the typical Band A house’s worth. A typical Band I resident, earning over £50,000 a year, will have and income 15.5 times greater than a person on income support, who may pay Band A council tax.

This makes the regressivity of council tax obvious. To underline the inequality entrenched in the current system, we can note that the poorest 10% in society pay over 4% of their income in council tax. The richest 10% pay just over 2% of their income in council tax, so we see that the poorest pay a part of their income that is nearly double the size of the part paid by the richest. Council taxis very hard on pensioners, single parents, and families with two or more children. This is not true for every family with two or more children – two adult homes are likely to be higher earners – but it is true that certain types of family are hit harder by council tax.

There are a few other problems with the council tax system, but regressivity seems the most important one. An IFS report[1] written in 1999 drew attention to the inefficiency of Council Tax Benefit, with the shocking fact that the poorest 10% get less help with their council tax than the three deciles immediately above them, yet the same system remains in place. Another shocking fact is that council tax bills have risen 32% faster than the growth in wages over the past 7 years, as reflected by the Office for National Statistics. This is an even bigger problem for pensioners, as pensions are linked to consumer prices, which have risen slower than the growth in wages.

The Tories will not change the system that they, under the leadership of Margaret Thatcher, created. New Labour have failed to do anything about council tax despite holding power in London since 1997 The mainstream parties dare not change the system because Middle England does so well out of council tax – and any change might affect voting patterns in this crucial constituency. It is obvious that Wales and Scotland lose out under council tax, as more households are in lower Bands in these countries. That is why we in Wales, as in Scotland, must demand the parliamentary powers to end this gross injustice.

There are many options for reforming council tax. The simplest would be to create more intermediate Band, and to increase the increments between Bands. However, research show that any combination of the measures would not be much more progressive than the current system – the best result possible would be a flatter line of tax percentage paid for each decile. It could also punish all couples withh children unfairly. Another option is to replace council tax with a property tax, pegged to a yearly review of property prices, which has the potential to be quite progressive. The problem is that such a tax would be quite expensive to set up and administer.

The option left on the table is that of a local income tax, and we can adapt an existing model[2] to research the possibilities for Wales. A local income tax would be simple and thus cheap, as the income tax system already exists and only minor changes would be necessary – additionally, there are several options as to the exact system we choose. The simplest option is a flat local income tax rate levied on the 20% basic rate  (BR) income only in addition to income tax. Even though this is effectively a flat tax, the system is progressive as it is complementary to the income tax system, as shown in the figure below. The lowest income deciles would pay almost no tax at all, and only the richest would face an increase in their tax bills. Only earnings would face local income tax, so that savings and investments, benefits and pensions are untaxed.

There are even more progressive systems of local income tax (LIT). For example, we could levy a flat LIT on both the 20% basic rate and the 40% higher rate (HR) of income tax, in a BR + HR system. Even more progressive is creating a higher rate system (HR) of local income tax, where LIT is levied on the basic rate, and a higher rate LIT is levied on top of higher rate income tax. The radical option is an upper higher rate (UHR) of LIT, where LIT is levied as in the HR system, but with an added charge for income over £100,000 per annum. The increasing progressivity of these proposed systems is pictured below, so that it it is obvious that most households will benefit from any one of them. The biggest winners would be pensioners, almost completely lifted out of local taxation, and single parents.

There are a few additional[1] considerations[2] to local taxation of course, and Plaid Cymru’s Fairness Commission must discuss them so that local government funding is structurally balanced and stable. These problems are not trivial, yet progressivity muust be a priority for any discussion on local taxation. The fact is that council tax is not fair by any measure. Progressive proposals for reform must be at the heart of Plaid Cymru’s future election campaigns and the campaign for full parliamentary powers.

References

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[1] Lyons Inquiry into Local Government, Place-shaping: a shared ambition for the future of local government, Department for Communities and Local Government, 2007

[2] The Balance of Funding Review, Office of Deputy Prime Minister, 2004

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[1] Clark, T., Giles, C., and Hall, J. (1999) “Does Council Tax Benefit work?”, IFS Reports R61, June,

Institute for Fiscal Studies., London

[2] Professor David Bell and Professor David King, Modelling The Effects of Tax Options: A Project For The Local Government Finance Review Committee, University of Stirling, 2006