How is the system of raising revenue for the financing of local government services being changed and what effect will this have on the property market?
The debate about local government finance has been simmering for several decades. Now, after many years of uncertainty, significant changes in the way local authorities raise money to pay for the services they provide, are about to come in to effect. In December 1987, the Government introduced its Local Government Finance Bill which became law in July 1988. The Act provides for the repeal of the 1967 General Rate Act, the replacement of domestic rates with the community charge and the introduction of major changes in the rating of non-domestic property. These changes are to be introduced in April 1990, which is also the date of a general revaluation, the first since 1973. As if all this was not enough, the Government will also be introducing a new system for the payment of grants to local authorities.
The community charge
It is perhaps unfortunate that the community charge has become known as the poll tax. The last time such a measure was introduced in this country it led to a peasants revolt! In 1974, when the Layfield Committee examined a range of alternatives to domestic rates, it rejected the idea of a poll tax as unduly regressive. Despite attempts to amend the Bill, relating the charge to ability to pay, the central idea of the community charge, that every member of the population is required to pay a single annual sum, remains an essential part of the Act.
The underlying aim is to broaden liability for local government finance. It is intended that the charge will be levied on virtually everybody over 18, bringing some 37m people into the tax bracket, compared with only 16m ratepayers under the present system. The charge is to be introduced in April 1990 (now in effect in Scotland) and (with the exception of 10 inner-London boroughs, where the charge will be phased in gradually) there will be no transitional period. There will be, however, certain “safety net measures” to reduce the more dramatic effects of the changes. These will take the form of a grant, subject to a maximum of £75 per adult, to ensure that the amount collected from the domestic sector in each local authority area is broadly the same in real terms as would have been collected in the last year of the present system.
Reform of local government finance
The need for change arises out of a desire to reform the way in which local government is financed. At present a local authority’s income is made up from domestic and business rates, charges for services, government grants, subsidies for specific purposes, and the rate support grant. The rate support grant comprises the general grant to local authorities, intended to even out the differences between localities which inevitably arise from varying needs and differing rate bases, and the domestic rate relief grant, which enables all local authorities to charge a lower rate in respect of domestic property compared with commercial and industrial rates. Under the new system, a revenue support grant will provide the necessary adjustment between areas and this will be paid to local authorities along with a share of the national non-domestic rate pool, the income derived from the newly proposed national non-domestic rate.
The community charge for each area will be fixed by the local authority depending upon its own assessment of its needs for the coming year. This will comprise a standard charge, which will apply nationally, as well as a local community charge. This will allow each local authority a degree of freedom in setting its charge, but central government will have the power to order high-spending councils to cut their charge. Councils who refuse to comply with such an order will find their share of the national pool cut off almost immediately.
According to figures published by the DOE at the time of the Bill (based on costs in 1987) the national average charge would be £224. This conceals a range from £134 in Teesdale to £355 in Brentwood and, not surprisingly, charges in London would be higher than elsewhere, the average there being £348, with correspondingly higher figures for inner London.
The register
The charge will require the creation of a register for each local authority area and, according to the Government’s timetable, canvasses to compile the registers should be commencing very shortly. The register will be presided over by the community charge registration officer, who will have powers to seek information from a variety of existing records. People will be required to re-register each time they move to a new area and there are substantial penalties for evasion as well as the power to register and charge retrospectively. The register will be open to the public and any individual will have the right to appeal against his or her appearance in it.
There are three different forms of charge; the personal community charge, the standard charge and the collective charge. The personal charge will be payable by all those appearing on the register who are over 18 and not otherwise exempt. The standard charge will be payable by houseowners. This will be fixed as a multiplier based on the personal charge. The multipliers will be 0, 1/2, 1, 1 1/2 or 2, enabling the Secretary of State to set different multipliers for different classes of house. Thus, it is expected that owners of unoccupied houses will be charged at the 0 multiplier for an initial period, effectively exempting them from the charge, whereas owners of second homes will be charged at twice the personal charge rate.
Each person appearing on the register will be required to pay the charge fixed for the locality. People in hostels, boarding houses and bedsits will pay the tax as part of the rent to their landlords, who will then pass on the charge to the local authority. This will be known as the collective charge. The local authority will be responsible for collecting all charges and producing the register. The present local valuation courts will be charged with the responsibility for maintaining the register but will become known as valuation and community charge tribunals.
Every person on the register will receive a bill each April outlining the charge, and payment will be possible, as with rates at present, by instalments. Local authorities will have powers to recover unpaid charges by distress warrant and in some cases by direct deduction from earnings. As now, there will be a system of rebates to reduce the burden on those with low incomes, although the rebate levels are yet to be decided. In all cases, though, liability will be for a minimum of 20% of the full charge.
Students in full-time education will pay this minimum charge, and so, based on present estimates, might have an average annual liability of £50 or more. Many students are in effect already paying rates by way of inclusive rents payable to private landlords. In theory, after the introduction of the community charge, they might expect such rents to be reduced in accordance with the savings made by their landlords, who will no longer be liable for rates in respect of the property. Whether this will happen in practice is, of course, debatable. It is not intended to legislate on such matters, any adjustments being left “to market forces”.
Effects of the charge
Most of the concern about the effects of the introduction of the tax has understandably centred on trying to identify the “winners” and “losers” and a major criticism of the tax is the regressive nature of what is effectively a flat rate charge when compared with rates which did at least bear some indirect relation to ability to pay. Clearly some people will be better and others worse off, but it would seem to be impossible to consider this question in detail before the actual amount of the charge is known. At the present time there does not seem to be any measure of consensus on this. For example, whereas the DOE calculated that the charge for Sheffield, at the time of the publication of the Bill, would be £248, the city treasurer estimated that the charge would have to be £352 on the basis of the 1987-88 Budget!
Of more general significance, however, is the possible effect on house prices. Logically, one would expect house prices to rise as a result of the abolition of domestic rates which will reduce total occupancy costs by about 15%, on average. This reduction will be most marked in respect of those properties which command the highest rateable values under the present system — newer and larger houses and flats, for example. This cost reduction is likely to create increased demand which would be translated into increased prices.
This issue was considered in the Green Paper which preceded the Bill and which concluded that abolition of domestic rates would bring about an increase of 5% in values over the long term. However, it was then assumed that the introduction of the charge would be phased over a 10-year period, thus giving the building industry time to respond to increased demand by increasing the supply of new houses. However, as every student of land economics will know, inelasticity is one of the supply side features of the property market.
The building industry cannot respond quickly to changes in demand so that any increase in demand would result in a shortfall, at least in the short term, which, all things being equal, would bring about increases in price. Subsequent studies have indicated that increases in price will be higher than predicted in the Green Paper — anything up to 30% in fact.
It has been suggested that on average, demand for housing will increase by 14% as a result of the charge. This will not necessarily be translated into price increases and it will take the increased demand some time to work through. Furthermore, other factors — high interest rates for example — may tend to dampen this effect. What is clear, however, is that the abolition of domestic rates will have an inflationary effect on the market and this will tend to be disproportionate, both in terms of location and property type.
