Council Tax Briefing

Local government in Scotland is funded mainly by central government, 20% of income is raised locally via the Council Tax. Recent rises in Council Tax bills and forthcoming revaluation have put Local Government funding back on the political agenda. Council Tax was introduced in 1993 as an alternative to the Poll Tax. This was levied on individuals leaving many households with huge bills. As a result of the outcry caused by this local government funding returned to a property based tax. The Council Tax rate is based on the value of a household's property, as this is a reasonable but by no means perfect indicator of household wealth. Council Tax Benefit was also introduced to support low-income households.

No taxes are popular and high profile anti-tax campaigns are vote winners. Since its inception Council Tax bills almost doubled in while earnings have risen by half in this period and other prices have risen by one third. In Scotland the Liberal Democrats SSP and SNP are now committed to abolishing Council Tax in favour of differing forms of tax on individual incomes. They claim this would be fairer. UNISON while not in favour of the status quo is in favour of a property based locally collected tax.

Council tax bills almost doubled in while other prices have risen by one third. This means the rises stand out. Unlike other taxes the council tax is physically paid. Income Tax comes off wages before you get them and VAT is not openly stated on most shopping. It doesn't "feel" like you are paying tax. Recently pensioners who have valuable properties but fixed incomes have been vociferous in their complaints and pushing for an income rather that property value tax. In essence they want to move the burden of paying for local services from themselves onto those in work.

Current bills are based on a property's value in 1991 so worries about forthcoming revaluation of bands where many properties will have increased substantially in value have increased pressure to change the Council Tax. Anti Council Tax campaigners have campaigned strongly on the issue that Council Tax is not as fair. The current banding system limits how much those with very expensive properties have to pay. £400K house pays three times as much as a £40K house not ten times. UNISON agrees that the banding system needs to change to take account of both changes in the house prices and particularly to ensure more bands at the top and bottom of the scale. Richest fifth of non-retired households pay 2% of their gross income on Council Tax the poorest fifth pay 5%. Changes to a local income or service tax will not redress this balance. Moving to more income tax will only place more of the tax burden on already hard pushed working families.

Whilst property value is not a faultless indicator of wealth or ability to pay, research shows that there is a broad link. UNISON believes that a property tax is an important part of the 'taxation basket'. It is particularly suited to local government funding, as the link is obvious. Houses are fixed in place and so are a form of wealth that cannot be hidden or moved abroad. This makes council tax easy to collect. The only information required is address, band that property is in and number of adults in the property. Because property is fixed in place Local Authorities have a good idea about long term Council Tax income and so can have reasonable confidence in future budgeting. Scotland is a small country that has pressure on space in certain areas and related housing problems. Encouraging over-consumption of housing by leaving it, as one of the few wholly untaxed items of consumption is not desirable. Almost everything else is taxed why should housing be exempt. It should also be noted that income is also only an indicator of ability to pay. The costs of bringing up children, caring elderly relatives, or paying a mortgage or rent on a house, mean that some pensioners who own their houses outright and only have themselves to keep have higher disposable income.

Abolishing the Council Tax would be the third major reform of local government funding in 20 years and would cause massive upheaval. Reorganisation would divert resources and focus away from delivering essential services.

Council Tax Reform

In order to address concerns about the Council Tax Council Tax Benefit needs overhauled. CTB, like all means tested benefits, is not always claimed by or available to those it is intended to protect. It is estimated that there is £ 1.2 billion in unclaimed council tax benefit. Although half of the 4.7 million recipients are pensioners only 65% for all pensioners and 45% among owner-occupier pensioners are actually claiming. They are losing on average £7.60 per week.

While much of the publicity has centred round pensioners the CTB system actually hits working families the hardest. Many low paid workers have to pay full Council Tax. Just under half the children living in poverty live in households not entitled to CTB. The table below shows just little those paying full Council Tax can earn. The table also shows how complex the system is particularly it relationship with the Tax Credit system. It is therefore no surprise that one sixth of working age households who are eligible do not claim.

Even for those who do claim the cut off rate is really steep: On earnings over £60 per week CTB falls by about 20p for every pound earned. This can put people off changing to better paid jobs, doing over time or even start work in the first place.

Households with children start to pay Council Tax before National Insurance or Income Tax.

