Professor Ken Gibb: PPT a system to replace council tax. Here's how

THERE have been several failed attempts to reform council tax since devolution, starting with the 2006 Burt Review proposing a fixed percentage tax on capital values. While this did not get out the starting blocks, a near identical reform was launched and worked perfectly well in Northern Ireland.

After 2007, the SNP Government were always cautious: the decade-long council tax freeze, the 2014-15 Commission on Local Tax Reform (which proposed abolition but led only to anaemic reforms).

Why is it important to replace council tax?

Firstly, it’s a bad tax – regressive both by income and because people typically pay more in cheaper housing markets. Council tax is based on 1991 values, and properties built since are valued back to assumed prices from 33 years ago. More than half of properties are now in the wrong band.

Council tax retains arbitrary discounts and exemptions derived from the poll tax. More malignly, it is heavily geared. If local spending rises by 1% and council tax makes up a fifth of local revenue, then council tax has to rise by 5% – unless you dig into reserves, or increase fees and charges. Further, the smaller the proportion raised by council tax the bigger the effect.

Why can’t we change it?

There is a lack of consensus about the direction of reform, and there is a genuine political unwillingness to take it on, such is the fear of electoral punishment and the claim that voters do not want change.

Both propositions should be challenged.

There is consensus now emerging around a proportionate property tax (PPT). This is a tax that would also roll-up the inefficient, anti-mobility Land and Building Transactions Tax (LBTT), abolishing it and raising the revenue lost as part of the new property tax.

READ MORE: Greens demand SNP stick to council tax reforms pledge ahead of Scottish Budget

Second, when we carried out a citizen’s panel in Glasgow this summer (as part of a Joseph Rowntree Foundation project shortly to be published), it was clear that once we surfaced the issues about the council tax, there was an appetite for fixing this and for making local government finance more sustainable – provided it was affordable.

A PPT would be a tax set as a percentage of the current capital value of the property.

Supported by Fairer Share, the Institute for Fiscal Studies, the Joseph Rowntree Foundation, and the Institute for Public Policy Research, the council tax component would be set locally and the LBTT element set nationally. It would be regularly revalued – preferably by an automatic valuation process relying on big data and statistical modelling. This is increasingly common elsewhere (indeed we carried out such an exercise in our forthcoming research).

READ MORE: How reforming council tax 'could cut bills for eight in 10 Scots'

It would be a tax on owners only, common in other countries, and this would significantly redistribute property tax payments progressively.

It would include a liability for landlords (including social landlords). Proponents suggest that the transition should be phased-in and that deferral schemes should be used to help those that are cash-poor but asset-rich. The tax would be phased-in over three to five years and annual losses would be capped to “damp” such effects.

A tax on property, paid by landlords, is common internationally, Prof Ken Gibb writes (Image: PA) The PPT would also reduce gearing and restore more local democratic accountability by re-localising non-domestic rates. Local councils would set the tax poundage and retain all income generated. More of the Scottish tax base would be property-based and, over time, it could help to redistribute the fiscal burden away from income tax payers.

I think there is a lot to be said for a PPT – with one major caveat. I am uncomfortable not levying domestic taxes for local services on renter households.

READ MORE: Why a land value tax system offers governments a real alternative

I believe in local democratic accountability and think that all consumers of local services should contribute to tax and vote on spending platforms at elections. I would therefore amend the proportionate property tax proposal so that:

• All households (including tenants) pay the local component. This will reduce the progressivity of the new tax, but all households would continue to contribute. While it is important to tax housing wealth more neutrally compared to other wealth holdings – there are other ways to do this that should be explored.
• Owners only (both owner-occupiers and landlords) pay the national component – but there would also be a green discount incentive for high energy efficiency properties reducing the national component of the tax.
• Alongside a deferral policy for owners, I would retain the national low-income rebate scheme aimed primarily at tenants, which could potentially meet 100% of the tax for those on the lowest incomes.

Making this case for reform will not be easy. There must be a campaign of education and persuasion about property taxation. Indeed it’s a good candidate for a citizens’ assembly as a way of demonstrating the informed opinion of taxpayers and citizens.