Theme: Society & Culture | Content Type: Blog

Council Tax is a Poor Tax. It Needs Urgent Reform

Charlotte Snelling



| 6 mins read

Council tax certainly has a reputation, and not a good one. There are well rehearsed arguments as to why: it is regressive and hits the incomes of our poorest households the most; it is out of date, with a banding system based on 1991 house prices and a baffling (to many) system of ‘ninths’ to calculate its rates; it is a local tax and yet constrained by central government rules; and it is increasingly insufficient in raising the money our cash strapped councils need to deliver vital services, in the wake of government cuts.

However, it is probably most famous for (a mantra which has become common among politicians and policy makers alike) sitting firmly in the ‘too difficult to touch box’.

Memories of the poll tax, which is widely credited with bringing down Margaret Thatcher, has meant that reforms to council tax have been reduced to nothing more than tinkering. Just look at the introduction of the health and social care precept, for example. Other moves have been counterproductive (given the cuts to central government grant) such as the centrally imposed limits on council tax increases without referenda.

A regressive tax

The problem, as new analysis of London boroughs from IPPR shows, is that the regressive nature of the system with regard to property value (which was embedded in the system’s very design) has significantly worsened over time. This is due to the failure to update property values and the rapid (but also uneven) increases in house prices.

Moreover, our analysis has found that the system takes far too little account of the ability to pay. The most significant reform to the system – the devolution of council tax benefit – has seen council tax become regressive for the very poorest far beyond anything which we consider acceptable.

In April 2013, the responsibility for council tax benefit was devolved to local authorities, coupled with a 10 per cent cut in central government funding, and a series of other powers over savings limits and eligibility thresholds. While councils have a legal duty to offer the same support to pensioner claimants as had been given previously (under the renamed ‘council tax reduction’ system), they can make changes to how claimants of working age are supported.

In London, this has involved as many as 26 (of 33) councils introducing minimum payments. Whereas before, qualifying households could have received a full council tax exemption, they must now pay at least a portion of their council tax liability, necessarily increasing the impact on their household finances.

Why the poorest pay disproportionately more

The figures are shocking. While as a property tax, a perfectly progressive system linked to income cannot be achieved, it should be everyone’s concern that in London the burden of council tax is significantly greater for the poorest households. As a percentage of their annual income, under a minimum payment system council tax for those in the bottom income decile is 8.1 per cent, more than six times greater than for the very richest and top income decile (1.3 per cent). Worse still, these figures take account of those who are eligible for council tax support and have taken it up.

Our research has shown that take-up of council tax support is a big contributor to the problem. The number of London households claiming council tax reduction has fallen from 824,000 claimants in March 2013 to 657,000 in March 2017.

This is partly due to stricter rules on eligibility but also a longstanding pattern of low take-up. Receipt of council tax benefit under the old pre-2013 system was only around 50 per cent of entitlement for the lowest income decile and 57 per cent and 67 per cent respectively for deciles two and three. Suggestions are that this is because of complicated application processes, levels of awareness, and a stigma linked to claiming.

The result is that many poor, low income households, are facing high council tax rates and ones which have far outpaced earnings growth in London. The average Band D rate in London has doubled since 1997/98 while earnings have increased at a much slower rate (1.7 times) over the same period.

However, IPPR’s analysis suggests that even if all those eligible claimed council tax reduction, the burden of those in the lowest income decile would still be much higher than any other group, at 4.5 per cent - a notable reduction but 22 times what it would have been (0.2 per cent) under the system in the 1990s.

Reform is urgently needed

As governments and councils grapple with questions over budgets and funding, the impact of any reforms on the poorest households must be central to their discussions. As one of our focus group recipients reflected, "The system should protect people who cannot pay, I’m not sure it does that at the moment”. The system as it stands is unfair and ineffective in ensuring the very poorest households do not face a disproportionate burden.

Issues around how the system itself is shaped – who does it support and to what extent – and how it operates, whether this is through an automatic qualification or self-application process, cannot be ignored. IPPR will be setting out its recommendations for reform in a report later in the year.