Reform of the bands

The Council Tax banding system needs reform. The system limits how much those with very expensive properties have to pay. £400K house pays three times as much as a £40K house not ten times. This means that like VAT it takes up a bigger proportion of low incomes than high. Richest fifth of non-retired households pay 2% of their gross income on council tax the poorest 20% pay 5%. A new banding system is needed to reflect the range of property values in Scotland.

UK Taxation

Anti Council Tax campaigns have gathered momentum because they appeal to the public belief that a tax system should be fair. There is evidence that people don't really understand the tax system in UK. 8% believe that those on higher incomes pay a much larger share of income tax than those with lower incomes. 56% thought they pay a larger share. (They also thought this how it should be). In fact when you combine tax on income and tax on spending almost all income groups pay between 32% and 37% of income on tax. Only the bottom 10% is different and they pay 53% of their income on tax.

Wealth inequality is rising. Now top 1% hold 23% of total personal wealth and top 10% now hold 56%. Market income other that wages and salaries is mainly investment income. Top 10% of working age population received 4% of their income from investment compared to under 1% for the lowest 10%. Taxing property contrary to the claims of anti Council tax campaigns can be an effective tool in reducing these inequalities.

The Liberal Democrats, SNP and SSP are all campaigning to move to a form of Local Income Tax. They claim this will be fairer. They claim that it will move the burden of paying from local government to the wealthy. UNISON believes that this will in fact move the burden to working families leaving many wealthy people no longer contributing. Only 60% of people in the UK pay income tax and so 40% of people would be exempt from paying for local council services.

No taxes are popular but in order to fund our public services most people are willing to pay them, What is important is that taxes are fair ,hard to avoid and simple to collect. Currently in Britain we have different types of tax, on earnings, property on spending, on business. Moves away from taxing property to earning place more of the tax burden on hard working families not to the wealthy.

Like the Poll Tax every adult in the house will be paying tax on their earnings rather than one charge per household. So even those on average earnings could pay more under local income tax schemes if there are two (or more) full time workers in the house

Democracy

Local government setting its own tax rate is a crucial part of local democracy. The Service Tax proposed by the SSP will break the link between those who use and pay for public services locally and their councillors. Only 30% of those from a low social class think they can influence decisions in their area at present compared to 47 % for higher classes. (ODPM 2001). It is more important than ever not to make less accountable to local people.

Because property is fixed in place Local Government can predict income over the long term. This also protects local democracy allowing long term planning and secure funding for vital services

Local authorities should raise and control revenue, maximising its autonomy and freedom from central control.

The Council Tax should be reformed including regular revaluation and by amending the banding structure.

Council Tax Benefit should be reformed.

Business rates should be returned to local authority control.

Grant support should be allocated with minimum ring fencing.

Level playing field between local authority borrowing and private finance.

In summary UNISON believes that the Council Tax provides a stable yield for local councils at low administrative cost. It should be reformed to make it more progressive through revaluation and changes to the banding. The non-property-based alternatives (Local Income Tax) are administratively complex and easier for the wealthiest members of society to avoid. They would not make our tax system fairer

How would local income taxes affect you?

The following examples show how public sector workers will be hit by a move to local income tax. The figures are based on the Lib Dem plan. But the SSP and SNP plans have similar outcomes. The Lib Dems propose a LIT rate of 3.75%, this rate assumes income from a 50% tax rate for top earners. The Scottish Executive has no powers to introduce this rate. The SNP plan allows councils to set the rate locally. Their proposals indicate that Glasgow would have to charge 4.8%. Assuming the families below pay average Council Tax (in Scotland £1094) Figures are for a year's bill.

Sharing houses will no longer be so attractive for young workers as each individual rather than the household will be charged.

Families on low incomes will also suffer if their children stay at home once they start work.

Some people may consider a household income of £50 000 to be mega-rich but really rich can move their wealth about to avoid paying their share. Many choose to live abroad for long periods to avoid paying income tax. They still pay Council Tax on their UK homes. Under a local Income Tax or a Service Tax the super rich could pay nothing yet still expect their bins emptied.

As well as the costs and disruption of any changeover there will be the added problem of elderly and infirm pensioners having to do self assessment for their tax bills.