Labour's poll tax?

Thousands of demonstrators against council-tax rises are expected in London tomorrow. Organisers are promising the biggest demonstration against local taxation since the 1990 poll-tax protests showed that Margaret Thatcher's time had run its course. This time the most vociferous protesters are not young people but pensioners. All manner of local campaigns have sprung up against a tax that increased by a record 13% in the current financial year, and that in some places rose by over 40%.

More than 25,000 people have signed a national petition against the tax, which will be handed in to 10 Downing Street tomorrow as part of the protest. In Devon and Cornwall, the chief constable has warned of civil disobedience, following an increase in the police authority's precept of 40%. Hundreds of pensioners in the two counties are withholding most of this year's increases.

What has gone wrong? Downing Street is a good place to start. The occupants of No 10 have an estimated joint income exceeding £350,000, but are only required to pay £1,140 in council tax. Modestly paid working couples across the river face similar charges in much poorer homes. From its beginning in 1991, council tax has been regressive. Nationally, the poorest 10% pay over four times more of their income in council tax than the richest 10%. Then there is its gearing problem: because 75% of local authority income comes direct from Whitehall, any council that wants to increase spending by just 1% on a popular local service has to increase its council tax by 4%. In some authorities, the ratio is five to one. Hence this year's large rises.

Long before this year's tax rises were known, ministers set up a review under Nick Raynsford, the local government minister, to re-examine the current balance of funding. From the deputy prime minister downwards, ministers have conceded the current system is unsustainable. Yesterday the Local Government Association submitted a paper to the Raynsford review, listing a dozen different ways that local councils could raise revenue. Six months ago the task of the committee must have looked much simpler than today. Leaks suggested it was exploring three areas: council tax reform, the relocalisation of business rates that were nationalised by the Conservatives in 1991, or even some form of local income tax. But, even before the LGA's document, a host of other options had been put up: congestion charges, green taxes, utility charges (for digging up roads), tourist, sales, land value, or land development taxes. Each is being judged by seven criteria, including accountability, predictability of income, and collectability.

With Labour committed to a revaluation of both homes and the eight bands into which they are currently placed for council tax, change is due to come, and 2007 has been pencilled in for its launch. Some form of property tax is likely to be retained. Unlike most taxes, it does not vary according to the state of the economy. A minimum package, which would not please the LGA, would be a more progressive council-tax system (including extra bands and better remissions for pensioners and the low-paid) and direct payment to schools of the £25bn education budget. A more radical plan would include local income tax, local business tax and wider use of supplementary taxes to achieve a more equal balance.

The final package should be judged by the following principles: the extent to which it devolves powers and allows more money to be raised locally; the readiness to use more than one local tax; the minimum standards that are laid down to ensure maverick councils do not slash services; and an equalisation grant, that ensures that the wide disparities of income and needs between local communities are radically reduced.