Now is the time of year when vicars and old ladies pack their bags and head
for prison. As trees burst into bloom, the last dead leaves of winter fall
through letter boxes in the form of council tax bills. The British pay their
income tax in sorrow, their stealth tax in ignorance but their council tax
in rage. Can’t pay, won’t pay, cry otherwise impeccable lawbreakers. And off
they go to jail.
Whom do they blame? The answer is the government. Who takes the blame? The
government. Each year ministers quake in their boots and promise to “do
something” about council tax, usually cut, reform, abolish, cap or inquire
into it.
Since ministers were in short trousers, somebody has been trying to reform
local finance. It brought down Margaret Thatcher and terrorised John Major
into the rotten banded council tax. Sir Michael Lyons has been conducting
the third inquiry into it under Tony Blair and his report has been twice
postponed for fear of little old ladies. He was supposed to conclude it last
winter and the Treasury is now burying whatever he says in the forthcoming
budget.
Taxes paid in rage may be a politician’s worst enemy but they are democracy’s
best friend. When Thatcher first conceived the poll tax her admirable
intention was to enable citizens to pin the state of local services on their
local council. That the implementation of the tax was unfair should not have
undermined that objective. What did was Nigel Lawson demanding to cap it for
fear of the Treasury losing control.
The result was to shift the weight of local spending onto the central
exchequer, from 40% in 1983 to 80% now. Local taxes in Britain constitute
just 5% of total public revenue, against 46% in Sweden, 18% in France and
13% in Germany. With council tax capped and almost all local budgets
ring-fenced by Whitehall, councils (and their electors) enjoy discretion
over barely 10% of their budgets. When Hammersmith wants to build a new
children’s centre it has no money of its own but must grapple with 16
“central funding streams”. Herein lies madness.
Gordon Brown has been making a determined attempt to force local people to pay
more in council tax — forcing it up at two to three times the rate of
inflation in his first seven years — yet without relinquishing any control
over spending. In direct defiance of his 1997 manifesto, he now caps the tax
and thus forces cuts on local government beyond anything imposed on
Whitehall, where ID cards, Trident and the Olympics suggest ministers beyond
any sensible budgetary control.
Worst of all has been Whitehall’s fixation with privatisation. Although under
Thatcher it reformed the state trading sector, it has been less successful
with core public services. Private children’s homes are proving on average
twice as costly as public ones, as are care hostels, refuse disposal and
road maintenance. Private finance initiative (PFI) deals lock councils into
expensive long-term contracts. Despite being audited as more efficient than
Whitehall’s disaster-prone ministries, councils are banned by Brown’s PFI
from fine-tuning their spending. Like NHS hospitals, they also face a
mountain of PFI debt service in years ahead.
Council tax has become virtually another central tax, but a regressive one.
The old rates were fairer, the richest properties sometimes paying 50 times
more than the poorest. They were a reasonable tax on Britain’s scarcest
resource, living space. Council tax, in a crude gift to the middle class,
declared that the richest would never pay more than three times the poorest.
As a result most Britons pay lower local taxes than anywhere in the western
world. In New York, properties valued at £300,000 pay an average levy of
£5,000 (not including other local taxes, as on incomes, commuting and
sales). The median property levy in wealthy Scarsdale is £12,000. I know
Connecticut second homers who pay £20,000 in property tax — and participate
fiercely in the town council as a result. In most European states, citizens
pay a mix of local property, income, business and transport taxes, the
spread making each seem less painful. Local business taxes also give
councils and mayors a vested interest in planned economic development.
In Britain, Brown’s personal fixing of business rates denies any incentive for
local councils to encourage business growth, indeed a reverse incentive to
encourage housing. Pressure from the CBI has led Brown to lower business
rates as compared with council tax, again imposing extra burdens on domestic
taxpayers. For all these reasons vicars, old ladies and everyone else are
entirely justified in blaming the government when council taxes rise.
Reforming local taxation is like reforming drugs law. Everyone knows it makes
sense but is terrified of taking the plunge. Blair has been most cowardly of
all, even cancelling a long overdue rate revaluation this year. This has
infected Lyons, who is reputed to be opting for the least radical change he
thinks Brown might accept, perhaps a new top band or more charges on
tourists or traffic, perhaps fewer targets to cut costs.
If Lyons suggests a new band above the present H, “to hit the millionaire
homes” as reported in the press, there will be howls of protest. The banding
system is now “virtual” since valuations and thresholds are based on 1991
values, which is unobjectionable in applying equally to everyone, but
ignores relative shifts in property improvement over time. But a new band I
(as in Wales) would require revaluation and while this would be revenue
neutral overall, it would yield the age-old horror for politicians of
vociferous losers and silent winners.
A simpler, ultra-timid reform would be to leave the valuations as they are and
spread the ratio of tax burden more widely across all bands, say from the
present 1:3 to 1:5 or 1:10. This would instantly leave poorer properties
paying less and richer more, although nothing like the “doubling” of a new
top band after revaluation. To yield constant revenue under such a reform,
Tony Travers of the London School of Economics says it would be possible for
a scheme under which owners of houses in the lowest band, A, might pay
roughly half what they do now, while those in the highest bands pay 10%-20%
more. Hardly revolutionary.
The bugbear of all taxation remains ability to pay. It is built into the
democratic psyche, but then so too is the idea that citizens, other than the
destitute, should pay at least something for what they receive from the
state. Ability to pay now infuses every debate. Blair conceded that a future
congestion charge might have to “take into account income and where people
live”. David Cameron’s green taxes sought to excuse the poor.
The concept of a local income tax has already been conceded to the Scottish
parliament. It comprises the bulk of taxation in much of Scandinavia. The
British government’s own 2005 survey, conducted by Nick Raynsford, the local
government minister, concluded that locally determined taxes abroad had
increased local participation, “led to a greater degree of local diversity”
and yet had “not provoked any major concerns or opposition”. Such localist
heresy was instantly binned by the Treasury and Raynsford was booted out of
office.
Local income-related taxes will come to Britain one day. A single tax,
especially on property, is too cumbersome and unfair. A mere 1% on income
tax, were it to be levied by local councils nationwide, would reduce the
council tax by a full quarter with no overall increase in taxation. But it
would be for local electors to choose. The “enraged” would for once be
winners and the losers a few “sorrowfuls”.
Central government would continue to redistribute a proportion of such taxes
through central grant from rich to poor areas and set and regulate minimum
standards. The proof of this pudding is in the eating. The Europe-wide
revolution in government decentralisation over the past two decades has
recorded rising satisfaction with public services. In centralised Britain,
according to a recent YouGov poll, that satisfaction is in steady decline.
Centralism just does not work.
Local taxes are bound to go on rising at the behest of the Treasury. This
would be no bad thing were they to accompany a vigorous revival of local
democracy. If Brown now refuses the second part of this bargain and takes
his control freakery into Downing Street, why does Cameron not steal the big
idea from under his nose?
simon.jenkins@sunday-times.co.uk
