Why We Tax Houses

Craig DalzellThe past week has been incredibly busy with some unprecedented levels of media attention pointing at Common Weal now. As much as I loathe to blow my own trumpet, I ended up appearing in The National five days in a row on various topics like local democracy, ScotWind and our local Property and Land Tax proposals (You can read all of those articles here: 1, 2, 3, 4, 5).By far the most feedback came from the latter articles on reforming Council Tax (Have you seen our new short video explainers popping up on social media about this and other topics? If so, what do you think of them?) and extending it into land to create a comprehensive Property Tax that would cut taxes for the vast majority of households and bring in over £1 billion a year in new revenue for Scottish Local Authorities.Of course, not all of the feedback has been entirely positive but much of the rest has been around asking genuine questions about the policy so I thought I’d take the time in my column this week to answer some of them.

1. Why not do a Local Income Tax?

We tried it, and it didn’t work. Replacing Council Tax with a local income tax was the plan proposed by the SNP back in 2007, the last serious attempt at reform in Scotland. That fell partly due to Holyrood politics (this was a time of minority government and there was no majority coalition around any of the proposals from any of the parties at the time) but it fell mostly due to the limits of devolution. At the time, the Block Grant that Holyrood relies on for most of its funding was partially calculated including a contribution based on the council tax benefits paid out in England which was calculated to be around £400 million per year. The UK Government stating that it wouldn’t pay out if Scotland no longer had a property tax and that they were unwilling to administer a separate system in Scotland.Things have changed since then, particularly with the creation of Revenue Scotland to administer Scottish taxes, but even if those issues were resolved there is a good reason to not replace the property tax with a local income tax (though the merits of creating a local component to Scottish income tax could be argued – this is how many countries operate, including some of the Nordic countries).>The benefit of an income tax is a close link to “ability to pay”. If you live in a large house but don’t have any income, you still need to pay the property tax and this is perceived to be a problem. But the argument only truly works if house prices are static. House prices in Scotland and the UK are not just rising but are actively being encouraged to rise at an unsustainable rate (see my book All of Our Futures for a discussion on how the UK replaced the state pension with risky private investments and capital inflation). Since 2015, the average Scottish house has increased in price by about 42%. Given average prices, that means that an average house worth a little under £200k has “earned” about £6,300 per year since 2015. It’s worse across the UK, with the average earnings per house being closer to £10,000 a year. In other words, some houses are earning more than some workers and one of those workers would have to save an extra £500-£1,000 in that year to be able to put together a deposit for a mortgage on that house. If they can’t, then they have to spend even more than that to rent, trapping them in a cycle of poverty.If we stopped taxing the ownership of property and only taxed income then there would be no brake at all on the continuing rise in prices. Especially if you’re only talking about your primary home and its exemption from capital gains tax, then buying low (especially if you got onto the “housing ladder” a couple of decades ago) and selling high becomes free money and everyone else has to work that much harder to keep a house over their head.

2. If we change Council Tax, won’t that mean tax rises?

Politicians have been deathly afraid of even revaluing Council Tax away from its absurd calculation of basing tax on what houses were worth more than a third of a century ago. The fear is that houses in areas that have gentrified will suddenly face a massive tax bill. Of course, the other side of that argument is that those houses are critically undertaxed and everyone else is subsidising them. The changes to the Scottish housing landscape have led to utterly absurd scenarios when it comes to banding of properties. I’ve seen a house for sale worth £50,000 in Council Tax Band D. I’ve also seen a house valued at £500,000 also in Band D. Both of those bandings cannot be correct. Both are, in fact, wrong. Under our Property Tax proposal both would pay a tax based on their current value. For the $50k house, that would mean the tax dropping from about £1300 to £315 in my local Authority at the time of writing. For the £500k house that would mean a rise to £3,150. If Council Tax was retained but houses were revalued, that house would likely be classed as Band G (£2,500) or Band H (£3,180) so our Property Tax is still reasonable for such houses compared to a properly functioning Council Tax. The average “break even” point for most properly banded houses in our scheme is around £400,000 but, as we’ve seen, the average Scottish house price is less than half that so while our scheme might mean tax rises for larger houses (and substantial rises for large mansions and estates) the vast majority of households in Scotland would get a tax cut. It really is time for the poor to not have to subsidise the lifestyles of the rich.

