Why we should keep taxing houses

The SSP has launched its Holyrood manifesto. Among it's policy prescriptions is the abolition of the Council Tax on the basis that it is very regressive. Clearly Common Weal could not agree more. But when we developed our own replacement policy we considered and rejected the SSP's proposal. It is worth explaining why.

Tax has at least three functions in society. It pools money to spend on public services and public infrastructure, it redistributes wealth in society, and it also seeks to change behaviour or progress policy priorities.

The SSP proposes to replace Council Tax with a Scottish Service Tax, a locally-set income tax. This is a fairly efficient means of raising income for public services. It would 'piggy back' on the existing national income tax infrastructure so it would not be particularly complex to implement and would be equally efficient as national income tax currently is.

But that leaves some weaknesses. Key is the fact that income in Scotland is fairly significantly taxed but wealth is not. There have been many approaches to taxing wealth proposed but they are all based on the concept of 'a small number of billionaires', and that does not reflect the pattern of wealth in Scotland. Almost all Scotland's private wealth is held in pensions and property.

Property therefore becomes the best proxy we have for wealth – and unlike financial wealth it is easy to tax and hard to avoid. Shifting tax from property to income will actually reduce the tax burden on some who are wealthy.

For that reason, while the Council Tax is regressive and the Scottish Service Tax is progressive, it is not clear that it is more progressive than a package which taxes both income and property but on a progressive basis. To put it another way, if property was taxed fairly, it would almost certainly redistribute wealthy more effectively than income tax alone.

But it is the third issue where care must be taken. Taxing property also has behavioural and policy implications. One of the biggest social problems facing Scotland is the housing crisis which is, at heart, a crisis of house price inflation. In the UK as a whole, house prices have gone from being four times average income to about eight times average income. Houses are now half as affordable for the average person than they were in the mid-1990s.

Housing in Scotland is and always has been more affordable than the UK average because of the London effect – but that disguises the fact that in Scotland the fall in affordability is actually worse. In the mid-1990s the ratio of house price to average salary was below two to one (1.8 : 1) and it is now 5.5 to one. The average UK house is two times as unaffordable, but the average Scottish house is nearly three times as unaffordable.

This is partly driven by the under-taxing of the most valuable properties. Notoriously, the least valuable houses in Scotland are taxed proportionately five times as much as the most valuable houses, encouraging rapid house price inflation at the top of the market which cascades down throughout the overall market.

One of the key reasons you tax property is to control and constrain price rises by altering the affordability arithmetic to 'cool down' rampant speculation. Common Weal's fear was that shifting the burden of tax away from property would be likely to accelerate house price inflation and so worsen the housing market.

Our solution is a Property Tax (technically, it is a form of Proportional Property Tax or PPT). It would simply tax all property at a set proportion of its overall value. This removes a massive financial perk for the very richest and leaves 80 per cent of the population better off (or at least no worse off).

That does not mean we don't think there is any place for local income tax. In fact we would like to see local authorities raising almost all their own money rather than being dependent on central funding (which puts overwhelming control over local finances in the hands of central government). We would cut national Income Tax by equivalent of the size of the local government block grant and provide local authorities with a full toolkit of taxes including property tax, income tax, tourist tax, business tax and so on with which they would replace the income.

It would then be for each local authority to decide its own tax package – and for constituents to vote accordingly. But since property taxation impacts everyone (a rising market in one place pushes up the market everywhere), there still ought to be a minimum threshold set at which property must be taxed for national policy reasons.

You can read more in our proposals for a Property Tax and for reform of local government via the introduction of Development Councils.