The present council tax system
Council Tax is the system of local taxation that is used to part-fund local authorities. It was introduced in 1993 to replace the Community Charge (known as the “poll tax”) and has remained unchanged since its introduction. The rate of tax payable is based on the value of residential property in 1991, and the amount that households pay depends on which band (A to H) their house falls into.
Local authorities set the Band D rate, and other bands are calculated as a set ratio to the Band D rate. Since 2008-09, the Council Tax has been frozen at 2007-08 levels. Various exemptions and discounts apply and people on low incomes may be eligible for Council Tax Reduction, which replaced Council Tax Benefit in 2013-14.
The Scottish Government and COSLA established the Commission on Local Tax Reform, which reported in December 2015, concluding that local tax “needs substantial reform” because “some people are paying more than they should.”
Scottish Government’s proposals for council tax reform
Prior to the election, in March 2016 the Scottish Government published its proposals for reform of the Council Tax, with the aim of making the system “fairer” (Scottish Government 2016). The Scottish Government estimates that its proposed reforms would raise an additional £100m per year.
The main area of reform is to increase the ratios of the upper bands (E-H) relative to Band D (see below). No additional bands have been added and the ratios for Bands A-D will remain unchanged. The Government has also confirmed that it does not plan to hold a revaluation of property, so Council Tax will remain based on 1991 property values. Changing the ratios in this way can be done through secondary legislation under the Local Government Finance Act 1992. Given the 2016 election result, it may now be more difficult for the new Scottish Government to get parliamentary agreement to its proposals as they stand.
Change in average Council Tax bill under council tax reform
Source: Campbell 2016
The impact of the proposed changes on Council Tax bills varies between local authorities – for example, those in Band H properties in Aberdeen City will see bills rise by £554, but those in Band H in Eilean Siar will see bills rise by £461.
Beyond the impact on Council Tax bills, many other aspects of the policy are, at present, unclear.
The distribution of households in higher bands varies considerably between local authorities, which means that the impact of the changes will vary across Scotland. Some local authorities will take in more income than others – Edinburgh will receive around £15.6m additional income, but the three island authorities will each receive less than £0.2m.
The SNP has proposed that extra money raised as a result of the changes be distributed directly to schools based on the number of children eligible for free school meals. However, while it can ring-fence money in the local government finance settlement as a “specific revenue grant”, there does not appear to be a mechanism for ring-fencing money received from the Council Tax, as it is collected by councils. It is currently therefore not clear how this proposal would work in practice. The impact of this on the local government funding formula is unclear and it is also not known what will happen if more or less income is received by councils.
Another aspect of the Government’s proposed reform is to end the Council Tax freeze, although the Government states that any future rises will be capped at 3% per year. It is not clear how this will be enforced. It may require primary legislation, or the Government may need to develop another “holdback” policy, similar to that which was in place in relation to the freeze, whereby any council that diverged from the Scottish Government’s requirement would have funding withheld.
In addition to amending Bands E-H, the other major area of proposed reform to Council Tax is the introduction of a targeted relief for “around 54,000 households in properties in Bands E-H on net incomes below the Scottish median for their household type, up to a maximum of £25,000”. However, the published information from the Government contains very little detail on how this reform will operate in practice, how much it will cost to implement and to what extent local authorities were consulted prior to its announcement.
Finally, the Government also proposed to consult on exchanging a fixed proportion of general revenue grant for the assignment of a fixed proportion of income tax receipts, distributed to individual councils through the local government settlement. This reform will clearly take some time to implement and, given disparity in income tax receipts between local authority areas, it is likely that an equalisation system would need to be introduced.
Commission on reform of local tax – alternative for council tax reform
The Commission on Local Tax Reform modelled an alternative, “proportional” Council Tax. The Commission concluded that, “to achieve proportionality would require the tax on the highest value homes to be 15 times the tax on the lowest value homes”. This appears to indicate that, while the Government’s proposals make the Council Tax more proportionate than the present system, they fall short of making the Council Tax a “proportionate” tax and Council Tax would remain a regressive tax.
Campbell, A. (2016) Scottish Government proposals for Council Tax reform, SPICe Briefing 16/28. Available at – http://www.scottish.parliament.uk/ResearchBriefingsAndFactsheets/S4/SB_16-28_Scottish_Government_proposals_for_Council_Tax_reform.pdf [Accessed 27 April 2016]
Scottish Government (2016) Council tax reform, Newsroom. Available at – http://news.scotland.gov.uk/News/Council-tax-reform-2347.aspx [Accessed 27 April 2016]