Q&A: the future of the council tax

What's wrong with the council tax? Didn't it replace the unpopular poll tax?
When the council tax was first introduced, it seemed the most logical option to raise local revenue, since it is easier to keep tabs on property than on people who can evade payment by not signing the electoral register or by moving away. Also, a tax based on property bands was seen to be fairer than charging everyone the same, regardless of their income and ability to pay. But as the years have gone on, the council tax's popularity has waned as annual increases have soared. The issue has politicised part of the pensioner population, who are angry the regressive nature of the above-inflation council tax rises which they say are eroding their pensions. They are calling on the government to replace the current property tax system with one that takes into account more fully the ability of individuals to pay. Kent county council attempted to meet this demand late last year, by proposing to peg pensioners' increases to inflation, but legal advice led the authority to shelve the scheme.

What is the government saying?
The Office of the Deputy Prime Minister has conceded that the balance of funding for local government in its current form is testing local council tax payers' patience, not to mention that of local authorities. High council tax rises posted last year brought the issue to the fore and a review of the current funding system is ongoing. The select committee responsible for scrutinising the ODPM portfolio has meanwhile launched its own inquiry into the balance of funding, ahead of the government review's findings, to ensure more views are aired and that the options available for the future are properly discussed in advance of any changes, rather than after, as with the poll tax and council tax.

What needs to change?

Councils say the current system is distorting local accountability, with the proportion raised locally too low (25%), and the amount distributed through government grants too high (75%). As a result, council tax increases suffer from what is termed the "gearing effect", whereby the need to raise 1% in local revenue results in a 4% increase in the council tax.

So is the council tax facing the axe?

It's unlikely. Only the Liberal Democrats want to see the council tax scrapped in favour of a local income tax to generate local revenue. The new Tory shadow cabinet has yet to form a view on the local government scene, but the Tory group within the Local Government Association broadly agrees with the Labour party's preference for a menu of local taxation options. However, the two parties diverge on how much of the overall funding balance should be raised locally. The Tories are willing to contemplate an income tax derivative whereby a share of the national income tax is used to fund councils, coupled with the collection and retention of a locally varied business tax. This would be alongside a reform of the property based tax. The Labour party also believes in the merits of keeping the council tax, since a property-based tax guarantees a fixed revenue, is difficult to avoid paying, and easy to collect. However, both parties agree that this source of revenue is in need of reform. The Labour party wants to retain centrally-distributed funding, but wants to see it drop so that government grants make up no more than 50% of overall council revenue. Like the Tories, they welcome the prospect of the relocalisation of business rates, but with equalisation measures factored in to ensure communities with little local industry are not unfairly disadvantaged.

What is the balance of funding review considering?
A range of options for altering the sources of local government finance were explored, and have now been honed down to four main possibilities. Aside from reforming council tax, the government is looking at the relocalisation of business rates - where business rates are collected and kept locally, rather than handed over to central government for redistribution. The idea of a local income tax is also tabled for consideration, as are other revenue raising powers, such as charging for various services. However, the local government minister, Nick Raynsford, has all but ruled out the prospect of a local income tax.

What happens next?
The Local Government Association is hoping to generate a debate following the publication of its discussion paper, but until the balance of funding review concludes later this year, everyone remains in a wait and see situation. Any changes, once decided, could take several years to introduce. Meanwhile, a review of council tax bands begins next year, ready for implementation in 2007.

So is the council tax safe for now?
The tax is, but councils are not. Mr Raynsford has made it abundantly clear that local authorities that fail to adhere to low rises this year will be capped, to protect the public from "unacceptable" increases. Mr Raynsford has even reneged on earlier promises that councils rated "excellent" by the government watchdog under the comprehensive performance assessments would not face capping. All bets are off, and councils have been duly warned.