Council tax bands in Wales are based on property values in April 2003 – 17 years ago. That is more up to date than in England and Scotland, where they are based on values in April 1991 (almost 30 years ago!). But it is still enough time for the relative values of different properties to change significantly: for example, official estimates suggest that while average prices had doubled since 2003 across Wales as a whole by the end of 2019, those in Blaenau Gwent had risen 171% compared with just 77% in Wrexham.
Moreover, while the difference in 2003 values between a property in Band A and a property in Band I was at least 9.5-fold, the difference in tax rates is just 3.5-fold. The structure of council tax is therefore both increasingly out of date and arbitrary, and highly regressive with respect to property values. It is ripe for revaluation and reform.
This report examines how revaluation and reform of council tax in Wales would affect the tax bases, average net tax bills and grant funding requirements of different local authorities (LAs); and the net tax bills and after-tax incomes of different household groups. This is in the context of a commitment from the Welsh Government to make council tax fairer and more progressive.
Our main policy messages are:
- Council tax is out of date, regressive and distortionary. It needs to be revalued and reformed. The values of properties in different parts of Wales have changed very differently over the 17 years since the last revaluation, increasing more than twice as much in Blaenau Gwent as in Wrexham, for example. This means properties are in increasingly arbitrary tax bands that may bear little relation to current reality: two households living in equally valuable properties in the same LA can find themselves paying tax bills hundreds of pounds different just because their properties used to be worth different amounts in 2003. Council tax is also highly regressive with respect to property value, and the 25% discount for single-adult households encourages the inefficient use of property.
- Whether grant funding from the Welsh Government were adjusted alongside reforms to council tax would have a crucial effect on the reforms’ impact across LAs. If it were not, each LA would need to raise just as much council tax revenue as before if it wanted to maintain spending – implying no change in the average tax bill in each LA, even as the amounts paid by individual households went up and down. With full adjustment of funding, average bills would change to reflect changes in local tax bases. For example, making council tax proportional to up-to-date values would lead to average bills falling by more than £160 in Merthyr Tydfil, Neath Port Talbot and Blaenau Gwent. Conversely, they would rise in areas with high average property values such as Cardiff, the Vale of Glamorgan and Monmouthshire. In what follows, we assume funding is fully adjusted.
- Reform could make council tax much more progressive. Revaluation alone would have little effect on the average tax bills of different household types. But a proportional council tax would reduce net council tax bills by the equivalent of 0.5% of household income, on average, for households in the bottom fifth of the income distribution, while increasing average bills by 0.3% of income for those in the top fifth. Younger households, renters and those receiving disability benefits would also see tax reductions, on average.
- While there may be particular concern about low-income losers from reforms, it is important to recognise they would be massively outnumbered by low-income winners. For example, 21% of households in the bottom fifth of the income distribution would see their net tax bill fall by more than £200 a year under a continuous and proportional council tax, while just 3% would see it increase by more than £200 a year. Many would see little or no change because their bills are fully or largely covered by the council tax reduction scheme, which could be made more generous if the Welsh Government wanted to mitigate the impact of reforms further. The government could also consider transitional relief and deferral of payments – although getting the design of deferral schemes right is vital to avoid undermining tax revenue.
- Revaluation and reform of council tax could help narrow household and geographical wealth inequalities via effects on property prices. Economic theory and empirical evidence suggest that changes in property taxes get largely or fully reflected in rents and property prices. This means that a proportional property tax would narrow the gap in property wealth between owners of high- and low-value properties and, if accompanied by redistribution of funding from central government, between areas with low and high property values. The scale of these impacts is highly uncertain, though.