Historical

This Topic Paper is concerned with the money which local government receives from local taxation and not with the money received from central government and other sources. What will be described here is the pattern in England and Wales. In Scotland, the early development of local taxation was very different. However, the Union of 1707 was followed by the gradual assimilation of the English pattern, and by the twentieth century local taxation was generally similar on the two sides of the Border.

Even before the Elizabethan Acts of 1598 and 1601 established a general system of local taxation for the whole of England, taxes had been levied locally to fund such projects as the drainage of Romney Marsh. The two Elizabethan "Acts for the Relief of the Poore" appointed Overseers of the Poor in every parish and authorised them to raise money for "the necessary relief of the lame, impotent, old, blind and such other being poor and unable to work" as well as for provision of materials needed "to set the poor on work".

These "Poor Laws" were a response to the unemployment, poverty and unrest that had resulted from the spate of enclosures of arable and common land for sheep farming during the reigns of Henry VIII and his offspring and the disappearance of the charitable functions performed by the monasteries. Sheep farming had become more profitable to landowners, but it also deprived large numbers of peasants and their families of the means to stay alive by reducing the need for paid labour, by cutting off access to woodland for fuel and grazing and by annexing open fields on which crops had been grown. The preamble to the 1598 Act tells us that "of late years ... there have been sundry towns, parishes and houses of husbandry destroyed and become desolate, whereof a great number of poor people are become wanderers, idle and loose, which is a great inconvenience".

The Poor Relief Act of 1601 authorised the overseers to raise money by "taxation of every inhabitant, parson, vicar and of every occupier of lands. houses, tithes, coal mines or saleable underwoods in the said parish ... according to the ability of the same parish". Thus the overseers could demand a "poor rate" from anyone they considered rich enough to contribute. As time went on, the value of "hereditaments" - that is, land and of developments such as buildings put on that land - became generally accepted as a measure of ability to pay the poor rate. This value was calculated on the basis of what a tenant would be expected to pay for annual occupation.

Relief of poverty was usually the principal burden on the ratepayer, but it was by no means the only one. Parishes were also responsible for maintaining the parish church and highways, while precepts could be levied by county authorities for their duties in connection with bridges and some aspects of public order.

Over the centuries, changes were made in the rating system. In the late nineteenth and early twentieth centuries partial or complete exemption was given to industrial and agricultural property. Rates became levied on a regular annual basis, and the distinction between rates required for different purposes was abolished. Some old obligations like relief of poverty were removed from local authorities and new duties were imposed upon them. In some cases - such as education and public health - large subventions were made from central government funds. Arrangements were made to ensure that local authority areas where property was very valuable should subsidise others where it was less so. But essentially the old system of local taxation through rates based on the notional rental value of hereditaments lasted until the late twentieth century.

UBR and"Poll Tax"

In 1989 the whole system of local taxation was changed in Scotland, and in the following year this was done in England and Wales as well. In both cases, a fundamental distinction was drawn between domestic and business property. For commercial property, a Uniform Business Rate (UBR) was introduced. As with the old rating system, it was related to the total value of the hereditament, but the amount payable was assessed nationally and not locally. There were various exemptions, the most important of which was agricultural land.

For domestic property, the rate was replaced by what was officially known as a "Community Charge", but was generally called the "poll tax". With various exceptions and qualifications, this was a levy on individual adults. The idea, at least in theory, was that many local government voters had not been direct ratepayers under the old system. They had therefore been tempted to vote for high spending Council policies, thinking that they would not be personally burdened by the cost of those policies. Under the poll tax system, the argument went, everybody would have a similar interest in the matter.

Whatever the arguments for the poll tax might be, it was certain to be highly "regressive" in practice - that is, it would impose a much heavier relative burden on poor people than on rich ones. The poll tax immediately came under huge criticism, leading to riots, and widespread refusals to pay. So severe was the loss of revenue by local authorities that VAT was increased from 15% to 17.5% to raise money to compensate them. Like many temporary expedients , this proved remarkably durable.

Council Tax

The Community Charge was obviously a dead duck, but it was not until 1992 that a new system emerged. The Local Government Finance Act 1992 retained UBR for commercial property, but introduced a new system of taxation for domestic property, which is still in operation. This is known as the Council Tax, and is payable partly on the basis of eight broad bands of value assessment, and partly on whether only one person, or more than one person, is resident in the property.

The Council Tax system was really a stop-gap, and there have been discussions about possible changes ever since, though nothing has actually been done about it. Nor has there even been a revaluation to take account of changing property values since 1992. Sooner or later revaluation must take place, though successive governments of different colours have ducked the problem, evidently fearing the outcry which will result from people who think that they will pay more when it happens.

If a major upheaval is inevitable sooner or later in any event, can we take the occasion not just to tamper with the existing system but to devise a better one?

Possible changes.

No agreement exists as to what system of local government financing should replace the present one, which goes some way towards explaining why it has not been swept away. There is much to be said for keeping the systems of assessment for domestic and business properties separate, perhaps the most powerful argument being that businesses today are commonly owned by corporations who, unlike householders, do not have votes for local authorities. There is general agreement that there should be (as at present) some kind of equalisation scheme to ensure that areas with low-value property and high social needs should receive assistance from other places where property values are higher. With those qualifications, it is useful to consider possible changes to the system of raising local revenue.

Local Income Tax.

