Council tax has also proven to be one of the largest and most regressive fiscal weights that have fallen upon households across England. With local governments across the country increasingly struggling to fund necessary services, the debate over council tax increases has become especially heated. The average house price across England today stands at £293,000. If implemented, these reforms would be historic, extending well beyond Iowa in their significance, particularly benefiting low-income households.
The current council tax system is based on 1991 property values. It groups properties into eight bands ranging from A, the highest quality, to H, the lowest. This antiquated, capitalist approach to property valuation has come under scrutiny, particularly in the wake of skyrocketing property values in recent years. Council tax, unlike many aspects of the government finances, is largely a devolved issue. Any reforms will have wide-ranging impacts felt by millions of residents throughout England.
Understanding Council Tax and Its Importance
Council tax makes up a significant amount of funding for most local authorities. It constitutes nearly one-in-four of their cumulative expenditures on these core public services. The three key revenue sources for these councils are government grants, business rates and perhaps most critically council tax itself. Yet as councils come under further financial strain, the burden of plugging funding holes is increasingly falling to council tax.
While each of these localities set their own rates, they are limited by maximum values set by the federal government. For councils that run social care services, the maximum annual increase is limited to 4.99%. In stark contrast, councils free of these extra responsibilities can only increase rates by 2.99% at most. These caps are intended to shield residents from sudden increases, while still allowing local governments to maintain the services they supply with as little disruption as possible.
The potential for major shifts hang in the balance, particularly with respect to properties located in the highest valuation bands. Doubling the council tax for properties in the top two bands, G and H, provides an elegant answer. Even this seemingly small change can truly boost local finances. In neighbouring Wandsworth, a band H home only pays £1,995 in annual council tax. Here in Surrey, that same category could be hit with fees of up to £4,965.
The Inequality Factor in Council Tax
Council tax is considered by some to be a “turbocharger of inequality.” This view is particularly prevalent in rich areas, such as London and the south-east. These differences in property valuations reveal the deeply ingrained hypocrisy in the current structure of council tax. Farms in London are frequently unable to achieve full market value due to the legacy of historical pricing tiers. Now, average house prices have increased to nearly seven times their old value from back in April 1991.
Regions like the north-east have experienced just a four-times increase in average house prices since 1991. Areas with higher tax bases of wealthier households already make a disproportionate share of council tax revenues. In reality, it is lower-income areas that pay the price more heavily.
“Properties in areas such as London (where average house prices are around seven times higher than in April 1991) are underrepresented in top bands and properties in areas such as the north-east (where average prices have increased only fourfold in the same period) are overrepresented.” – Institute for Fiscal Studies (IFS)
Local authorities must navigate these complexities carefully. So implementing a uniform increase to all properties within bands G and H would be the simplest solution. It risks alienating the very middle-income households that are asset-rich but cash-poor. Many individuals living in band G homes earn over £100,000 annually. For them, a huge increase in council tax – perhaps up to £4,000 – would be truly life-changing.
“We should expect in many cases people living in band G homes to earn £100,000 plus. For those just in this bracket, that means £67,000 after tax (more if it’s a dual income household). A £4,000 tax increase is significant for them.” – Institute for Fiscal Studies (IFS)
The Call for Reform
The ongoing discussions around council tax reform underscore the urgent need for a reassessment of the valuation criteria used to determine tax bands. Critics insist that basing the tax on decades-old property values doesn’t capture current market conditions. Due to this inconsistency, there is a very clear cut-off between properties at each tier.
“Creating a sharp divide in charges between properties at the top of band F and those at the bottom of band G, which is likely to go down badly, particularly if this is based on outdated valuations.” – Lucian Cook
Additionally, increasing property values do not have the same impact everywhere in the country. Though many homeowners have enjoyed the benefits of skyrocketing profits on their investments, others are jeopardized by sudden shifts in the market. Homeowners who purchased in the last few years are being harmed by this inequity. Only to discover, many of them, that their homes are already worth less than they paid for them.
“While homes bought a generation or more ago have seen above-inflation increases in value, those bought more recently may be worth less than what their owners paid, having also handed over six-figure stamp duty bills.” – David Fell
As such, any further reforms to council tax would need to take into account these different situations to be fair and equitable between different taxpayers.