Council Tax and Fairness
For many years, a common criticism of Council Tax has been that it is unfair and regressive. This is because when the average Council Tax liability is expressed as a percentage of the estimated property value, the effective tax rate is higher for lower value properties and lower for the higher value properties.
The Scottish Government's CTR scheme aims to address the unfairness in the system by reducing a household's Council Tax liability based on what they could be expected to afford. The CTR Scheme was introduced in April 2013 following the UK Government's abolition of Council Tax Benefit. CTR offers means-tested reductions to household Council Tax and is administered by local authorities. The reduction can be any proportion of the liability, up to and including 100% (where the household has their Council Tax liability reduced to zero and pays no Council Tax). Entitlement to CTR and the amount awarded is based on the characteristics, capital, needs and income of the household.
This means that regardless of the property band of a dwelling, nobody in Scotland should have to meet a Council Tax liability they cannot be expected to afford. No matter the property band, the scheme protects the most financially vulnerable. The scheme in total reduces the amount of Council Tax income raised across Scotland by around £370 million. The GRG paid by the Scottish Government includes funds in recognition of this income forgone by local authorities. There is no national equivalent to the CTR scheme in England, and Council Tax support to low-income households is the responsibility of individual councils. This has resulted in the Institute for Fiscal Studies estimating that four out of every five councils in England require each household to contribute a minimum amount (in some cases up to half) of Council Tax, irrespective of their ability to do so.
Although the CTR Scheme takes into consideration the amount of Council Tax a household is liable for and their ability to pay, the present Council Tax system retains an inherent unfairness in that it is a regressive tax.
Consequently, Council Tax is unlike any other tax in the UK in that the effective tax rate decreases as the value of the tax base increases. All other taxes are either at a flat rate (like Value Added Tax which is charged at 5% or 20% irrespective of the value of the good or service liable to the tax) or progressive (like income tax, which applies higher rates for higher incomes). The root cause of this regressive characteristic lies in the "multipliers" – the proportions of the Band D charge that are used to calculate the charges for properties in all other Bands.
In 2015, the Commission on Local Tax Reform highlighted how the original multipliers - set out in the 1992 Local Government Finance Act – resulted in properties in Band H paying three times as much Council Tax as a property in Band A despite the fact that the Band H properties were estimated to be worth, on average, fifteen times the value of properties in Band A.
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