It has been suggested that the Council Tax for domestic property should be replaced by a Local Income Tax (LIT). This would require everyone who now pays income tax to central government to pay income tax also to the local authority for the area in which he lives. Some people have qualified this proposal by recommending an income ceiling beyond which LIT should not operate.

It is sometimes said that LIT would be cheaper to administer than any system, whether Council Tax or rating, which is based on the value of property, because only one assessment would be needed for both local and national taxation. But it would present difficulties which in all probability would far outweigh the apparent economy, even in purely financial terms.

Income tax is often deducted at source by employers through PAYE. But not all taxpayers come under PAYE, and some who do are not required to make returns to HMRC. There are also great practical difficulties in assessing the tax payable by a person with property in more than one local authority area, or even by a person who lives in one local authority area and works in another, since different local authorities usually have different financial requirements. In such cases, to which local authority should the LIT be paid? On top of this, LIT would impose considerable "compliance costs" on employers.

Another argument sometimes advanced in favour of LIT is that it would be based on ability to pay, and would therefore be fairer than any other kind of local government tax. Clearly, the burden of LIT would be very different from the burden of either Council Tax or rating. Both of those systems are designed to extract payment for unearned benefits, and in that sense are fairer than LIT. The "fairness" argument for LIT is subject to deeper objections. Where the taxpayer is a house-owner the removal of taxes falling on his property will result in an increase in its market price, which will make it even more difficult than at present for first-time buyers to afford anything at all.

There is also a more general difficulty, applicable to all kinds of property and property-owners. A property tax includes two things: a tax on buildings and other "improvements" already constructed, and a tax on the land on which the "improvements" stand. Abolishing the tax on property does not reduce the cost of putting up buildings. Nor can it reduce the cost of land - because humans do not manufacture land, and its price depends solely on the competition for it.

Return to a ratinq system?

The pre-1989-90 rating system was open to various objections. Agricultural property was completely exempted, and industrial property partially so, which increased the burden on domestic property. But there was also a fundamental objection to the whole rating system, and this objection still applies both to Council Tax and UBR today. The assessed value of a property was, and is, based on the total value of the land site plus any "improvements" which people had put on it. Yet the value of the land and the value of the "improvements" arise in very different ways. The value of the "improvements" derives from the activities of the ratepayer or his predecessors. The value of the site derives from two sources. The first of these comes from nature: its fertility, for example, or the presence of minerals, or a good view. The second source of site value is from the activities of other people, to which the occupier had contributed little or nothing: the presence of good roads or transport services; the proximity of schools or shops and so on. To lump together site values and improvement values, as the old rating system did, and both the Council Tax and UBR do today, produced, and still produces, all kinds of anomalies and absurdities.

The owner of a site with no "improvements" on it was actually exempted from liability for rates, and still is exempted from both Council Tax and UBR. This rule applied (and still applies) even if the site is of great and rising market value because many people wish to put it to use. The owner of such a site could, and can, hold on to it as prices rise, hoping eventually to make a killing. Not only does this mean that the local authority receives no revenue, but also the value of nearby property suffers.

Site Value Rating (SVR)

It is possible to overcome these difficulties by the introduction of Site Value Rating. This means the application of what is known as Land Value Taxation (LVT) to the special needs of local government. What would be assessed would not be the total annual value of a hereditament, but the value of the site alone, discounting the value of any man-made "improvements" such as buildings which had been put upon it. When the assessment had been made, a rate would be levied on the basis of the valuation. . As with any other tax, the value of the subject of taxation will vary from time to time and should be re-assessed periodically - perhaps annually.

Planning.

Planning has a great influence on the value of a site. If, for example, a site which is close to a growing town is scheduled exclusively for agricultural purposes, it will probably have a very different market value from a similar site scheduled for building purposes. In the same way, if a site is constituted a Site of Special Scientific Interest (SSSI) and all development is prohibited there; or if the owner is required to preserve a listed building or even a tree on a site, this will radically affect the value of the site, and therefore the SVR which can be collected there. When planning changes are made, immediate revaluation should be made, in order that changes in the site value can be captured by the community.

Merits of SVR.

SVR has a number of advantages over both the old rating system and the modern Council Tax-UBR system.

1. SVR charges both for the unearned benefits the occupier of a plot of land receives from its natural qualities (e.g., a fine view, rich soil) and from its amenities (e.g., convenient public transport system, schools, shops). Taxes like income tax and VAT penalise the production of desirable goods and needed services. Although Council Tax and UBR charge for the unearned benefits of occupying a particular site, they also penalise the construction of high-quality buildings and other artefacts on the soil.

2. SVR, unlike other possible local taxes, cannot be avoided or evaded. Nobody can either hide land, or hide its value.

3. SVR provides a positive incentive for the owner to make the best use of his land, within the ambit of planning law. He pays the same amount of tax whether he leaves the land idle, under-uses it or uses it to the best advantage.

4. SVR would therefore discourage the derelict eyesores which are often found when owners hold property out of use in anticipation of selling them when land values have risen. It would also discourage "land banks" which builders and developers often hold in anticipation offuture changes in planning regulations.

5. Local authorities would have a stronger incentive to improve local services, in order to generate higher site values which they would be able to collect.

Hard Cases.

These are no more likely to arise when SVR is introduced than when there is any other change in current tax law. Such cases require legislative provision; but they do not provide a good reason for failing to adopt the sound policy of SVR.