Council tax reform is in right area

Tomorrow's second reading of the local government bill is a significant and very welcome step towards reforming the council tax, one of the more pernicious taxes of modern times.

The bill opens up the possibility of a great improvement in this tax - but unless the government introduces a degree of regional variation, it will hit low-paid workers across southern England.

The part of the bill that deals with council tax is essentially an enabling measure, setting out the timetable and framework for the revaluation of all domestic properties in England and Wales. It leaves all the important decisions (at least for England) until later.

Revaluation is long overdue. At the moment, council tax is based on the value of the property in 1991. The problem with this is not that the value of homes has risen since then but that values have risen by very different amounts in different places. This applies at every level.

At the regional level, for example, average house prices rose by 160% in London between 1991 and 2001, compared with just 40% in Yorkshire and Humberside.

At the local authority level, average house price inflation within the north west was between 15% and 180%. There are also huge variations between neighbourhoods. If council tax is to be credible, a revaluation is essential to ensure that homes everywhere are in tax bands that reflect their price.

The bill goes further than this, though. It allows the government to increase the number of council tax bands. Since the tax depends on the band in which a property is placed, more bands would allow a greater difference in the tax paid. At present, the ratio between the highest and lowest tax bills in any local authority area is just three to one, even though the difference in the underlying property prices may be as much as 30 to one.

By increasing the number of bands, and using existing powers to alter the payment "multipliers" that determine the tax ratios between bands, the government is putting a framework in place that can be used to make the council tax much less regressive.

There is certainly a strong case for this. After tobacco tax, council tax is the most regressive of all taxes. The people it hits hardest are not the very poorest, who are protected by council tax benefit, but those with incomes just above that threshold, in other words, lowpaid workers.

As the only tax over which local authorities have control, the regressivity of the tax severely limits their ability to raise money at their own discretion.

The possibility of reform contained in the bill is very welcome - but if it is to work, it must go further. In particular, the bill needs to be amended to permit some form of regional variation within England, for example by allowing different band limits in different regions. This would bring England into line with Scotland and Wales, which have always had different band limits.

Without it, many low-paid workers living in modest accommodation in the south will find that above-average house price inflation has pushed them into a high tax band, presenting them with a big rise in their council tax bill as a result. This would add to the already recognised problem of housing being unaffordable for some key workers. As a result, the differences around the country in the council tax bills of low-paid workers will be more striking than any improvement in the fairness of the tax within each local authority.

The way the council tax system works means that revaluation will shift the government grant to local authorities away from areas that have had higher house price inflation and towards those that have had lower inflation. The regional variation we are calling for should not stop this: some redistribution via an updated council tax system, from richer parts of the country to poorer ones, is to be expected. But a system that treats everybody living in, say, a £100,000 property the same, irrespective of their ability to pay, is far too inflexible a basis for this.

By giving itself the power to vary the council tax system between regions, the government would give itself more room for manoeuvre. It needs it.

Revaluation and reform are long overdue, but if the government is perceived to be getting it wrong, the council tax system itself, which is the cornerstone of local government's independence and its capacity to raise money at its own discretion, could be in jeopardy.

· Peter Kenway is director of the New Policy Institute. Ines Newman is head of policy for the Local Government Information Unit.