Reform council tax to level up

By Henri Murison | 13 February 2024

Local government finances are in crisis – and for once, Westminster has noticed.

With local authorities facing a £4bn funding gap over the next two years to maintain services at current levels and unprotected day-to-day departmental spending set to fall by 2.3% a year from 2025–26, statutory services could soon become undeliverable without urgent action.

As well as an emergency injection of cash targeted at areas with the lowest council tax base, an overhaul of the whole system is needed to get local finances back on a more secure footing – starting with our archaic council tax system.

Currently, someone living in a house in Hartlepool worth £150,000 is paying over £200 a year more in council tax than someone in Westminster in a property worth £8m, according to campaign group Fairer Share.

Clearly, something needs to change to make things fairer for households that are paying over the odds and for the councils teetering on the edge of financial collapse – as well as those who have already fallen off.

A recent report from the Levelling Up, Housing and Communities Select Committee found council tax is ‘regressive, long overdue for reform, and is contributing to a disproportionately negative impact on funding levels of local authorities in the most deprived areas of the country’.

The average property price in London is now more than six times what it was in 1995, compared with barely three times in the North East, according to the Institute for Fiscal Studies. Our system has never taxed properties at the very top end of the scale enough – even back in 1991.

Our analysis with Open Innovations has found that our outdated council tax bands alone mean Northern households are overpaying by £250 a year on average – a total of £1.2bn.

Work should begin immediately on a revaluation of all properties in England before the General Election. At the very least, a localised re-banding – which would maintain the current proportion of properties in each band for each council – would bring valuations into the 21st century with a revenue neutral approach. This is better than doing nothing, but it would still leave many in the most deprived parts of the country overpaying.

We should therefore consider introducing three new council tax ‘super-bands’ for properties worth more than £2m, paid by the owner not occupier. This could generate £9bn, raised mainly from houses in central London, assuming a 8x multiplier on properties over £2m, 16x multiplier on properties over £10m and 32x multiplier on properties over £20m.

At the very least, this tax could be levied on foreign-owned properties – something the levelling up secretary Michael Gove reportedly supports.

The revenue gained from these super-bands would be shared across the country through a cast-iron transfer system. This is the pre-requisite for any full national revaluation, which would otherwise create big winners and losers among councils in terms of their tax base.

Open Innovations has developed a tool which allows local authorities to see what this new system could mean for their area, including the implications of devolving stamp duty (a key recommendation of the London Finance Commission).

Gove has admitted in the past that council tax is regressive and even commissioned a review into what reform could look like. However, while he has said the main parties will propose changes in their manifestos, that review has gone quiet and the official line is that the Government plans to ‘prioritise stability’ for the time-being.

This should be part of a wider conversation about fiscal devolution and the introduction of additional tax flexibilities, such as over National Insurance or tourism taxes, if local government is to become free from Whitehall meddling in the long term.

With one in five councils likely to issue a section 114 notice over the next year, everyone agrees that reform is needed. The question is how far is the sector prepared to embrace change.

Henri Murison is chief executive of the Northern Powerhouse Partnership

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Council Tax LUHC Committee General Election S114 Michael Gove