Sam Robinson: The case for comprehensive property tax reform is long-standing and crystal clear

31 Dec

Sam Robinson is a Senior Researcher at Bright Blue

Recently, yet another Conservative Research Group – this time the Property Research Group, comprising 29 Tory MPs – was launched.

With the vaccine arriving in the UK, it seems attention among those on the centre-right is starting to shift towards what happens after the pandemic is under control: specifically, making sure things do not just go back to normal on housing policy.

One of the Government’s main tax interventions during the Covid-19 crisis, the stamp duty holiday on the first £500,000 for any buyers, is set to come to an end in the next fiscal year. But we should be asking ourselves: do we really have to go back to the default settings of stamp duty and council tax when we come out the other side of Covid?

The short answer is that there is no good reason to.

Economists have long been in agreement that the UK’s current system of property taxes is horribly designed and inefficient. The evidence is incontrovertible. Stamp duty distorts the volume and timing of housing transactions; just look at the wild spikes in transactions during the current holiday. Indeed, a two percentage-point increase in stamp duty is estimated to reduce the mobility of homeowners by around 40 per cent.

And council tax regressively hits low-value homes located in less prosperous regions hardest: a person living in a property worth £100,000 may pay six times more, as a proportion of their property value, than someone in a house worth £1 million. As Paul Johnson of the IFS succinctly put it: ‘it’s rather like charging VAT at a lower rate on Bentleys than on Fords’.

The sticking point for reform has always been the politics. Partly, this is driven by competing priorities: many on the left want a tax system that is redistributive, while the right often slams policies such as stamp duty as a ‘tax on aspiration’.

But when it comes to property taxes, this is a false trade-off. There are many alternative models out there, such as proportional property taxes or land value taxes, that ensure a more equitable impact across regions and across the income distribution but without the economically damaging impacts of a transaction tax.

Many policymakers recognise this, but retort that while such ideas are good on paper, implementing them would be costly and unworkable, in particular due to the need for accurate and regular valuations. Perhaps this was true in decades past. But it’s worth noting that we already have an administrative system in place for regular property valuations, in order to calculate business rates liabilities. And with the rise of Automated Valuation Models, the digitisation of property and location-based data, and technologies such as AI and blockchain on the horizon, the administrative strain of property valuation is on a downwards trajectory.

Even the difficult task of valuing land is possible. Not only are there methods available to estimate the value of land in the absence of a deep market with many transactions, but several governments including Denmark and Estonia, as well as numerous US and Australian states, have experience of implementing land value taxes.

To be sure, radical property tax reform would bring implementation challenges. But such proposals are very much grounded in reality.

The real political issue is in truth electoral: substantive property tax reforms will create winners, yes, but a lot of losers too. But given that, eventually, tax reform will be needed both to pay off the escalating budget deficit and to address the complexity and inefficiency of the tax code, the question of winners and losers cannot be skirted indefinitely.

Analysis from the IFS lays bare the political economy of reforms to council tax, which the Treasury has allegedly got its eye on. If council tax were revalued and moved to a flat-rate, proportional system then council tax bills (assuming central government funding to local authorities was adjusted) could reduce by 20 per cent or more across much of the North, and conversely increase by a similar proportion in London and the home counties.

It is not difficult to see the political risk to the Tories of pursuing this line of reform. But this also presents political opportunities: the winners of a move to a fairer system of property taxes would comprise people in the regions paying over the odds on their council tax bill relative to those living in London and the south-east, as well as those in low value properties, who are often young and on modest incomes. Surely, these are the very people this Conservative Government purports to champion through their ‘levelling up’ agenda?

Aside from the principled argument for levelling up, if the Conservatives are to prosper in the long term then they will need to maintain their electoral coalition of voters in the red wall and shire seats; and they will need to win over young people, millions of whom would consider voting Conservative but have yet to be persuaded to do so in elections. Reforms that reduced tax bills on low-value properties and lowered the penalty on buying a house would reward the ‘just about managing’ yet deeply aspirational households that Conservatives have long sought to win over.

Evidence bears this idea out. Recent polling conducted by the Property Research Group shows that council tax is the most unpopular tax in the country: 51 per cent of people dislike or hate it. And levels of dissatisfaction are higher still in the North East, where the Tories will be hoping to consolidate their ‘Blue Wall’ ahead of the next election. In any case, roughly seven in ten around the country want to see council tax reformed to make it better reflect house prices.

