The Scottish Government wants to avoid reforming Council Tax

A briefing of the Scottish Government’s consultation on Council Tax reform, what’s missing from it and why it has been published now, just months before the next election.

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In the run up to the 2021 Scottish Parliamentary Elections, the SNP published their election manifesto with a promise to hold in depth discussions about reforming local taxation, culminating in a Citizens’ Assembly on the subject. After they were returned to Government, they embedded that idea in the 2021 Programme for Government and explicitly elevated the idea that Council Tax reform would be part of this discussion from an idea to an promise.

I remember this being an exciting time in Scottish politics. I was still riding the high from being an expert witness in the Scottish Climate Assembly (and didn’t yet know how badly the Government would let them down). After multiple years of failure to reform or replace one of Scotland’s most badly broken taxes, this was finally a change for politicians to admit that they were part of the problem, to step out of the way and to let citizens tell them what to do instead.

It was never going to be that simple. Despite the success of the Climate Assembly to produce radical ideas – or because of that success in the face of the politicians’ unwillingness to relinquish power and implement those ideas – the promise of a Citizens’ Assembly before the 2026 election dragged on. It was never formally dropped, but Nicola Sturgeon’s Government did not appear to take any action towards setting it up.

When she resigned in 2023, time was tight for the Humza Yousaf Government to pick up the policy. One lesson from the Climate Assembly was that they can take a year to plan, several months to undertake and then a year to properly analyse the results. By his tenure, there was still time to create the Assembly but he’d be passing the job of actually reforming Council Tax to the next Parliament.

And then he, too, resigned. Without once to my knowledge even mentioning the Assembly and not doing much at all to reform local tax by other means (other than his disastrous ad hoc announcement of a freeze to rates during a local government revenue crisis).

And now, in the waning days of the Parliament and with zero time to implement anything new at all, John Swinney’s Government still hasn’t formally cancelled that 2021 manifesto promise but they have clearly decided that they’ll break it.

Instead of a Citizens’ Assembly, his Government has put out a very standard public consultation on some options that they’ve considered around reforming Council Tax while also stating that even if they accept one of them after next year’s election that we shouldn’t expect any actual change to the tax any time within even the next Parliament. We’ll submit our formal response to that consultation and you can too here, but I wanted to use my column this week to discuss their proposed options.

The first thing to say is that they’ve effectively ruled out replacing Council Tax entirely.

The Scottish Government has presented four proposals for reform of Council Tax. This first is the most minimal change possible, though it’s one that has been advocated for as long overdue. The current Council Tax isn’t based on what your house is worth now but what it was worth in 1991. Keeping the current rates and bands but revaluing houses to ensure they are all in the correct and appropriate band would fix problems that have crept in over 30 years of rampant but uneven house price speculation (I’ve seen houses worth £30,000 and worth £300,000 both marked as Band D for Council Tax).

This has been designed to be “revenue neutral” with the current system and as such doesn’t do much to cut taxes for people already in appropriate and low bands or to raise taxes for those appropriately in high bands. It does fix the problem of possibly half of Scotland being in the wrong tax band but this effectively means a lot of upheaval to the system for comparatively little actual gain – even where that gain is necessary.

Two intermediate steps are to change the current 8 Band system to a 12 Band system with one aimed at keeping taxes more or less the same for folk in lower band houses and adding addition bands for the extremely wealthy at the top and the other being more “progressive” by reducing tax rates slightly for lower bands and and increasing it for upper bands.

And finally, there is a 14 band system that looks much like the 12 band “progressive” proposal but with a slightly greater cut for lower bands and a slightly higher increase for upper bands.

The problem with all of these proposals is that the banding system for Council Tax is inherently unfair. Not just in its present form where a house worth 10 or 100 times more than a cheap, Band A house will still only pay about 3.5 times more in Council Tax, but even if the bands were reformed or extended as the Government has proposed here, that problem will always exist.

The very rich who live in houses in the top band will always pay less than their fair share of tax and that means that those in the poorest households will always pay more than their fair share. Even the 14 band system would only apply a maximum differential rate of about eight times as much Council Tax for a house sitting near the bottom of the highest band (starting at £1.83 million) compared to one sitting at the top of the lowest band (£65,000).

