Any tax rise will eat into disposable incomes. But the UK’s Council Tax is regressive: sharp rises in this tax – as widely expected – will particularly hurt those on the lowest incomes. This in turn evokes memories of the painful “poll tax” episode of British history, argue Lalitha Try and Tom Clark.
Local government finances in Great Britain have long been desperately strained, caught between a sharp squeeze in grants from the centre over the austerity years, and rising obligations to social care and special educational needs. Something has to give, and in parts of England at least it will be the long-held rule that Council Tax bills should not rise by more than 5 per cent.
At the start of February, the UK’s Labour Government declined Conservative-run Hampshire’s shot for a 15 per cent increase. But it gave the green light for Labour-run Bradford to raise the tax by 10 per cent and Liberal Democrat Windsor and Maidenhead by 9 per cent, after each had bid for an even bigger rise than they got. And given 30 local authorities in England have been granted Exceptional Financial Support to allow them to borrow to help with squeezed budgets next year, we might expect more councils asking for permission to raise more funding via Council Tax in the coming years.
Sharp rises in this tax will pose particular threats to the living standards of middle and poorer Britain
Any tax rise eats into disposable incomes, but sharp rises in this tax will pose particular threats to the living standards of middle and poorer Britain. And a long view on British local government finance – from the days of the explosive “poll tax” that helped bring down Margaret Thatcher – underlines just how fraught the consequences could be…
Poll Tax and Council Tax: A very brief history
In the late 1980s, the Thatcher government replaced Great Britain’s traditional Domestic Rates, which had imposed large bills on expensive properties, with the flat-rate Community Charge, or “poll tax”. Its unpopularity sparked rebellion on the streets, and political chaos at Westminster, where it precipitated the downfall of the Prime Minister. But what mattered most to the public finances was widespread non-payment, which economists described as “fiscal anarchy in the UK.”
The scrapping of the poll tax and the introduction of Council Tax in 1993 was essentially designed to make local government finance boring again. In this it succeeded even if, just like the poll tax, the new regime under-taxed pricey and under-occupied housing. Still, the sting was taken out in two ways: by reducing the overall take from local tax bills, which was replaced by bigger central government grants (funded by an increase in VAT); and, just as importantly, by properly rebating bills for the poorest.
Under the poll tax, the government had capped such relief at 80 per cent of a supposedly “standard” bill, leaving the poorest families to find more than 20 per cent of the higher actual bills they faced. This had left councils tasked with pursuing a large number of poor people for sums which were big for them but marginal to the public finances. Under the Council Tax, all of this changed with a comprehensive system of Council Tax Benefit. This offered 100 per cent relief of the actual bill to the very poorest families, with support then gradually reduced for the next-poorest group, with 20 pence of the rebate being clawed back for every £1 of earnings above the income support line.
But over the past generation, both of the easements that smoothed the way for Council Tax – lower bills and proper rebates – have been compromised. First, average rates of the tax rose sharply through the 2000s. Then, in 2013, the nationwide Council Tax Benefit was abolished and replaced with a variable patchwork of discretionary local schemes, for which only limited central government funding was provided. And this is the under-appreciated reason why the Council Tax has a growing fairness problem…
From those with least: Council Tax eats up more of the lowest incomes
While most direct taxes are progressive – that is, charging proportionally more from those with higher incomes – net payments of Council Tax are regressive. Figure 1 shows that richer households pay relatively more than poorer households in both Income Tax and employee National Insurance, but that Council Tax works the opposite way: bills are eating up 5 per cent of gross income for the poorest bracket shown, a burden that declines as we move up the income scale.
Figure 1: Average proportion of gross household income paid towards various taxes, UK, 2020-21
Several basic features of Council Tax contribute to this skew – emerging out of the long and bumpy story of British local government finance. Bills depend on the value “band” your house is in, not your income; bands are translated into bills in a way that curbs payments from the priciest homes; and, bands are increasingly arbitrary, still being based on house price valuations from 1991. (The product of successive British government’s ducking the job of running a revaluation, out of fear of all the losers it would create).
But none of these features is the biggest problem for the poorest families currently confronting growing Council Tax payments: that is, instead, those post-2013 changes in the way that bills are rebated for them. And what makes the large burden at the bottom-end so frightening on the chart is that it is capturing net payments, after allowing for discounts and support schemes.
Can’t pay, will pay: the Council Tax burden over the last 20 years
The evolution over time is captured in Figure 2, which shows average Council Tax payments as a proportion of gross household income across the income spectrum at three points in time.
Back in the early 2000s, even though bills had already edged up since the mid-1990s, the burden was generally lighter than today. It was also reasonably proportional across most of the distribution, except the top end, where it had always weighed less heavily. At the very bottom end (2nd income vigintile), the combined effect of the tax and the benefit kept the average burden down to 2.4 per cent of gross income. By 2010-11, bills were higher across the board (up by nearly a quarter in real terms in England), but this basic distributional pattern remained unchanged.
Figure 2: Proportion of gross household income paid in Council Tax, UK
By 2020-21, the story was different. Average bills had stabilised – indeed they’d actually edged down relative to average incomes, particularly for many at the top end (in part because of a new requirement that councils wishing to raise bills by more than a certain amount – typically 5 per cent – had to fight a local referendum). But because of the abolition of Council Tax Benefit, net payments for the poorest families now soared. Look at the lowest income bracket shown on the chart (the second income vigintile): its net Council Tax payments edge up from 2.4 per cent of gross income in 2002-03 to 2.8 per cent in 2010-11, but then surge to 4.6 per cent of gross income by 2020-21.
Put all this together, and the story is worrying. Whereas 20 years ago the Council Tax was relatively low, and broadly proportional below the upper reaches of the income spectrum, today it is notably higher and regressive right the way down to the bottom. The burden on the poorest families is almost certainly now closer to what they faced under the poll tax than under the early years of the Council Tax. (Contemporary estimates of notional net poll tax liabilities for the bottom income bracket were only around 2 per cent of disposable income, although the real tax burden was somewhat higher, because not everyone who could have claimed a rebate actually did so). The picture continues to darken, with some individual town halls who used to offer full rebates to the very poorest having very recently moved to requiring them to stump up for a quarter of the bill.
The burden on the poorest families is almost certainly now closer to what they faced under the poll tax than under the early years of the Council Tax
Where does this leave us when it comes to current debates about public finances in the UK? The bizarre nature of the Council Tax’s base of 1991 property values is rightly ridiculed. What’s less appreciated, but perhaps even more important to the most vulnerable as bills in some places begin a fresh rise, is the way that the system has slowly recreated some of the issues that in the end undid the poll tax.
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