3. What about Granny in the old family home?

A persistent topic raised in argument against changes to property taxation is that there are a large number of single occupants of large houses as a result of children moving out (and often the implication of the death of a spouse), resulting in a single pensioner living in a four or five bedroom home that has increased massively in value in the decades they’ve lived there and whose limited pension would prevent them from paying an increased tax.What is harder to find is the number of actual households in Scotland that this scenario actually applies to (data like the under or over occupancy of households isn’t readily correlated with number of bedrooms, number of occupants etc as much of this data is locked behind census data protection regulations). In any case, Council Tax already has a system of discounts and exemptions around things like single-occupancy (though Starmer’s UK Government appears to be eyeing that for another attack on the poor) and there are solutions that Scotland has already historically implemented around this. In All of Our Futures we called for a “right to community” in housing. That is, if you wanted to downsize your home and requested a social house to do so (one built to far higher standards than the private sector will deliver) then you have a right for that house to be within your local community so that you don’t have to move away from friends and family. This is, in fact, how we used to build houses in Scotland. I currently live in a one-bedroom cottage bungalow that is built on the end of a terrace block. There’s a similar house on the other end and the mid-terrace houses are all two floor, two/three bedroom family houses. The original intention of the bungalow was specifically to allow older folk to downsize and move next door. We don’t do this any more because we don’t think of houses as part of a community any more. We think of them as individual assets bought and sold by individual people. The current system doesn’t care about Granny in the family home – you only need to see the fact that she’s just lost her winter fuel payment to understand that.

4. It’s my property. Why do you want a slice of it?

A legacy of that individualistic streak that Thatcher pushed us down is that idea that we can insulate ourselves from the impact we have on the world. What’s mine is mine alone, Me First, “Deil tak the hindmaist” and all that. Contrary to the Libertarians, tax isn’t theft. It’s your subscription fee to civilisation. Your house isn’t an island, but is connected to your community both physically and socially. Those bonds require communal effort to maintain. Tax is a part of that, as is its power to be a leveller in an unfair world. As Piketty said in Capital in the 21^st Century, once those with capital are able to use it to extract rents and suck in ever greater levels of wealth into themselves, everyone suffers as a result. Your house is yours, but its impact on the community is everyones. If your house pushes up house prices, then that hurts folk who can no longer afford to be your neighbour which potentially deprives you of them as part of your community.The problem isn’t the tax, but in the speculative economy that is pushing up prices and is demanding they keep rising further. A properly functioning property tax is a brake on that speculation. We know this to be the case because whenever taxes on property have been cut (like stamp duty) under the guise of making housing more affordable then prices have continued to rise as those who already have capital eat even more of it.We have to remember that we’re not arguing for our Property Tax from a position of there not being any kind of tax on owning a wealthy asset. Council Tax already exists. It is, however, inarguably broken and leads to too many people paying far more than their fair share and too many people paying far less than that fair share. If a house is worth ten times as much as yours then, just as with someone who earns ten times as much as you do, we would expect them to pay more in tax. We’ve seen above examples where that isn’t the case. Even when Council Tax “works”, that mansion might only pay 3.5 times as much tax as the smaller house. We’ve seen the person living in it earning a substantial amount of capital not necessarily because they’ve gone to the effort of improving their home but because the neighbourhood has improved (something that might have happened due to public money investing in a new railway station or other infrastructure). Ultimately, everyone paying their fair share and allowing this tax and other policies (again, look at the vast stores of untaxed wealth in Scottish land) would allow us to bring the “housing market” back under control, keep housing affordable and allow us to remember what houses are for. They are not speculative assets to flip, nor are they a rung on an ever-climbing ladder to nowhere. They are not vehicles to extract ever increasing rents from workers, nor should they be your retirement security because the government wrecked your pension. A house, when it comes right down to it, should be your home.