Why is council tax unfair and why does it need reforming?

There are a number of different reasons why council tax is deemed unfair, from the fact it is based on property value and not income, to outdated valuations of homes.

We had a look at some of the key reasons why this is tax that needs replacing.

Outdated valuations

One of the reasons council tax is seen as unfair is because of outdated property valuations.

England and Scotland both use property values as assessed at April 1, 1991. Wales uses values as assessed at April 1, 2003.  So by and large, the banding of properties is still dictated by a valuation that is now more than 30 years out of date (or 20 in Wales). This means that many people may be paying too much or too little tax because they are in the wrong band.

Since 1991, the relative prices of different properties have changed significantly. Analysis carried out by the Commission on Local Tax Reform, which looked into the reform of council tax in Scotland in 2015, suggested that over half of all properties in Scotland would have changed band if there had been a revaluation in 2014. 

Two households living in equally valuable properties in the same council area can find themselves paying tax bills hundreds of pounds apart just because their properties used to be worth different amounts in 1991.

Emma Congreve, an economics expert based at the Fraser of Allander Institute, said this was the top reason she believed council tax to be unfair.

Asked what she believed to be most unfair about the tax, she told The National: “I think it’s the out of date valuations.

“Based on the principles of taxation the Scottish Government have set out themselves, it doesn’t meet those criteria about being progressive and being fair and being credible even, because the values are so out of date.

“When we’re asked about council tax reform, or replacement, the first thing that has to happen is that revaluation.”

Regressive tax

You might hear council tax being described as a regressive tax rather than a progressive tax. This means that the effective rate of tax for higher valuation bands is lower than the effective rate of tax for lower valuation bands. So essentially, the more your house is worth, the less effective tax you pay.

Income tax, in contrast, is broadly progressive, because the rate of tax increases as taxable income increases.

Tax on a property in the highest band is three times the tax on a property in the lowest band, despite the former being worth at least eight times as much (in 1991) and typically even more today – it has become more regressive as prices have risen most in areas where they were already highest.

(Image: NQ) According to the Institute for Fiscal Studies, a proportional council tax would reduce net council tax bills by the equivalent of 0.5–0.9% of household income, on average, for households in the bottom half of the income distribution, while increasing average bills by 0.7% of household income for those in the top 10%.

Congreve said she considered this to be the second-biggest reason why council tax is unfair.

She said: “It is regressive in relation to its tax base, which is property values. It is also regressive in terms of people’s incomes, but it is a tax that is based on property values and as the value of your property goes up, your effective tax rate goes down.”

Based on property value and not income

Not only are property valuations outdated, the concept of tax being based on your property value at all is seen as unfair.

As council tax is based on your property value and not your income, this raises concerns about the ability of some households to pay. While the value of your home can be an indication of your wealth, this is certainly not always the case.

Council tax also doesn’t consider how many working adults are in living in a property.

Banding

The tax is also regressive within each individual band.

The same basic charge applies to all properties in the same band. There are eight bands in Scotland.

So for Band D in Scotland, properties will have an April 1, 1991 value of between £45,000 and £58k. So, a property with a value of £45k generates the same tax charge as a property with a value of £58k.

This is seen as unfair because the effective tax rate decreases as a property value increases within a valuation band.

Discounts

There is generally quite a low uptake of discounts and exemptions, because they can be confusing and difficult to suss out and involve long forms, meaning many households are probably not paying what they should.

Analysis carried out in Scotland suggests that only between 60% and 70% of those entitled to council tax reduction actually claim and receive it.

The fact that so many households are eligible for some sort of discount or exemption also suggests council tax isn’t really fit for purpose. Analysis carried out for the Welsh Government suggests that nearly half of households in Wales currently receive some sort of discount or reduction.