This means that a house worth more than 28 times another will only pay about eight times as much tax. What the Government is claiming is a more progressive tax proposal than the current system is still nonetheless deeply regressive and its claim of being “revenue neutral” still means, in effect, the poor are paying a massive tax subsidy to the rich.

“Nine out of ten houses in Scotland are worth less than £400,000.”

Instead, we argue for a proportionate Property Tax similar to the one used in many countries in Europe where the property tax is based on a percentage of the current value of the house – doing away with bands entirely (One could argue to make things even more proportional and add surcharges on very expensive houses in the same way that we don’t pay a flat income tax rate but a progressive one based on how high our salary is – but let’s make the case for a flat percentage tax first, then we can discuss going further). This removes the inherent problem of banding. A house worth ten times as much will always pay ten times as much tax.

One of the arguments against property taxation as opposed to taxing income is the “ability to pay”. It’s often held up that there will be asset rich, income poor people stereotyped as a lonely widow living in her mansion after the kids leave the family home. The truth is that while I’m sure that there will be people in a situation like that, there are better mitigations available than holding the rest of the country back from reforming and replacing an outdated tax system.

The consultation document itself considers a couple of these such as phasing in the tax over several years to make it easier for people to adjust their finances to copy with any increases or allowing people to defer the tax for several years – perhaps until the sale of the house or the death of the owner, though this may result in people having to face a large lump sum tax bill when that time comes.

Another option, one that we may suggest in our response, might be to limit the increase someone pays due to the transition to some percentage of their income or to expand Council Tax discounts to cover people in that situation. Over time though, this would become less of a problem. House prices in general will adjust to reflect their tax bill and houses that are currently overvalued may reduce in price as a result of a high tax burden attached to them (something that wouldn’t happen if we abolished property taxes for a local income tax as some have suggested).

A final point to make in this column is the fact that people don’t really understand just how unequal property wealth actually is in Scotland. This can be seen in the Daily Express’s claim that the Scottish Government’s proposal would mean a tax of up to £6,600 on “hard working families”, without mentioning that this is what would be paid only in the biggest change proposed (the 14 band system) and this rate would only apply to the most expensive houses worth more than £1.83 million.

Very few “hard working families” in Scotland live in £1.8 million houses. In fact, thanks to this consultation, we now know how many households live in worth £1.83 million or more. This band would cover just 0.02% of houses in Scotland – fewer than 15,000 out of Scotland’s more than 2.6 million homes.

In fact, as you can see in our Graph of the Week this week, we can plot the various government proposals (in this case we’ve just plotted the most and least progressive of the four) in comparison to how much more or less people would pay in Council Tax compared to a fair Property Tax. If we moved to our Property Tax then a small house in Band A could see its tax bill halve, while a £2 million mansion would see a substantial increase of £6,000 or more. The “breakeven” point between the current Council Tax (and, in fact, all four of the Government’s proposed reforms) is a house worth £400,000 that is or should be in Band F.

This threshold is at about the 90% percentile of house prices. Nine out of ten houses in Scotland are worth less than £400,000. That means that nine out of ten households in Scotland are currently paying more than their fair share of Council Tax and would benefit from a fair percentage based Property Tax. It also means that all four of the Government’s proposed Council Tax reforms would tweak but would not remove this inequality.

The Scottish Government is, in effect, continuing to protect Scotland’s top 10% of property owners at the expense of everybody else. This is a key lesson that we will be including in our response to the consultation and I hope you will too.

The Council Tax is outdated, unfair and needs to change. The argument of that fact was won more than a quarter of a century ago. That the Government accepts the need for a progressive and fair tax but still cannot bring itself to propose one is a dereliction of duty. That they’ve broken a manifesto commitment to let the people come up with a solution instead is a democratic scandal.

And that they’ve stated that even if they win the next election, they’re not going to implement the solution in the next Parliament just means that this consultation looks like it’s much more about delaying change for another decade rather than righting the wrongs of the lack of change so far.

We can do better than this, especially when the solutions are already clear and understandable. Please submit a response to this consultation and do make clear to your local MSPs that you want to see Council Tax fixed properly, fairly and for the ultimate benefit of All of Us.