Local housing taxation
Stuart Adam, Institute for Fiscal Studies
Presentation to the Commission on Local Tax Reform
Edinburgh, 19 May 2015
© Institute for Fiscal Studies
Choosing a local tax base
• Start by designing a rational set of taxes (Mirrlees Review’s focus)
• Then decide which should be set locally
• Property taxes make the best local taxes as property is immobile
– Especially residential property as local taxpayers are local voters
• So if going to have any local taxation, start with residential property
• May want others as well:
– if want more local tax than residential property can reasonably provide
– if want local authorities to have more than one tax-raising option
• Localised business rates next best, then local income tax
– Other potential local taxes generally unworkable, undesirable or tiny
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Housing in the tax system
• Property = land + buildings
• Taxing land value is efficient
– More or less fixed supply, so no disincentive effects
• Should we tax buildings too?
– If OK to tax land + buildings equally, simplest to tax them as a package
• Not business buildings: an intermediate input into production
– So replace business rates with a land value tax (if valuation feasible)
• But there is a case for taxing housing...
• Housing is both a consumption good and an asset
– Tax system should treat it appropriately from both perspectives
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Taxing housing as an asset
Investment returns (income tax and capital gains tax)
• Mirrlees Review proposed reforms to income tax and CGT regime
Stocks of wealth (annual wealth tax)
• Taxing all wealth is practically difficult and economically inefficient
• But taxing only housing wealth is inequitable and distortionary
Transactions (land and buildings transaction tax)
• Basic principle that transactions should not be taxed
– Why impose heavier tax on properties that change hands more often?
– Assets should be held by the people who value them most
– Reduced labour mobility one symptom of this more fundamental problem
• But don’t want to give up revenue / give windfall gains to owners
– So look to replace with better taxes rather than simply abolish
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Taxing consumption of housing services
• Housing should be taxed like other consumption
• Two ways this could be done
1. VAT on new build
2. Annual tax on the stream of consumption
• From where Scotland is starting, the latter makes more sense
 Tax the annual consumption value of housing: substitute for VAT
• Looks like a sensibly reformed council tax
– Based on up-to-date valuations (rather than 1991 values)
– Proportional to values (rather than regressive with wide bands)
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A ‘housing services tax’ illustrated for England
Note: rough guide only – see Chapter 16 of Tax by Design for details
£6,000
Council tax bill
Housing services tax bill
£5,000
£4,000
£3,000
£2,000
£1,000
£0
£0
£200,000
£400,000
£600,000
Current property value
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£800,000
£1,000,000
Taxing consumption of housing services
• Housing should be taxed like other consumption
• Two ways this could be done:
1. VAT on new build
2. Annual tax on the stream of consumption
• From where Scotland is starting, the latter makes more sense
 Tax the annual consumption value of housing: substitute for VAT
• Looks like a sensibly reformed council tax
– Based on up-to-date valuations (rather than 1991 values)
– Proportional to values (rather than regressive with wide bands)
– No discounts for single occupancy (rather than 25% discount)
• Ideally based on rental values rather than capital values
– But there may be a trade-off with practicality here
• And replace LBTT on housing in the process
– Initially on a revenue-neutral basis
© Institute for Fiscal Studies
Difficulty paying housing taxes
• Housing has important advantages as a local tax base
– Immobile, supply (and demand) unresponsive to price, ownership easily
established
• But owner-occupied housing has one big disadvantage
– The stream of services is not linked to a cash flow
• Distinguish between two different concerns:
1. Well-off people who own a valuable asset but lack liquidity

Allow deferral of tax payments as a form of loan?
 With interest, secured against the property, until sale or death
 Long-term credibility crucial
2. People who lack the underlying ability to pay

Provide council tax support (or equivalent: design issues here too!)
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Conclusions: recommendations for Scotland
• Replace council tax and LBTT on housing with a ‘housing services tax’
to stand in place of VAT
– Proportional to up-to-date (and regularly updated!) values
• There is a case for allowing some home-owners to defer payment
– With interest, until sale of the property or death
• Benefits safety-net should include an allowance for the tax
• Could supplement with others if want more local taxes
– localised business rates (or, better, land value tax on non-residential land)
– local income tax
© Institute for Fiscal Studies
For more...
On the tax system as a whole:
http://www.ifs.org.uk/mirrleesreview
On housing taxation:
http://www.esri.ie/UserFiles/publications/RS31.pdf
On business rates:
http://www.ifs.org.uk/budgets/gb2014/gb2014_ch11.pdf
© Institute for Fiscal Studies
Local housing taxation
Stuart Adam, Institute for Fiscal Studies
Presentation to the Commission on Local Tax Reform
Edinburgh, 19 May 2015
© Institute for Fiscal Studies