A Poor Tax - Council Tax in London: Time for reform

Council tax is considered by many to be in the ‘too difficult to touch’ box when it comes to reform. Haunted by memories of the community charge, better known as the poll tax, which is widely perceived to have contributed to the fall of Margaret Thatcher, the majority of national politicians daren’t even speak of reform, let alone propose any change, for fear of the political consequences.

But leaving council tax unreformed is becoming ever more unsustainable. Local authorities across the country are increasingly cash strapped as a consequence of government cuts to their core grant funding and limits on their ability to raise funds through council tax and other sources. Moreover, the direction of public policy is towards greater devolution and allowing local politicians, accountable to their local electorates, to have a greater say – not just about what services should be prioritised, but how the funds for them should be raised.

Perhaps most significantly, however, is just how unfair the current system has become. Our research, focused on London, but with wider relevance for the whole system across England, demonstrates how council tax has become increasingly regressive with regard to property values – the cheaper your property, the more you are likely to pay as a proportion of your property value. What is more, our analysis shows that council tax has become substantially more regressive with regard to income too. Property taxes are not designed to be progressive with regard to income but many people believe that ability to pay is an important conception of fairness – however we conclude in this report that council tax has become more regressive for the poorest Londoners than we consider acceptable. The most substantial reform to the council tax system since its inception – the devolution of council tax benefit – is further exacerbating the regressive impact of the system on London’s poorest. IPPR will be setting out its proposals for reforming council tax later in the year but as our findings in this report make clear, the time for reform has come.

Our case for change rests on five fundamental arguments.

• London’s local authorities are becoming increasingly dependent on council tax as part of their core spending power. In 2015/16, the average council tax contribution was 40 per cent, but this is set to rise to 52 per cent by 2019/20.
  
• Outer London boroughs are more dependent on council tax revenues than their inner city counterparts. In Richmond upon Thames and Kingston upon Thames council tax revenues make up as much as 76 and 70 per cent of their core spending power for 2017/18, while in Hackney, Newham and Westminster just 27, 27 and 25 per cent.
  
• Growth in B and D council tax rates across London boroughs since the turn of the century has far outpaced the growth in the consumer price index (CPIH) and average earnings for London.
  
• As far as property values are a proxy for wealth, council tax is not progressive. A household living in a Band A property in London would pay, on average, over 0.5 per cent of its value, compared to a household in a Band H property which would pay just over 0.1 per cent.
  
• IPPR analysis estimates that in London the burden of council tax for the poorest Londoners as a percentage of equivalised household income after housing costs (not accounting for council tax support) was more than eight times higher than those in the highest decile (10.8 per cent compared with 1.3 per cent).
  
• Even accounting for council tax support, the burden of council tax on London’s poorest households is more than six times greater (8.1 per cent) than on those in the highest decile (just over 1.3 per cent). Those on middle incomes face a burden more than twice as great (2.9 per cent) as those on the highest incomes.
  
• The poor take-up of council tax support and the reduction in the support provided in the majority of authorities since decision-making on the awards was localised for working age claimants in 2013/14 has a significant impact on those on the lowest incomes. But even with our analysis modelling 100 per cent take-up for all those eligible, the burden on those on the lowest incomes (4.5 per cent) is still more than four times higher than for those on the highest incomes (1.1 per cent).
  
• The council tax system has become more regressive over time. For London’s poorest our analysis suggests the burden under the contemporary system was 10.8 per cent compared with 8.2 per cent in the early 1990s. Accounting for full take-up of council tax benefit, the burden on those on the lowest incomes under the current system (4.5 per cent) is more than 22 times what it was in the early 1990s (0.2 per cent).
  
• Since the reforms to council tax support, there appears to have been a steady reduction in the number of people claiming council tax reduction in London, dropping from 824,000 claimants in March 2013 to 657,000 in March 2017.
  
• Londoners have an appetite for change. Our London focus groups made clear that they see the use of outdated property prices as unfair and they would like to see the system updated and made fairer.
  
• There was no support for the discounts offered for empty homes and second homes among the Londoners we spoke to, but there was support for the current policy of levying premiums on empty homes. However, there was considerable support for the single person’s discount.
  
• As well as changing the way it functions, Londoners also supported an improvement in how local councils communicate and decide what their money is spent on. There was a desire for greater information about what services council tax supports and how local services are paid for.
  
• While there was broad support for reform of the council tax system, most people wanted to see changes to the current system, rather than see it completely overhauled or replaced.