Local Taxation Options: Lessons from NI &

elsewhereDr Peadar Davis Ulster University

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

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!!

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

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

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.

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

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

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

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)

Banded System

The Variables

Tax Rate Structure

Number of Bands

Width of Bands

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

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

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

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

Tax Bills from 3:1 to 10:1

447

408

375

347

323

302

283

267

-

200

400

600

800

1,000

1,200

1,400

1,600

Ratio 3-1 Ratio 4-1 Ratio 5-1 Ratio 6-1 Ratio 7-1 Ratio 8-1 Ratio 9-1 Ratio 10-1

Band A

Band B

Band C

Band D

Band E

Band F

Band G

Band H

Band I

Band J

Band K

Comparison Between Council Tax and proposed system

0.0000

0.0050

0.0100

0.0150

0.0200

0.0250

Band A Band B Band C Band D Band E Band F Band G Band H Band I Band J Band K

Wales 3-1 Ratio Proposed 5-1 Ratio

Comparative performance - equivalised tax burden by value

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Band A Band B Band C Band D Band E Band F Band G Band H Band I Band J Band K

NI Proposed Bands

Equ

ivili

sed

Tax

Bur

den

(£)

EquivRATESsum

EquivDISCRETEsum

EquivBANDsum

Comparative performance - equivalised tax burden by deprivation decile

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

1 2 3 4 5 6 7 8 9 10

Deprivation Decile

Equiv

ilise

d T

ax

Burd

en (

£)

EquivRATESsum

EquivDISCRETEsum

EquivBANDsum

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

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

6. Automated Data Capture, automated valuation

5. Manually Surveyed, Automated valuation discrete values – Such as NI Domestic Rating System

4. Manual valuation to discrete market Values – such as Rating System – too expensive for houses!

3. Area based / Hybrid value systems, such as Council Tax

2. Simple non value systems with some differentiation – such as a Window Tax

1. Simple non value systems – such as a Hut TaxIn

crea

sing

tech

nica

l cap

acity

and

mar

ket

soph

istica

tion

A Property Taxation Continuum?

Scotland is here!

Council Tax is here!

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)

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!!