IFS: Scottish Government should grasp the nettle of council tax reform

In Scotland, as in England, council tax bills are still based on April 1991 property values. This is unfair.

The unfairness is not because property values have increased so much nationally over the last 34 years: if properties were revalued, the property value thresholds between bands could be reset to account for this.

Rather, it is because the values of different properties have changed so differently over the last third of a century – some increasing by much more and others much less than average.

New analysis shows that as a result, over half of properties in Scotland are now effectively in the ‘wrong band', compared with if council tax bands were based on up-to-date values and band thresholds set so that the same share of properties across Scotland were in each band as now. Just under 30% are in too high a band and a similar number are in too low a band.

Revaluation and wider reform of council tax could make the tax fairer and more efficient, especially in conjunction with reforms to other taxes – something a more fleshed-out version of the Scottish Government's recently published Tax Strategy should aim for.

These are among the findings of the second chapter of IFS's third annual Scottish Budget Report, ‘Scottish council tax: ripe for reform'. It is published the day after the Scottish Government announced a new programme of engagement to build consensus on council tax reform, and a week before the Scottish Parliament's Local Government, Housing and Planning Committee takes oral evidence on the issue.

The chapter finds that:

• Updating the allocation of grant funding to councils would be vital alongside council tax revaluation and reform if tax bills across Scotland were to fully reflect the reformed system. In the absence of any redistribution of grant funding, a council wanting to maintain its spending would need to raise as much council tax as now, and so levy the same average tax bill. In that case, revaluation and reform would redistribute bills between households within council areas (e.g. within Edinburgh) but not across council areas (e.g. between Edinburgh and Glasgow).
• If properties were revalued for council tax on a revenue-neutral basis and grant funding redistributed accordingly, we estimate that around 60% of households would see little or no change in their net bill. These would be those staying in the same band and/or whose low income and assets mean their bills are fully or partly covered by the means-tested council tax reduction scheme (CTRS).
• Around 18% would see a tax increase of £50–500 a year and 17% would see a decrease of that amount. A further 3% would see an increase of over £500 a year and 3% a cut of over £500. The average change in bill would be close to zero for all income and demographic groups, though – reflecting the fact that the growth in property values since 1991 has been similar, on average, for different groups.
• A reform that reduced the current regressivity of tax rates (whereby council tax is a much higher percentage of value for low-value properties than for high-value properties) would see bills change more, and more systematically across different groups. For example, under a system where tax rates were proportional to the (up-to-date) median property value in each band, 42% of households would see their bill reduced by at least £50 a year (and 6% at least £500 a year), with 31% seeing little change and 26% an increase of at least £50 (and 10% at least £500).
• Moving to such a banded proportional system would create winners and losers across the income distribution. But there would be more winners than losers among low- and middle-income households, and more losers than winners among high-income households. On average, households in the lowest four-fifths of the income distribution would see their net bills fall by £56 per year and households in the top fifth of the income distribution would see their net bills rise by £227 per year.
• Reforms to discounts and exemptions could help reduce economic distortions caused by the current design of council tax. For example, the current design of the single person discount – a 25% reduction off the tax otherwise due – means it is larger in cash terms for higher-band properties. This incentivises single-adult households to live in larger properties, and multi-adult households to live in smaller properties, than they otherwise would, contributing to both underoccupation and overcrowding of housing. Reforming the single person discount so that it was a flat amount could remove this distortion and make the discount more progressive (it would be a bigger percentage of the bill for low-band properties, which low-income households are more likely to live in).

The chapter also examines some practical issues for reforming council tax, such as transition and mitigation measures to ease the introduction of reforms, and legislative change to help keep Scottish council tax up to date in future.

David Phillips, an Associate Director at IFS and an author of the chapter, said:

‘Like in England, council tax in Scotland is a relic of the 20^th century, with properties still assigned to tax bands based on their relative values in April 1991. The Scottish Government has been promising to consult on reforms since the 2021 election. It is therefore welcome that it has now announced a programme of analysis and consultation this year on the options, to culminate in a full Scottish Parliament debate on reform proposals before the 2026 Scottish election.

‘At a bare minimum, reform should consist of a revaluation. We wouldn't tax people's incomes based on the relative salaries their jobs paid 34 years ago – but we do tax their housing based on the relative values of their properties 34 years ago. Those living in properties that are now worth the same amount can face council tax bills that differ by many hundreds of pounds because they used to be worth different amounts. That is unfair and should change – both north and south of the border.'

Sam Ray-Chaudhuri, a Research Economist at IFS and another author of the chapter, said:

‘Broader reform alongside a council tax revaluation could improve the fairness and efficiency of the Scottish tax system. For example, even if the Scottish Government did not want to make its tax system overall more progressive, increasing the progressivity of council tax could be offset by reducing other, more damaging taxes. For example, raising less from high-value properties via land and buildings transaction tax and more via a revalued-and-reformed council tax would be fairer and better for growth and well-being. Fairer because the tax system would no longer penalise people who move more, or whose property's value has not kept pace with the rest of Scotland. And better for growth and well-being because it would no longer hinder people from moving to properties that better suit their circumstances, including for work.

‘Scotland's Tax Strategy commits the Scottish Government to seeing and making tax policy “in the round”. Council tax and wider property tax reform would be a good place to start.'

ENDS

Notes to Editor

Scottish council tax: ripe for reform is an IFS briefing by Stuart Adam, David Phillips and Sam Ray-Chaudhuri. It is the second in a series of briefings from our third annual Scottish Budget Report that we will be publishing this month.   

• Read the report on the IFS website