Admittedly, stamp duty is potentially an easier political sell, for the simple reason that it is a ‘voluntary’ tax insofar as it is only incurred when you buy a house. Nevertheless, with the average home in England incurring £2,300 in stamp duty – £6,000 in the South East – the tax weighs heavily on purchase decisions and successfully deters many transactions. With the end of the stamp duty holiday in sight, around a third of buyers recently suggested they would pull the plug on their move if they had to pay stamp duty, with a further 43 per cent saying they would ‘most likely’ do the same. That’s hardly a ringing endorsement.

The economic case for comprehensive property tax reform is long-standing and crystal clear. But not enough attention is given to the political rationale for such reforms. Hopefully, with the birth of the Property Research Group, that could well be about to change.

Phoebe Arslanagić-Wakefield: Ministers should add legal aid to the ‘levelling up’ agenda

2 Dec

Phoebe Arslanagić-Wakefield is a Researcher at Bright Blue.

Perhaps over half-way through the pandemic, thoughts are turning back to the levelling up programme the Government has promised to pursue.

September saw eager Conservative MPs launch the Levelling Up Taskforce and the newly-formed Northern Research Group is putting pressure on the Government to deliver on its promise to level up the North.

But if Conservatives are serious about addressing regional inequalities across the country, then legal aid must make the cut and appear alongside transport, investment levels and R&D on the levelling up agenda.

This is vital. Austerity-era cuts and a lack of funding have created a system in which access to legal advice is highly regional. These damaging geographical inequalities now exist across England and are especially stark in the housing law practice area, and they will soon be made even starker by the effects of coronavirus.

The problem first emerged when 2012 cuts to legal aid saw the number of providers plummet, and plummet unevenly. The resulting creation of ‘legal aid deserts’ means that there are vast swathes of England and Wales where legal advice for housing issues is simply non-existent locally. These yawning gaps mean that as of 2019, 37 per cent of people in England and Wales – some 21 million people – live in a local authority area where there are no housing legal aid providers.

These figures have to be viewed in the context that housing legal aid covers the gravest problems that a tenant can face, including severe disrepair, repossession proceedings, and eviction.

Eviction is already the single biggest cause of homelessness in England and an estimated 227,000 renters have fallen into arrears since the beginning of the pandemic in March. The Government has responded to fears of a wave of pandemic-related evictions with an eviction ban that was effectively extended over the second lockdown, and by extending notice periods till March 2021.

Nevertheless, tens of thousands of people have already been made homeless as a result of the pandemic and sooner or later, the Government’s alleviating measures will come to an end. When they do, official forecasters have made it clear that the economic scarring of the pandemic will still be here, predicting soaring unemployment.

As harried tenants, months behind on rent with depleted savings, are eventually served eviction notices, they will need legal advice. But they may well find that a housing legal aid service simply does not exist in their area.

Busy Northern Research Group MPs may be pleased to learn that they can cross one thing off their list – when it comes to legal aid, the south trails the north. In the south west, a shocking 92 per cent of people live in a local authority with one or no provider. Cornwall must make do with a lone housing legal aid provider serving just over half a million people across an area of some 1,300 square miles.

The situation is also dire in the East of England, where 91 per cent of the population, more than five million people, live in a local authority area without a housing legal aid provider. A resident of Jaywick – named England’s most deprived area for the third time in a row last year – attempting to reach their nearest housing legal aid provider without a car, must make a two hour journey each way, taking two trains and a bus in the process.

Meanwhile, northern cities including Leeds, Manchester and Sheffield, have plenty of housing legal aid providers to go around. London stands apart as a veritable oasis, with an incredible 49 per cent of England and Wales’ housing legal aid providers concentrated in the city.

The regional disparities encapsulated in the legal aid desert phenomenon hamper the abilities of those living outside major cities to exercise their legal rights, to make good decisions, and to challenge unfair processes. This critically overlooked issue will continue to loom as the pandemic bites into next year, and more and more people face the terrifying prospect of eviction without access to solid legal advice.

For this reason, legal aid must urgently appear on the levelling up agenda, and Conservative MPs must pressure the Government on the matter, just as they do on coronavirus support measures or poor transport links.