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Although it is often said that council tax is too high, the main problem with council tax is that it is unfair particularly for people on low incomes and those who own or rent properties of little or no value. Council tax is regressive with regard to both income and property values. Low income households pay a higher percentage of their earnings in the tax than high income households. Those who experience most hardship in paying council tax bills are the less well off, especially people whose earnings are just above the level of entitlement to council tax benefits. It is people on low or moderate earnings that are likely to think of council tax as too high. The tax is also regressive in terms of property values, in that people who live in expensive homes pay a smaller percentage of their property values than those who have low value homes. The question of whether council tax is too high or not should therefore be looked at in the context of property values and the income levels of taxpayers.

The minimum rate of council tax in 2011 - 2012 for England as a whole averages £959 even for people on low incomes, apart from those entitled to receive council tax benefits, and this applies regardless of how cheap the property is. Even self contained units that have no market value and which in many cases can not be sold separately from the larger building in which they are situated have to pay this minimum amount. In contrast, the maximum rate in England averages £2,878 regardless of how rich a person is or how expensive their home is. For a billionaire living in a ten million pound mansion £2,878 would not be considered excessive, but for a person on the minimum wage living in a rented bedsit above a shop £959 is too high.

Another problem with regressive taxes such as council tax is that they can not be increased without hitting the less well off members of society even harder. This creates a problem for local authorities if they want to raise extra revenue from the tax. There is a fixed three to one ratio between the top and bottom council tax bands. The tax can not be increased on the rich without increasing it on low income households by the same proportion, and creating even greater hardship for them. It is mainly this regressiveness that has resulted in the perception that council tax increases are too high. Again, the increases are too high for the less well off but not too high for the rich.  The perception of excessive increases has in turn led to the imposition of council tax freezes, and although these benefit the less off they also benefit the rich by the same proportion. All these problems stem directly from the use of a regressive taxation system, and the solution therefore would be to replace council tax with progressive taxes. 

On average Local authorities generate about 25% of their funding from council tax, with the rest provided by central government grants and redistributed Non Domestic Rates. They could be financed entirely by central government or it may be feasible to implement a workable system of local income tax. (The non domestic rating system (" business rates ") is also regressive and in need of major reform but that is a separate issue.).  There should be a form property tax to reflect the vast amount of property wealth and inequalities in property wealth in the UK, but this should be a fair tax based on actual property values, and it should be set at a level that does not create hardship for low income groups and, unlike council tax, does not force a great many people into benefit dependency.  

Table 1 below shows the amount of council tax payable for properties of different values using the average rates for England in 2011 – 2012. By comparison it also shows the amount that would be payable for such properties using an ad valorem (proportionate to value) tax set at 0.7%; that is 0.7 pence is paid for each pound the property is worth. This is roughly the average of the domestic rate poundages used for Northern Ireland rates which are based on capital values. It can be seen that the lowest property value given in the table is £10,000. Although it is unlikely that many properties will be sold at such low amounts, there are properties that have no market value and are effectively worthless, such as self contained units in larger hereditaments, or bedsits above shops. Banks would not lend on such dwellings and nor would people want to invest their savings in them.  In many cases they can not even be sold separately from the larger hereditament. Because the council tax banding system starts at zero, such worthless dwellings are placed in band A and pay the same as homes worth £40,000, which is a third of the amount paid by homes worth millions of pounds.  For illustrative purposes we have assigned a notional value of £10,000 to dwellings that have no market value, and it can be seen that at an ad valorem rate of 0.7% they would pay £70 instead of the £959 they pay under the council tax banding system. At the other extreme we have properties worth £20,000,000, although some homes have been sold for more than this amount. These homes are worth two thousand times as much as the notional £10,000 dwellings and they would pay two thousand times as much property tax, instead of the three times as much they currently pay in council tax.

An ad valorem system would be much more progressive in regard to property values and would have a closer correlation to earnings than is the case with council tax. It would be a clearer reflection of property values and would be much more affordable for low income households. A great many people would be relieved from council tax benefit dependency, and this would remove the disincentive to work associated with council tax benefits.  Table 1 shows that for all property values up to around £300,000, households would pay less at 0.7% poundage than under the current method of taxation. A capital value property tax could be administered either centrally or locally.  If the tax is used to finance local government, then it may or may not generate as much revenue as council tax, and if it does not then the difference could be made up by central government grants. Although this would have an impact on gearing ratios in local authority finances this may be a price worth paying for a fairer system of taxation.


Table 1.    The second column shows a range of property values and the first column shows the council tax band that properties with these values would be assigned to. The third column shows the amount payable under the current system and the fourth column shows the amount that would have to be paid with an ad valorem rate of 0.7%. It can be seen that properties worth up to £150,000 would all pay substantially less with a tax charged at 0.7% of capital value than they pay under the present method.    This would clearly benefit less well off households because they tend to have cheaper homes.  It would also be an accurate reflection of actual property values




Band         Value          Council Tax            0.7%                                                                                        
   A           £10,000        £959.33                £70                

   A           £20,000        £959.33                £140

   A           £30,000         £959.33               £210
   A           £40,000         £959.33               £280  

   B           £50,000         £1,119                 £350
   C           £60,000          £1,279                 £420

   D           £80,000          £1,439                 £560 

   E           £100,000        £1,759                 £700

   F            £150,000        £2,079                 £1,050      

   G           £300,000        £2,398                 £2,100

   H           £ 350,000       £2,878                 £2,450

   H           £500,000        £2,878                 £3,500
   H           £1,000,000      £2,878                 £7,000
   H           £5,000,000      £2,878                 £35,000
   H           £10,000,000    £2,878                 £70,000

   H           £20,000,000    £2,878                £140,000





Council Tax Benefits Charges Rates Bands Exemptions Flats
Copyright (2007)