Council tax bills in Wales are based on 2003 property values. This is better than in England and Scotland, where the failure to revalue properties at all since council tax was introduced means it is still based on 1991 values. But it is long enough ago for property values to have changed very differently in different parts of the country: up 171% in Blaenau Gwent, compared with just 77% in Wrexham, for instance. This means council tax bills and Welsh Government grant funding for local authorities (LAs) – which reflects different councils’ assessed capacity to raise revenues for themselves via council tax – are increasingly arbitrary and unfair.
Council tax is also highly regressive with respect to property values. The bill for a Band I property is just 3.5 times that for a Band A property, despite Band I properties being worth at least 9.5 times as much as Band A properties in 2003 and often much more.
In addition, the single-person discount in council tax encourages the inefficient use of property, increasing both overcrowding and under-occupation.
Council tax is ripe for revaluation and reform. This includes updating property valuations, making bills more proportional to value, and reforming or abolishing the distortionary single-person discount.
A new report by researchers at the Institute for Fiscal Studies looks at the impact reform of council tax could have on different parts of Wales and different types of households, assuming the total amount raised (and therefore the overall average bill) was kept the same as now. The report was part-funded by the Welsh Government as part of its evaluation of options for making local taxation fairer and more progressive. However, its conclusions and recommendations are those of the authors alone.
Looking at impacts across different parts of Wales, the report finds that:
- If properties were revalued based on values in Q1 2019, and Welsh Government funding for LAs fully adjusted to account for this, average bills would fall slightly in the south-west and north-east of Wales and rise slightly in the south-east and north-west of Wales, reflecting how relative property values have changed since 2003. We estimate the biggest increase in average bill would be in Anglesey (+5%), while the biggest reductions would be in Flintshire (-6%) and Wrexham (-7%). Underlying these changes in average bills would be increases and decreases for many individual households.
- If, in addition, council tax were made proportional to property value, the changes in average bill by LA would be larger. Average bills for most Valleys LAs would fall by more than 10% – and more than 20% in the case of Merthyr Tydfil – reflecting low average property values. There would be smaller falls in south-west and north-east Wales. Conversely, average bills in the Vale of Glamorgan and in Monmouthshire would rise by 25% and 32% respectively, reflecting the high average property values in these areas.
- Council tax reform could therefore help to reduce geographical inequalities, ensuring households in poorer parts of Wales with low property values no longer face tax rates that are a higher proportion of property value. But this depends crucially on Welsh Government funding for different LAs being reallocated in line with the updated property valuations and council tax system. If this funding were not adjusted, each LA would need to raise as much council tax as now if it wanted to maintain spending. This means while some households would see their bill go up and others go down, the average bill charged by each LA would be unchanged.
Looking at impacts across different types of households, the report finds that:
- Revaluation alone would create many winners and losers, but would have little impact on the average bills of different types of households. We estimate that about 0.2 million (or 13% of) households would see their bills fall by more than £200 a year, while a similar number would see them increase by more than £200 a year.
- Making council tax more proportional to value would create many more winners than losers, especially among young adults and households with low and middle incomes. Overall, 0.5 million households (34%) would see their bill fall more than £200 a year, compared with 0.2 million (16%) who would see it rise more than £200 a year – although the average loss among the losers would be bigger than the average gain among the winners. For the poorest fifth of households, 21% would see their bill fall by more than £200 a year, compared with 3% seeing it rise by £200 or more.
- There would be regional patterns, though, at least if government funding for LAs were adjusted in line with the reformed council tax system. Low-income households would be more likely than others to see their bills rise in parts of Wales with high property values – such as Cardiff, Monmouthshire and the Vale of Glamorgan. For private tenants, market rents would likely adjust to compensate, but this may not be the case for rents for social housing, which are not set by the market.
One option for supporting low-income households would be to increase the generosity of the council tax reduction scheme alongside reform of council tax. The Welsh Government could also consider transitional arrangements to phase in changes in bills and a deferred payment scheme to help the cash-poor asset-rich who see a big increase in their bills. Such deferral schemes are in place in Ireland and parts of the US and Canada.
Stuart Adam, a senior research economist at IFS and an author of the report, said:
"Wales undertook a council tax revaluation in the mid 2000s, so its system is less out of date than that of England and Scotland. But 17 years is enough time for big changes to the relative values of properties in different parts of the country, meaning tax bills bear less and less relation to current values. At a minimum the Welsh Government should therefore revalue properties and put in place a cycle of regular and frequent revaluations to ensure council tax remains up to date in future. Ideally it would undertake more radical reform too.
"Reform would create many losers as well as winners, which means doing it would probably involve some political pain. But it must be done at some stage, or Wales could still be basing council tax in 2053 on relative property values in 2003 – an absurd state of affairs."
David Phillips, an associate director at IFS and also an author of the report, said:
"Revaluing and reforming council tax, and at the same time adjusting Welsh Government funding for LAs, could help reduce geographical inequalities in Wales.
"Council tax bills could be cut or spending on local services increased in areas with the lowest property values – in particular in the South Wales Valleys. The flip side is that with a revenue-neutral reform, bills would rise or council spending have to fall in parts of Wales with higher property values, most notably in Cardiff and the relatively affluent Monmouthshire and Vale of Glamorgan."
Xiaowei Xu, a senior research economist at IFS and another author, said:
"By making council tax less regressive at the same time as revaluing it, the Welsh Government could cut the average bills of lower-income and younger people, with higher-income and older households paying more on average to make up the difference.
"Transitional arrangements and measures to support the relatively small number of low-income losers would have to be considered, with social housing tenants in the most expensive parts of Wales and the asset-rich cash-poor requiring particular consideration."