Fairer Council Tax Consultation definitions: FOI release

Information requested

Under the Fairer Council Tax Consultation 2023 being run by the Scottish Government in multiple places references to ‘fairer’ and ‘regressive’ are made. They are provided in the consultation as statements, as if factual.

Please provide the definition used when applying both words and the methodology used to demonstrate that both of these words, and their meanings, can be substantiated in fact.

Response

The Fairer Council Tax Consultation sets out, under the section ‘Council Tax and Fairness’, that:

“For many years, a common criticism of Council Tax has been that it is unfair and regressive. This is because when the average Council Tax liability is expressed as a percentage of the estimated property value, the effective tax rate is higher for lower value properties and lower for the higher value properties”.

Regressive

With regard to regressivity, the Consultation document references the work of the Commission on Local Tax Reform (CLTR). I have provided excerpts below, but I have also included the full documents, including the Technical Annex and Compendium of Evidence. Together these outline the methodologies used underpin their assessment.

Figure 5.1 from the Main Document from the CLTR, provides a very useful illustration as to what is meant by, progressive, and regressive taxation, including definitions:

See Figure 5.1 at Annex A.

The figure above describes regressive taxes as those where, “the lower the value of the tax, the higher the tax rate”. As set out in the Fairer Council Tax Consultation:

“Council Tax is unlike any other tax in the UK in that the effective tax rate decreases as the value of the tax base increases. All other taxes are either at a flat rate (like Value Added Tax which is charged at 5% or 20% irrespective of the value of the good or service liable to the tax) or progressive (like income tax, which applies higher rates for higher incomes). The root cause of this regressive characteristic lies in the “multipliers” – the proportions of the Band D charge that are used to calculate the charges for properties in all other Bands.”

Regressive by Property Value

The tax base for Council Tax is made up of residential properties, subdivided into bands with each band paying a set proportion of the Band D rate which is set by local authorities. The proportions each band pays are determined by the band multiplier, which is a fraction or multiple of Band D. Whilst the multipliers, and therefore the tax liability increases through Band A to H, multipliers do not increase proportionately with property value and hence the tax rate (total liability divided by property value) falls for each band.

The Fairer Council Tax Consultation states, based on evidence set out in CLTR (in the documents provided to you), “a chargeable property in a Band H has a Council Tax liability of about three times that of a Band A property, but is, on average, worth about fifteen times the value.”

Fairness

Referring to fairness, as also set out in the CLTR that, “the concepts of fairness and equity in a taxation system are not straightforward and are often subjective. Typically, when people refer to “fairness”, it is often interpreted as being substantially based on the “ability to pay”, though that term in itself can be understood in several ways.”

The following is an excerpt from the Fairer Council Tax Consultation:

The chart below plots Council Tax liability as a proportion of household income (Net Equivalised Income).

See chart at Annex A.

Source: The Commission on Local Tax Reform (Volume 2: Technical Annex). Note equivalisation is a standard methodology that adjusts household income to account for different demands on resources, by considering the household size and composition. Each data point relates to Council Tax liability (before and after the Council tax Reduction scheme is taken into account) for the median household in each income decile group, expressed as a percentage of equivalised income.

The Council Tax Reduction (CTR) Scheme reduces a household’s Council Tax liability based on what they could be expected to afford. CTR offers means-tested reductions to household Council Tax and is administered by local authorities. The reduction can be any proportion of the liability, up to and including 100% (where the household has their Council Tax liability reduced to zero and pays no Council Tax). Entitlement to CTR and the amount awarded is based on the characteristics, capital, needs and income of the household.

Therefore, CTR takes into consideration the amount of Council Tax a household is liable for, and their ability to pay. However, as demonstrated above, Council Tax liability as a proportion of household income decreases as income rises (after income decile 5).

General definitions in Tax

Although not in the scope of your request, I have included a link to the Scottish Government’s Framework for Tax, which includes useful definitions and principles, Framework for Tax 2021 - gov.scot (www.gov.scot).

About FOI

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FOI 202300377072 - Information released - Annex A

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3 page PDF

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417.7 kB

FOI 202300377072 - Information released - Annex B

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341 page PDF

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4.2 MB