Time to sound the horn for council tax reform

My French horn-playing days may be long behind me, but nonetheless I found myself lingering over news of a unusual job vacancy from Ripon council in North Yorkshire — for the city’s “official hornblower”.

The main responsibility of this ancient role, which locals say has taken place every night without fail since the year 886, is admirably straightforward. The hornblower, one of three in the team, should “sound the horn at 9pm on an agreed number of evenings per week in the Market Square at Ripon by one blast at each of the four corners of the plinth of the Obelisk”.

The original purpose was to let the population know that the nightwatchmen were out and about and that home fires should be made safe for the night. The second thing the hornblower had to do (and still does) was find the mayor and sound the horn three times in their presence — a cunning way of ensuring he hadn’t repaired to the pub before discharging his duties.

Your pay? A princely £8.72 an hour, with an additional flat fee of £21 for civic events and processions. Of more interest to Money readers, though, is what happened when the medieval city authorities decided they needed to raise a tax to pay the wages of the hornblower and watchmen.

Reasoning that the well-off should contribute more than the poor (an early example of progressive taxation) they chose the location of the taxpayers’ front doors as a proxy measure of wealth. Those with entrances facing directly on to the Market Square would pay four pennies a year, while those with less desirable addresses (whose doors were tucked away down a side or back alley) would pay two pennies.

No prizes for guessing what happened next. The good burghers of Ripon blocked up their front doors and switched their main entrances to the alleyway in order to bring them into the lower tax bracket. The legacy of this architectural tax dodge is still visible today, where high street retailers on the square have an alley or “ginnel” leading to a less conspicuous entrance.

It is a classic example — should we need one — of how taxes influence behaviour, and how this may affect their capacity to generate revenues. If we wanted to pick a modern-day version, we could do worse than look at recent reforms to stamp duty land tax.

By raising the costs of moving home, stamp duty is likely to have “very substantial detrimental effects” on the property market, according to research released this week by academics from the London School of Economics and Finland’s VATT Institute.

In many cases, its authors argue, stamp duty acts like sand in the gears. The cost of the tax discourages renters from taking the plunge into owner-occupation and older homeowners from downsizing by moving out of homes that are too big for them. It also drags on the economy by reducing the mobility of the labour force: those offered more productive jobs elsewhere are dissuaded from moving by high costs and the unemployed are less likely to take up a job offer far from home.

These effects will have been amplified by repeated rises in the rate of stamp duty since 1992 when, if you can believe it, stamp duty stood at 1 per cent on purchases over £30,000. Improvements were made in 2014 when the government switched from a “slab” system that encouraged price clustering below an arbitrary threshold such as £250,000 to a progressive “slice” arrangement that removed the need for the tactic. But it remains, according to the Institute for Fiscal Studies, a bad tax — just a slightly less bad one.

For the majority of homebuyers, stamp duty bills have fallen. For those at the upper echelons of the property market, it is considerably more expensive. The top rate is now 12 per cent (15 per cent if you’re buying a second home or buy-to-let) meaning much more pain for wealthy buyers — not to mention heartache for estate agents — in expensive areas such as central London.

Estate agents predicted the policy move would cause stamp duty revenues to collapse. How wrong they were. In fact, the government has scored twice with stamp duty: not only did it rake in a record £11.7bn in the 2016-17 tax year, but it has helped douse rampant house price growth at the top end of the market.

They will still complain it is unfair. But given the state of Britain’s public finances and the uncertainty that looms over the economy, ministers are likely to ignore them. If anything, the success of the stamp duty reforms could see policymakers address the shortcomings of the other main residential property levy — council tax.

Levied by local authorities, this regressive tax is based on property valuations that are more than 25 years out of date.

Incredibly, the eight council tax “bands” determining the annual levy that occupants have to pay to fund local services are still based on 1991 property prices. As a result, the highest band (H) is for homes valued at £320,000 and above.

The average London house price is now way above this at £481,000. In fact, a property in prime central London that was valued at £320,000 in 1991 would now be priced at £1.6m, according to property agent Savills. In the “prime regions” (including cities such as Cambridge and Bristol) the equivalent price tag would be just under £600,000.

What you will actually pay for a property in the top band is a postcode lottery. Homes in Westminster enjoy the lowest council tax rates in the country. The annual bill for a “Band H” property there is just under £1,400. Yet in Weymouth, Dorset, one of the top-charging areas, the top rate is nearly three times that amount, coming in at just under £4,000.

Overhauling these outdated bands would undoubtedly result in the occupiers of the most expensive properties paying more. This is already happening at the margins as the cost of providing social care for Britain’s ageing population pushes many town hall budgets to breaking point. Some, for instance, already charge double the normal council tax bill for properties that are left empty. But these are piecemeal measures, not a thoroughgoing reform.

Successive governments have ducked the issue, but the council tax system looks increasingly dysfunctional. Reform of the annual levy is needed, not just tinkering with stamp duty. If only solving the problem were as simple as moving one’s front door.

James Pickford is deputy editor of FT Money. Email: james.pickford@ft.com; Twitter: @jamespickford2

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