In brief
Council tax reform

In July the New Policy Institute launched a new mini-think tank to campaign for a council tax which is fairer to families with low incomes. This Centre for Council Tax Reform is being supported by the public sector union, PCS, and the Local Government Information Unit. Through publications, events and behind-the-scenes lobbying we aim to draw attention to the inequities of the current system and campaign for change.

At the moment, council tax is the most regressive of Britain’s major taxes. Government statistics show that, as a share of their income, on average the poorest fifth of families pay three and a half times as much council tax as the richest fifth. In contrast, low-income groups pay only two and a quarter times as much in VAT, fuel duty and other indirect taxes, often criticised for hitting the poor.

What is remarkable is that these statistics take into account council tax benefit, which exempts almost three million low-income households from council tax. So, while some poor families pay nothing, others are clearly paying a massive share of their income in council tax. In many cases those families hit hardest are just outside the benefits system, struggling to make ends meet with low-paid work.

Council tax, however, is not intrinsically unfair. Instead most of the problems arise from the way it was initially set up in the early 1990s. At the moment, there are only eight council tax bands covering all property values. Critically, the top rate of tax is only three times as much as the bottom rate, even though top-band homes are typically worth ten times more than homes in Band A.

The Centre is asking policy makers to consider a series of measures to address these inequities. Firstly, we think the tax could have more bands at the top and bottom. Secondly, the gap between the top and bottom levels of council tax could be much closer to the corresponding gap in house prices. Finally, something could be done about people in expensive homes with low incomes. These ‘asset rich, income poor’ groups are often pensioners. Their annual council tax payments could be commuted into an growing lump-sum charge which local authorities would redeem when the home was eventually sold.

One concern is that, even with these changes, reform of council tax will hit people with low and moderate incomes in the South East who have ‘no choice’ but to live in expensive properties. There are potential ways round this problem (for example, setting regional or local council tax bands) but these have implications for the distribution of resources between local authorities. There will not be one neat solution, but if policy makers want to see a fairer distribution of tax-raising within each local authority, a compromise will probably have to be struck.

Andrew Harrop, Co-ordinator of the New Policy Institute’s Centre for Council Tax Reform (www.counciltaxreform.org).

Free copies of a pack on council tax reform can be ordered from the New Policy Institute on 020 7721 8421.

Poverty 110, Autumn 2001