Revaluation and reform of council tax in Scotland: design considerations and potential impacts

Glossary

Capitalisation

Capitalisation is the phenomenon whereby expected future payments associated with an asset are reflected in current asset prices: in the context of this report, the effect of expected future council tax liabilities on current property values. ‘Full capitalisation’ refers to the case where the discounted value of expected future council tax bills is reflected pound-for-pound in lower property values (see below for an explanation of discounting). ‘Partial capitalisation’ refers to the case where the discounted value of future council tax bills is reflected less than pound-for-pound in lower property values.

Data zone

Census-based geographical area covering a set of households containing approximately 500–1000 individuals.

Discount rate

The discount rate is a measure of how much less individuals collectively (through the market) value money received or paid in future, relative to money received or paid today. For example, an annual discount rate of 1% would mean that a given amount of money received or paid in one year would be valued 1% less than the same amount received or paid today. For example, a guaranteed £100 in a year’s time would be worth £99 today. Discount rates have a close relationship with interest rates: interest compensates individuals for the fact that a given cash amount in future is worth less than the same amount today.

Equivalised net income

Net income is the sum of a household’s income from various sources such as earnings, pensions, benefits and savings, less the taxes that it pays. Equivalisation involves adjusting household incomes to reflect the fact that larger households require more income to attain the same material living standards as smaller households.

Gross relative tax rate

The gross relative tax rate on a property is a measure of how the tax bill for a property compares to that levied on a Band D property in the same council area, prior to any discounts, premiums, exemptions or means-tested reductions. The gross relative tax rate for a Band D property is 1. Under the current system, and the pure revaluation reform system, the gross relative tax rate varies from 0.667 for a Band A property to 2.45 for a Band H property.

Gross council tax bill

The gross council tax bill is the council tax bill levied on a property before any discounts, premiums, exemptions or means-tested reductions.

Hedonic regression

A statistical technique used to estimate the relationship between property values and the property’s location and characteristics (such as size, dwelling type, number of rooms, etc.). This report uses a log-log hedonic regression specification. This means that the statistical analysis is based on equations where property values and continuous variables (such as size in square metres) are measured in natural logarithms.

Intermediate zone

Census-based geographical area based on groups of neighbouring data zones (see above), covering a set of households containing approximately 2,500 to 6,000 individuals.

Low-income, middle-income and high-income

In this report, we use low-income to refer to households in the bottom 40% of the equivalised household income distribution. In terms of income quintiles (fifths), this corresponds to those in the first and second income quintiles. We use middle-income to refer to households in the third and fourth income quintiles. We use high-income to refer to households in the top income quintile (the top 20% of the income distribution).

Net council tax bill

The net council tax bill is the council tax bill levied on a property after any discounts, premiums, exemptions or means-tested reductions.

Progressive tax

A tax is progressive (as opposed to proportional or regressive) if the average tax rate rises with the tax base or with a measure of ability to pay. For example, an income tax is progressive with respect to income if individuals with higher incomes pay a larger share of their income in income tax. In the context of this report, a property tax such as council tax is progressive with respect to property value if the tax is a higher share of property value for higher-value properties; it is progressive with respect to income if it is a higher share of income for higher-income households.

Proportional tax

A tax is proportional (as opposed to progressive or regressive) if the average tax rate is constant as the tax base or a measure of ability-to-pay rises. For example, an income tax is proportional to income if individuals with higher incomes pay the same share of their income in income tax as individuals with lower incomes. In the context of this report, a property tax such as council tax is proportional to property value if the tax is the same percentage of property value for high- and low-value properties; it is proportional to income if it takes the same share of income from high- and low-income households.

Regressive tax

A tax is regressive (as opposed to progressive or proportional) if the average tax rate falls with the tax base or a measure of ability-to-pay. For example, an income tax is regressive with respect to income if individuals with higher incomes pay a smaller share of their income in income tax. In the context of this report, a property tax such as council tax is regressive with respect to property value if the tax is a lower share of property value for higher-value properties; it is regressive with respect to income if it is a lower share of income for higher-income households.