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Response to the Lyons Inquiry
Oxfordshire County Council Liberal Democrat Group
New approaches to local taxation
Local Income Tax
The LGA have suggested a “combination” option which includes an element of local income tax. Council Tax is an unfair tax; those on low and modest incomes, especially pensioners, pay far more than the highest earners as a share of their income. A local income tax is fair because it is related to ability to pay. It would mean big tax cuts for ordinary families, although those on higher incomes would pay more. The average household will be over £450 a year better off; 50% of people will be better off, with 20% paying about the same.
Local income tax is a practical option as it works in many other countries, such as America, Switzlerland, Sweden, Norway, Japan and Denmark. It was recommended by a Royal Commission in 1976 and two reports from CIPFA last year showed how a local income tax can work in the UK. It would use the existing national income tax system. Councils would set their rate for local income tax and this would be added to the national rates of income tax. The Inland Revenue would administer and collect LIT, with national income tax, passing the money to councils depending on their rate. This could be done using the existing PAYE system for employees - by simply altering tax allowances and feeding it into the PAYE codes issued (with no extra work for the employer) - and the existing self-assessment system. It also means that the bureaucracy of council tax and council tax benefit can removed, saving taxpayers around £300 million a year, net of the costs of collecting LIT. The LIT system allows greater privacy than the council tax system. Under council tax, people have to fill in complex means-test forms to claim council tax benefit.
Using Government figures the national average rate for LIT would be around 3.75p in 2005/6. It would be paid on taxable income, after the tax-free allowance. All exempt income, such as tax free savings, rent a room scheme and so on, would remain exempt. Like council tax, LIT rates would vary depending on the local authority. LIT will only be payable at a person's main place of residents. However, owners of second homes will pay the equivalent of business rates on that property.
A similar redistributive grant system to the current one will continue. The grant formula wil take account of differences in the LIT base - just as now it takes account of different council tax bases. So areas with lower incomes will receive higher levels of grant support.
Land Value Tax
Oxfordshire County Council and Vale of White Horse District Council recently carried out a study to investigate how Land Value Tax could work in practice, as a replacement for council tax and national non-domestic rates. LVT is a tax based on the value of each plot of land but not including the buildings on it and is already in use in many other countries, such as Denmark and parts of the USA. It encourages development (e.g. housing) on sites wherever this is allowed for by local planning policies without penalising the landowner through higher rates. It is very helpful to local authorities in that their investment in infrastructure improvements generates an increased tax income. LVT could also be used to replace one or more national taxes and would produce similar benefits for central government.
The study showed that it would be comparatively simple to replace two existing unpopular taxes, Council Tax and NNDR, with LVT. Various models could be produced by varying the rates or by introducing a residential allowance.
Oxfordshire County Council voted on 5th April 2005 to ask the appropriate government departments to proceed with trials of Land Value Taxation with the intention of either introducing it throughout England and Wales or of making it available to local councils who wish to adopt it. Oxfordshire County Council would be interested in taking part in such a trial.
Council tax reform
We would prefer to see the Council Tax replaced by a fairer tax. However, if the Council tax system is to continue, some reform is required. This reform needs to recognise the very large increases in the burden on council tax payers in recent years. There is no room for further large increases in council tax bills for any individual property. Moderate reforms are appropriate however, and the way that revaluation has been handled in Wales provides useful information. Our views on possible reforms are as follows:
We consider that the Council tax benefit system should be reformed, to increase the current low take-up rates. Council tax benefit should become an entitlement rather than a `benefit'.
We think that another tax band should be added below Band A and as many bands above Band H should be added as needed to reflect the price of houses in Oxfordshire.
This would help to make the tax more progressive and avoid the situation where revaluation could not increase the tax paid by a property in Band H.
We do not think that the ratios between the existing tax bands should change.
It should be recognised that it may be difficult to precisely target the revaluation so that there is no increase or decrease in the underlying taxbase. In Wales there was an overall increase in the taxbase due to buoyant house prices. The taxbase would not matter to the Council Tax payer (it is the rate used by the Council that determines what an individual has to pay) except that Government takes it into account when determining grant. Grant should not be determined by the taxbase, but by local prices. We would, however, be very concerned if the effect of the revaluation was to reduce the council tax base
We think there should be a better scheme to protect individual taxpayers from the effects of revaluation than has been proposed for Wales. In Wales, increases of one band are permitted each year to phase in the new revaluations. This can lead to a 22% tax increase in the worst case however (being revalued from Band D to E) and at least 13% (Band C to D). We suggest that no household should face an increase of more than 10% in underlying council tax in any one year as a result of revaluation.
We are extremely concerned about the overall effect that revaluation may have on Oxfordshire. Some exemplifications show that we may lose as much as 9% of our grant. Such evidence as we have suggests that currently the system requires taxpayers in Oxfordshire to pay 13% more than is typical for England, but that their incomes are only 10% above the England average. Thus the existing system already requires taxpayers to pay a greater share of their income in council tax than in other parts of England. The revaluation looks set to add to this, making council tax a more unfair tax for Oxfordshire.
As a result of these concerns, we consider that the Lyons inquiry should consider other bases for revaluation, including
Having a region by region system of council tax banding that removes the focus on house prices, so that similar properties (eg a 3 bedroom semi) in different parts of the country pays more or less the same amount.
Having a banding system that focuses on aspects other than the value of the property, perhaps number of rooms or floor area.
Either approach could lead to a fairer system, avoiding the current arrangements where the same house would pay very different council tax figures (for spending at FSS) in different parts of England.
Cllr Dermot Roaf
Leader of the Liberal Democrat Group
01865 815284
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