Miscellany
14 November 2007
Peter Kenway
It’s rare to find Simon Jenkins making a mistake when it comes to local government, but in signalling a switch of allegiance from Council Tax to Local Income Tax, he is making a big one.
Why?
Because one third of households either already pay tax, or are entitled to pay tax (but don’t take up the entitlement) to their council on the basis of their income. In other words, we already have a form of Local Income Tax, an income-based ‘Council Tax’ running alongside the property-based Council Tax. The debate about whether we should have one or the other is therefore fundamentally flawed because we already have both.
Although you may well be surprised at this to the point of disbelief, it is perfectly straightforward. The way this local income tax works is like this.
With household income below a certain level, the household’s tax liability to their local council is zero. Household incomes above that threshold incur are then taxed at the rate of 20 pence per pound. That 20 pence rate, which is completely separate from the basic rate of Income Tax of 20 pence (from April 2008), is what makes this tax a form of income tax.
The odds are, though, that you don’t pay tax to your local council on this basis. Why? Because there is one more very important condition built into the system namely, that, in effect, households actually pay whichever is the lesser of this income-related Council Tax and the normal, property-related Council Tax. For the two thirds of households for whom the latter is the greater amount, the income-related tax neither comes into play nor probably even into view.
So even if this is true, why haven’t you heard of this local income tax? Because that is not what it is called and not how it is presented. The effect I am describing here are the workings of that thing called Council Tax Benefit, the means-tested benefit that reduces the amount of normal Council Tax a household has to pay when it is income is deemed to be low.
The principle of a benefit to offset a tax is very disturbing: in effect, the state sets your liability to tax and then invites you to apply for a rebate if you think your income is too low. There is a great deal wrong with the details of Council Tax Benefit. For one thing, it is very harsh on working age households compared with pensioners. For another, entitlement to the benefit is reduced and even removed once household savings rise above certain levels. That means that my income related local tax is actually an income-and-savings related tax.
But – and here is another point where Jenkins makes a mistake which I would not expect of a good conservative – the answer is not abolition but careful, gradual reform. Reform of the details of Council Tax Benefit: the little rules, the rate, the exemptions, the treatment of savings.
And reform of the details of Council Tax itself. Like the fact that any home deemed to be worth more than £320,000 in 1991, the last and only time a revaluation was carried out, is taxed at the same flat rate. And like the fact that one and a half million children in low income households are paying full Council Tax.
Having spent four years on the Government’s agenda, Council Tax reform was
rudely dispatched to ‘beyond the next election’ in 2005, despite a Labour
manifesto commitment. I do not expect it to return. Yet unless they are careful,
the politicians who will pay the price for this are the Liberal Democrats, who
may find easy votes in promising abolition, but will more than struggle when
required to defend its replacement.
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