Local Taxation Options: Lessons from NI & elsewhere

1. Local Taxation Options: Lessons from NI & elsewhere Dr Peadar Davis Ulster University

2. Local Tax - What are the criteria? • Should be related to the ability to pay • Should be easily understood • Should be administratively efficient • Should be difficult to evade and avoid • Should be impartial • Should be economically efficient • Should benefit those who pay

3. Why A Property Based Tax? • Property one of the main forms of wealth! • Property can’t be removed to a tax haven! • Can’t be explained away by a clever accountant! • It is visible, can be found, improvements are visible to be assessed and ownership / occupancy can be established • A property tax is stable – not linked to actual profits in any given year • Property value is buoyant – rises over time slightly above inflation • Properties are located within the taxable area – so are closely linked to the expenditure typical in a local tax – benefit & accountability! • Economic theory identifies property tax as the best candidate for locally raised revenue!! • A property based tax is a great fit for a new local tax for Scotland!!

4. Discriminating Factors? • All Real Estate based tax options perform similarly • Benefit principle • Payment based on ‘benefit received’ • Difficult to assess extent of benefit received • Tends towards “metering” such as a parking meter • or a flat rate user charge • Rationale of Poll Tax – low acceptance rate! • Property value based taxation is traditionally viewed as having weak correlation with benefit • But property values positively supported by things property tax pays for – good schools, road maintenance, refuse collection etc. • Ability to pay principle • Payment based on “ability to pay” • Property taxes assume property value to be an indication of “wealth” and thus “ability to pay” • Ability to pay is a major criteria for discriminating between options

5. Ability to pay? • Two main measures • Horizontal equity • Those with similar incomes receive similar Tax Bills • Properties of similar value receive similar tax bills • Based on appraisal accuracy • Vertical equity • Those with different income levels receive appropriately different tax bills • properties of different value should receive appropriately different tax bills

6. Vertical Equity? • Proportional • As the value of property rises, tax liability rises by the same percentage. • Thus, the tax constitutes a constant percentage of value at all value levels. • Progressive • As value rises, taxes take a smaller percentage of value. • Regressive • As value rises, taxes take an increasing percentage of the value.

7. Capital Value Banding • Rationale • This is the basis of the Council Tax system used in GB • Major changes in values are required before large numbers of properties are treated unfairly • General, proportional increases / decreases less of a concern • Less sensitive to unequal increases / decreases • Valuation accuracy is less of an issue • Reasonable degree of public acceptance since the introduction of Council Tax

8. Problems • Jamaica only other example of banding in practice – • 11 bands used • for domestic AND non domestic! • No longer in use • Current GB Council tax highly regressive • Deemed to be unfair • Poor vertical equity • Council Tax methodology complex • Introduction to NI may not have been acceptable to the public

9. Banding Unfair? • Council Tax in GB is highly regressive • The more valuable the house the lower the tax rate • To an extent – the poor pay at a higher rate than the rich • Like having the higher rate of income tax below the standard rate • Result? • More fair than Poll tax • Much more unfair than income tax, VAT or the earlier rating system

10. Banding Complex? • Discrete system has two stages • Establish a capital value (valuation exercise) • Set a rate poundage • Banding requires more stages • Decide number of Bands • Decide Band “widths” • Decide band multipliers • Band properties (valuation exercise)

11. Banded System Number of Bands The Variables Width of Bands Tax Rate Structure

12. GB Council Tax • 8 valuation bands • same for entire English jurisdiction • Separate for Scotland & Wales • Only limited, if any, relationship to property market, especially locally • A 3:1 ratio between the Bill paid by the highest band (H) in comparison with lowest (A) • Capital values have a ratio of at least 8:1 • Rents have a ratio of approximately 6:1 • A system of ‘ninths’ to determine the relevant tax multipliers per band, with Band D representing ‘nine ninths’ or one. • Totally arbitrary • A starting point for Band A of ‘six ninths’ or 0.67 • Totally arbitrary

