Unfair hole in UK budget next week

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If the government doesn't announce tax rises in next week's budget, I'll be short. I will laugh at my scarf if no one complains about it. And if Labor announces tax reform, which I wholeheartedly support, I will gobble up my gloves. When asked about the council tax reassessment during the election campaign in June, the party said it would focus its political energies elsewhere. Why don't nerds win?

It is not because of technical difficulties, nor because the current state is good. The UK's council tax system classifies homes into eight classes, with bills being higher for more expensive properties. However, these home prices were last calculated in 1991, the year Nirvanas Smells Like Teen Spirit hit the charts. (My parents weren't fans and I was two, so I don't remember much about it personally.)

Interestingly, relative home prices have changed quite a bit over the past 33 years. This was enough for David Phillips of the Institute for Fiscal Studies to point out that at least half of all homes are in the wrong range.

The full effect of the revaluation is complicated by the fact that council revenue is held by local authorities and funded by central government grants.

If subsidies were held constant, councils in the south, where house prices have risen relatively quickly, could respond to their expanded tax bases by simply lowering their council tax rates, leaving the average local authority bill unchanged. But if the subsidy were to be reduced where the tax base was increasing, the revaluation would result in less paper money in the North and more money in the South.

There are three reasons why British politicians are reluctant to correct this unfairness. The pain of confusion; And the pain of redistribution.

The confusion ultimately boils down to confusion about what local taxes actually are. Economists tend to think of it as a property tax, while ordinary people are more likely to see it as a contribution to the cost of running public services. Resistance to change may stem from the argument that some areas have experienced relatively high house price growth over the past few decades, but not when it comes to bin use.

Then there is confusion. Local taxes are a very prominent and widely disliked tax. And you can expect taxpayers to get annoyed when their bills change. Perhaps any increase could be phased in, but this comes at a cost. (Treasury's rebuttal includes 'no', read the room.)

The final problem is that fundamentally, revaluation alone cannot be a revenue-raising reform.

In 2020, IFS analyzed scenarios where central government top-ups conserve local authority funding and estimated that three-fifths of households would experience fewer than 50 bill changes per year. Still, one in nine households are expected to scream as they face paying more than $200 extra a year – about a sixth of the average net council tax bill.

If the winners from a revaluation tend to be poorer than the losers, it may be easier to pressure them. However, the same IFS analysis suggested that the reforms would not be particularly progressive and that the number of winners and losers within each income decile would be roughly balanced. The revaluation could mean a redistribution from young to old, as young people are more likely to live in places like London, where house prices have risen relatively sharply since 1991.

A bigger problem among the unfair funding issues between local governments is the replenishment of the outdated central government. If grants to poorer areas were more generous, council tax in those areas could be reduced.

As it stands, Winks continues to suggest fixes. Last August, Tim Leunig of the center-right think tank Onward released a neat proposal for a local proportional property tax on up to $500,000 in home value to replace local taxes. (A tax is levied on the value above that to replace stamp duty.)

In the meantime, he proposes making the system more progressive by cutting subsidies to wealthy councils and reducing bills for those currently in the cheapest property range.

Ominously, Leunig also points out that England's first land tax was based on rental yields from 1692, which was not updated for another 140 years until the tax was abolished in 1832. Maybe even buy some chocolate sauce to use with your gloves when betting on your local taxes. Re-evaluation is incorrect. But I would choose the kind that has a very long shelf life.

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