THE FINANCING of local authorities in Britain can stir passions and topple leaders. In 1989 Margaret Thatcher’s Conservative government introduced the “poll tax”, an average annual charge of £392 (£934 or $1,190 in today’s money) on every voter. It was very unpopular, leading to violent clashes with protesters in London, and contributing to the ousting of the prime minister eights months later.

Three decades on, the levy that replaced Thatcher’s poll tax is also in trouble. Council tax is among Britain’s most regressive. It pays for services used every day. In 2023, 296 local authorities raised nearly £40bn—half their funds (the rest comes from central government)—from 25m householders in England. It pays for services such as social care, which accounts for half of their spending and the growth in which is partly why fixing local-government finances is so urgent, but also schools, policing, libraries and much else. On December 6th the Local Government Association, a club for local authorities, said that as many as a fifth of them risk financial collapse. On November 29th Nottingham’s council had become the fifth local authority in a 12-month period in effect to declare bankruptcy.

Council tax was always badly designed. In April 1993, all 20m homes in England were sorted by their estimated market value on April 1st 1991 into one of eight bands (A-H). The tax is still assessed on that value. As Stuart Adam of the Institute for Fiscal Studies (IFS), a think-tank, says: “We wouldn’t tax people based on what their jobs paid 30 years ago. It is just ridiculous.” 

In Scarborough, a seaside town in north Yorkshire, a 1930s three-bedroom semi-detached flat sold for £200,000 in May; in Hackney, in London, a two-bedroom flat built 15 years ago sold for £750,000 in July. But for council tax, both homes are in band C, valued at between £52,001 and £68,000 in 1991 prices. In short, 30 years of differential house-price inflation have made the valuation bands meaningless.

The absurdity does not end there. How much money local authorities receive from central government is calculated on a Byzantine formula unchanged since 2014. It takes into account local authorities’ ability to raise revenues from council tax, but only as of 1991. Local authorities must then set their council-tax charge according to how much tax revenue they need.

The system is riddled with distortions. Council-tax charges for band-D properties vary from £914 to £2,422. Or, to take an extreme example, Buckingham Palace, valued at around £1bn, sits in band H and is charged £1,828 by Westminster City Council, less than an average three-bedroom semi in Blackpool. In fact this year 46% of households in England will receive a bigger council-tax bill than the Palace.

That helps make council tax such a regressive levy. A home valued at £1m is charged just 0.2% of its value each year, on average, whereas a home worth £250,000—the median value—is charged three times that rate. According to calculations by the IFS, in 2019 council-tax bills for the poorest 10% in England accounted for one tenth of take-home pay. For the richest 10%, it was just one-fiftieth.

There are three approaches to fixing the council-tax mess. One would be indirect: amending the formula that Whitehall uses to dole out central-government funds for local services. Grants could be allocated to reflect local authorities’ current tax bases and needs. Local authorities would then have to adjust their council-tax rates to reflect the change. But a “fair funding” review of local government to effect this adjustment, promised by the government since 2016, was recently delayed again.

A more direct approach would be a revaluation of the 25m homes in England, and legislation to ensure that those values are regularly updated. In 2019 the IFS estimated that such an exercise would result in very little change in council-tax bills for four-fifths of households. Revaluation has been tried before, but apart from in Wales, where the Labour-controlled Welsh government in 2005 introduced new council-tax bands and will do so again in 2025, the system remains unreformed.

In 2022 the Conservative government conducted an internal review of council tax. But in December it said that any reform will wait until after the general election. The Labour Party, perhaps fearful of losing middle-class votes, has said little about it.

But amending valuations alone would be a partial fix at best. A complete overhaul might be needed, such as replacing the bands and charging council tax as a fixed proportion, say 0.4%, of a home’s value. The IFS has estimated that fully 70% of households in England would pay less under such a system. The richest 10% of households would be on the hook for an additional £750 per year. It would also require far more redistribution from Whitehall to the regions beyond the south.

The can of worms

Still, executing reform could be tricky. Assessing the true value of homes would be contentious, and the right-wing press would be up in arms about a “wealth tax”. The asset-rich, cash-poor losers would shout far louder than those set to gain a few hundred pounds a year.

Perhaps it is the memory of the riots in 1990 that has caused such inertia at Westminster. Now, three decades on, reform is becoming unavoidable. But Michael Heseltine, who as secretary of state in 1991 introduced the council tax to the House of Commons, counsels caution. Lord Heseltine remarks that “no government considering a revaluation has ever won a subsequent election”. Torn between maintaining an unpopular, regressive tax and even more unpopular attempts to improve it, successive governments have let its inequities worsen by the year. ■

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