13. Banding Unfair? • In form of Council Tax, probably • However • Complexity does allow considerable flexibility • Number of Bands can be amended • Band multipliers can be adjusted • Ratio of top Band to bottom can be adjusted • Issues of concern • Narrow Bands will require additional accuracy • Narrow Bands have potential to increase appeals • Increased ratio can create steep increase in bills between Bands • Combined with narrow Bands this could result in high appeal rate • Danger of losing advantages of Banding, whilst failing to achieve high level of public acceptance

14. Proposed NI Banding System • The NI research proposed a variety of ways to arrive at Bands derived from the data itself • Best performing was created using 11 Bands • Median value forms top of Band E • 5% ‘ile forms top of Band A • 95% ‘ile forms bottom of Band K • Intervening Band margins at equal arithmetic steps • Minor rounding to ‘tidy up’ • Multipliers arrived at with common start point of 0.5 for Band A, 1 for Band E with K dependant upon ratio, between 3:1 & 10:1 (ie at 5:1, K = 2.5) • Intervening multipliers at equal arithmetic steps

15. Best performers • ‘Good’ performance defined by flattest ETR line and even Tax Bill increases • Full range of ratio analysis has supported choice • Lower ratios are more regressive • Higher ratios are more progressive, but have unacceptable increases between bands • 5:1 & 6:1 perform best overall • On balance, 5:1 ratio adopted for the research

16. Tax Bills from 3:1 to 10:1

17. Comparison Between Council Tax and proposed system

18. Comparative performance - equivalised tax burden by value

19. Comparative performance - equivalised tax burden by deprivation decile

20. Discrete Capital Value option • Advantages • Good if there is good quantity and quality of transactional evidence • Good public awareness of capital values • Extensive international experience of operation • Substantial improvements in technology have improved accuracy achievable whilst reducing cost implications • Regular (even annual) revaluation possible • Discrete is administratively as feasible as Banding • Less complex • Value property (Valuation exercise) • Set rate poundage • Results in a proportional system and thus performs highly in terms of vertical equity • Performs highly in terms of horizontal equity

21. A panacea? • Not quite! • Disadvantages • Cost prohibitive unless Computer Assisted Mass Appraisal approaches undertaken • Computer generated values require “explainability” • Exacerbates the adverse effects of any failings of the concept that property value is a good proxy for wealth • Will result in redistribution of tax burden • Will result in large tax bill increases at top end of market – cap an option • Does adversely affect those who have low incomes in relation to the value of their homes • Does adversely effect single occupancy • Needs well balanced set of reliefs to offset adverse affects in order to win wide public acceptance

22. A Property Taxation Continuum? Increasing technical capacity and market sophistication Scotland is here! Council Tax is here!

23. Perennial Issues! • Pensioner in large house • Asset rich, income poor • Rarer than you may think! • Options to defer payment • Rarely taken up – encumbered inheritance!! • intergenerational equity issues not all one way!! • May be politically necessary to offer rebates to seniors, at some level • High top end values lead to high top end tax bills!! • Retains equity, possibly fairness!? • Often results in mobilisation of effective tax opposition! • Some sort of cap may be a sensible policy concession • Low income affordability issue! • Merit in having some contribution from all householders • At very bottom of value / socio-economic spectrum – diminishing returns • Banding does provide an economic minimum bill • Means tested exemption a sensible policy option (see IRRV designed NI exemption)

24. A Modern Local Tax?? • Current Council Tax well past sell by date • Banding provides a continuing option, but increasing its acceptability likely to lessen its advantages over Discrete Capital Value approach • Discrete Capital Value approach is now feasible and performs well against most measures • Transfer to a fairer system will inevitably result in redistribution of tax burden and associated “pain” to achieve “gain” • Challenge to policy makers to bring forward well balanced “basket” of policies to win public support • A property based tax still the way to go • But regular revaluations and list maintenance vital!!