The flexibility of the council tax system makes it ideal for reform

Jonathan Portes’ Guardian article in favour of a housing services tax looks good on paper. But, would such a tax really require the abolition of council tax and its system of bands (as Portes avers)? Or, could it instead be built from it, as a reform of council tax?

Although long in the political wilderness, council tax reform was once rather high up the political agenda. For about five years from 2001, New Labour was committed to the revaluation of all homes for council tax purposes in England. Once you have decided to look again at which band each home should be in, it is almost automatic to start thinking too about what those bands and their respective tax liability should be. In short, the prospect of revaluation opens up the possibility of reform.

Responding to the opportunity and working with various local government bodies, NPI looked in detail at the options for reform, who would be affected, by how much, and whether (or rather on what basis) such changes could be deemed ‘fair’. The essence of this work found its way into the recommendations of Local Government minister Nick Raynsford’s 2004 Balance of Funding Review. The whole-government response to Raynsford was to set up a second review straightaway, chaired by Sir Michael Lyons but housed in the Treasury, which in due course killed the whole thing stone dead.

Looking back at this work, our proposals were in fact really quite modest. At their heart was the recognition (which had not been our starting point) that across the middle bands of the system, from band B (second from the bottom) to band F (third from the top), the current system could quite easily be defended as fair. The surely essential political condition of any reform – that it should leave middle England alone – could therefore quite reasonably be justified.

Where reform needed to be concentrated was at the top and the bottom. For the least expensive properties, band A may be too high; for the most expensive properties, bands G and H may be too low. Quite how this floor and this ceiling should be modified is endlessly arguable; but the principle is clear. And this is the principle (explicitly at the top) for which Portes commends the housing services tax. He is right to do so. But whatever a housing services tax could achieve could also be achieved by a suitably reformed council tax.

The lesson we draw from nearly ten years ago is that when it comes to the reform of local taxes and/or property taxes (in his article Portes also discusses stamp duty and the mansion tax), public perception is key. Proposals for reform don’t founder in their own terms. What killed the whole thing last time round was not that people didn’t like the reform but that they feared revaluation – their home being “moved up” and so being asked to pay more tax.

Couldn’t this fear have been addressed through a combination of cast iron guarantees and a patient explanation of the facts? A reform of the type we favoured would have left 70% in the middle alone while offering at least some of the 25% at the bottom the prospect of a tax cut. Only the less than 5% (in bands G and H) faced an increase – and not all of them either. If politicians cannot sell something like this, we concluded, it can only be because they just don’t want to.

But idealists who want something better don’t help. In defending council tax, NPI is almost alone. What politician is going to spend serious political capital reforming something that has so few friends? We are completely open-minded about whether reform or replacement would be the better political path. But, the idealists should be too. Council tax, as introduced by Major’s government 20 years ago, was a triumph of conservative statecraft, retaining key elements of the poll tax whilst securing the public consent that the poll tax lacked. To pull off that trick, the tax had to be flexible. That flexibility is still all there – and it is perfectly possible to turn it to quite different ends.