By Kieran Neild-Ali, grassroots assistant at the TaxPayers’ Alliance
Council tax may be one of the most overlooked issues in Britain. The national media thinks it’s dull. Westminster doesn’t care, because they believe it is someone else’s problem. But it's a huge issue for almost every taxpayer. In our polling last year, capping council tax was the most popular policy, with 83% of working class voters supporting it. There is an appetite for big reform, with changes that could affect literally millions of households. So what could those changes be, and why should we care?
What is council tax?
Council tax is charged by local authorities to residents in order to fund local services, such as waste collection and education. The amount of tax a household pays depends on the value of their property, which is categorised into bands. The greater the value of your house, the bigger your bill (in principle).
Local authorities have discretion over the rates. In England and Scotland rates rises are capped by the respective governments each year. That’s why many rises are just underneath the threshold, by 0.1 per cent - because that’s the highest councils can get away with, while still claiming they simply can’t raise the cash they need and don’t have the powers to do so.
In Wales there is no cap. Over the years, crafty councils have increased rates to inflation-busting levels. In Wales, the average annual rate of tax on a band D property is now a colossal £1,696. Across the board, Welsh local authorities have ratcheted up their rates. Wrexham has increased council tax by an eye watering 6.4 per cent this year. Monmouthshire, Caerphilly and Carmarthenshire have each raised tax by 5.4, 5.1 and 4.9 per cent respectively.
As or polling showed, many residents wonder why on earth their taxes have to keep going up. We concur. Despite forcing residents to contribute more, local authorities have continued to waste taxpayers’ money. Eradicating wasteful spending should be councils’ first priority to keep rates as low as possible. But perhaps changing the current tax system could be part of the solution?
What is the alternative?
The Welsh government is considering a fairer system in the form of a local income tax (LIT) to replace the current system. They have written a report on how the system could work.
In short, an LIT is a tax levied on earnings like income tax and not based on property bands. Already used by 18 OECD nations, the TaxPayers’ Alliance supports the implementation of an LIT. Our landmark report The Single Income Tax argued it would make taxation in Britain lower and simpler.
Like the Welsh proposals, we believe that funding for councils should be based on ability to pay reflected through income. It’s critical though that any local income tax does not further increase the overall burden on Welsh taxpayers.
The report by the Welsh government gets a number of important issues right but also opens the door to some serious problems.
What it gets right
Firstly, it means a tax actually based on ability to pay.
The strength of an LIT is the notion that indicators of ability to pay should be based on income from employment. For years, council tax has unfairly burdened working people who have fallen on hard times, putting people in arrears and swallowing up their pay cheque. If your property value races ahead of your income, you're in trouble. Now more than ever, council tax bills are a daunting prospect for those hit hardest by the pandemic.
In particular, older people have been burdened by the current council tax system. The report rightly highlights the plight of our elderly as one reason for a need for change. Pensioners have reduced income in later life, yet they are still expected to pay the same rates as those in employment. Only students and people living alone are entitled to council tax relief.
If pension income was factored into ability to pay, more appropriate tax rates could be set for pensioners.
The report also agrees with our insistence that local authorities should have discretion over the rates they charge. The study highlights that by giving councils power to levy rates, they can promote fiscal responsibility and improve the prospects of their residents. This makes local authorities entirely responsible for their income and expenditure.
The main findings of the assessment are a positive starting point for a future local income tax. However, the report does leave some options on the table which would spell disaster for residents. It's important to nip these ideas in the bud and ensure that any future LIT is fair and lowers the tax burden.
What is gets wrong
Proposals like this should not use savings and investments as indicators of ability to pay.
The report looked at what indicators of ability to pay an LIT should use. Although the report did see income from work as the main factor, it also looked at savings and investments as a potential consideration.
This would be a total disaster for the feasibility of an LIT. The idea that councils could raid individuals’ savings and private investments is simply unacceptable. Not only are savings acquired from income that has already been taxed, they are vital for people's retirement plans and the prosperity of future generations. Taxing these would be a disincentive to sensible savings decisions. Once again pensioners would be the prime targets, and the advantages of setting a tax based on ability to actually pay are lost.
A LIT should also be very careful about exemptions, such as minimum threshold for universal credit claimants.
The report proposes a minimum income threshold for an LIT, to protect those on welfare and universal credit. By excluding a proportion of the population from paying into services the entire community benefits from, an arbitrary minimum threshold will give many people a free ride whilst eligible households will have to pick up the tab. Shrinking the tax base in this way should not be done lightly.
The report also urges any future LIT to prevent a ‘race to the bottom’ and suggests that policy should prevent fiscal flight to cheaper English local authorities. The fear is that if local councils can set their own rates, there will be disparity between tax rates across Wales. As a result, wealthy people could move to places with cheaper rates in Wales or in the rest of the UK. A minimum rate is proposed to prevent a so-called race to the bottom.
But this scenario is simply an opportunity for the taxpayer to hold the balance of power over council fat cats. By allowing authorities to set rates, councils will be cautious not to over charge residents, sticking to their budgets and culling waste to stay competitive with other authorities. If one council is performing well (i.e. keeping rates low and delivering excellent services), those hiking taxes will be wary not to lose a large chunk of their tax base - forcing them to get a grip on their budgets. If anything, this could be a huge advantage - not least for Welsh councils versus notoriously expensive and wasteful English ones.
Rather than fearing the effects of competitive rates, Wales should embrace the opportunity to give their people more power and revolutionise local spending.
However, there is also the reverse issue. Having no maximum cap would instead give councils power over their residents, with an incentive for big rises which could seriously harm low income families in high tax areas. Wealthier households could afford to move to areas with falling rates, but poorer households could be stuck in areas with rising rates.
For those who cannot afford to move house to escape extortionate tax levels, any local income tax should have a maximum rate. The TaxPayers’ Alliance Single Income Tax recommends an 8 percent maximum to prevent councils taking advantage:
“The minimum rate should be set at zero, allowing authorities maximum scope to compete for new residents with the lowest possible taxes. The maximum should be set at eight pence, giving existing residents, who may find it expensive to move in the short term, some protection against the predations of ‘loony’ councils”.
This added protection prevents big spender councils from fleecing their poorest residents.
TPA proposals
That is one of a number of additional ideas we proposed for any local income tax.
Our plan for an LIT includes provisions to give local authorities complete responsibility over their finances, by allowing councils to set local sales taxes and gain increased control over business rates. This would give councils a real stake in making residents wealthier and better nurturing local businesses, as well as directly providing the funding necessary to maintain and improve town centres. The Welsh government’s report unfortunately falls short on this.
Our LIT proposals are part of a UK wide single income tax plan. Although future discussions of a Welsh LIT should consider this, it would be beneficial for all four nations to discuss a UK wide tax shake-up. These changes can’t happen in a vacuum.
The key strength of our Single Income Tax proposal is that the tax burden cannot rise above 30 per cent. An LIT would be embedded into the single income tax, meaning the overall marginal tax rate for any person would not be higher than 30 per cent. That is how you would guarantee that a new local income tax would mean genuine change, rather than simply adding to the already inefficient council tax system. Adding yet more charges on top of existing bills would be no different to just putting up council tax.
Wales must think carefully about whether a local income tax will make the burden on taxpayers worse or better than it already is. Their assessment only scratches the surface of the endless benefits Wales (and the entire UK) could reap from an LIT, and gets some aspects very wrong indeed. While the national media and political debate might not care what happens with council tax or any local income tax, millions of residents will.