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.