David Laws

Liberal Democrats | Yeovil

Your say on your taxes

There is little doubt that Council Tax is the most unfair tax in Britain. A tax based on property prices rather than income will always hit those people, particularly pensioners, whose incomes only rise at the rate of inflation. This is exactly what happened last year when councils of all political persuasions were forced to increase council tax by large amounts. During 2003-04 council tax rose by 12.9% on average for a band D property in England. The Government blamed local councils, saying that they are responsible for their own tax rises but the independent National Audit Office (NAO) blamed the Government for loading responsibilities on to councils without giving them the resources necessary to do the job. The NAO also called on the Government “to address the fundamental flaws in the local tax system”. This is a problem that will not go away, and the average council tax bill is set to increase by 7% this year.

It is not hard to see that taxing people according to the price of their property and not their ability to pay is potentially unfair. Council tax is regressive as, broadly, the poorer people are the higher a proportion of their income goes on tax. It is so unfair that it leads to the poorest 20% of households paying three times as much, as a proportion of their income, as the richest 20%. The situation is even worse for pensioners as the poorest 20% of pensioners pay six times the proportion of their income on council tax as the richest 20% of pensioners. The Local Government Minister has recently threatened to cap ’unsustainable’ council tax increases but many people believe that it is the council tax system itself which is unsustainable.

So, what are the options for change? The Government is currently undertaking a ‘Balance of Funding’ review which is looking at four main options for reform: reform of council tax, local income tax, re-localisation of the business rate, and a package of smaller taxes like a tourist tax and a localised stamp duty. I would be grateful if you could tell me which option(s) you favour.

1. Reform of Council Tax

Property tax may be regressive but it does have some advantages. It is a simple and understandable system and it may be easier for councils to bill properties than individuals. It is also possible for the Government to make the system fairer by creating more bands and u[prating the present ones. The Government and local councils could also do more to encourage those on low incomes to take up council tax benefit.

However, many people think that that this fiddling will not help those in middle bands who are still being penalised for growth in their house prices and whose taxes rise even though their ability to pay them may not. Property tax may be sustainable when it is charged at a low rate but if one uses it too much, or if the rates rise too rapidly, then its inherent regressivity tends to outweigh its advantages.

2. Local Income Tax

Local Income Tax has fairness built into it as it is directly related to a person’s ability to pay. Whilst council tax is Britain’s most regressive tax, income tax is the most progressive.

Local accountability should also be enhanced under this system. As the system rolls out, more of a council’s budget could come from local people and less from central grant so councillors won’t be able to blame Whitehall for council tax rises.

Local income tax is a tried and tested form of local taxation and is in use in such diverse countries as the United States, Sweden, Switzerland, Norway, Japan, Finland and Denmark.

3. Re-localisation of Business Rates

I expect that the business community is content for business rates to be set at a national level and sees no good reason for transferring these powers to local government. However, I would still be interested in business people’s views on this idea and whether they would like local councils to have the ability to vary business rates or set sales taxes.

4. Supplementary Taxes

The Office of the Deputy Prime Minister is also looking into giving local councils various other tax raising powers such as a tourist tax – a tax on hotel beds – and a local stamp duty. These ideas have the merit of widening a council’s tax base but on the other hand there would be the administrative cost of managing a number of different tax systems. In any case, if one were to have different stamp duty rates thoughout the country it might be easier and more effective for these to be set at a regional level than at a very localised one.

5. All/none of the above.

You may think that a mixture of these ideas (like a combination of a property and a local income tax) might be best or that there are other ways to reform council taxes. In either case I would be grateful if you could let me know your ideas and I will press the Local Government Minister Nick Raynsford to take account of them.

Yours,

David Laws MP