The Welsh Government is consulting on a range of possible approaches to council tax reform, some of which would represent the most radical reforms to council tax anywhere in the UK since this tax was introduced in 1993. The bar is pretty low, though. The English system is virtually unchanged from the initial system put in place. The Scottish system has seen modest increases in the relative tax rates applied to properties in Bands E to H, but like in England, bands are still based on 1991 values. The Welsh Government is the only one to have revalued properties before – in 2005, based on 2003 values – when it also introduced an additional band (Band I) for the most valuable 0.4% of properties but otherwise left the structure of the tax unchanged.
The Welsh Government’s consultation document provides three examples of possible reforms – although it notes that the choices are infinite. The first example is a simple revaluation, placing properties into bands based on up-to-date values and updated band thresholds set so that the same fraction of properties across Wales as a whole are in each band as now. The second and third examples go further by reducing the tax rates applied to low-value properties and increasing them on high-value properties to make the tax less regressive with respect to property value than is currently the case, and potentially adding up to three new tax bands. Planned legislation would also put in place provisions for regular revaluations in future, initially every five years.
This report analyses and appraises the possible approaches to council tax reform that the Welsh Government is consulting on, and compares them with a system where the tax rate applied to each band is proportional to the value of properties in that band – which is a useful benchmark to consider to what extent the reforms would address the regressivity of the existing council tax system. It also briefly describes the role the Institute for Fiscal Studies (IFS) has played in helping the Welsh Government model the impacts of different scenarios as it has developed its consultation.
It has been clear from the lack of any revaluation in both England and Scotland that change to council tax is politically difficult. Whatever our views about the ‘ideal’ system, we welcome the fact that the Welsh Government has felt able to work openly with us and others on developing the analytical basis for reform, and is consulting on a range of reform approaches that would improve the current system – some more than others. Governments in Westminster and Holyrood could learn a lot from this example.
The Welsh Government’s consultation
Council tax in Wales is forecast to raise about £2.1 billion in net revenue in 2023–24, an average of just over £1,400 for each of the 1.5 million households in Wales.
Properties in Wales are currently placed into one of nine bands (A to I) for council tax purposes, with the Welsh Government setting the relative tax rates for different bands, and local councils (and police authorities) determining the overall level of council tax in each area by setting the tax rate for a Band D property. There is a range of discounts and premiums for different kinds of households/properties, the biggest of which (a 25% discount for one-adult households and a means-tested council tax reduction scheme, CTRS) are Wales-wide schemes but some of which are at local discretion.
Council tax bands in Wales are based on property values in April 2003 – 20 years ago. That is more up to date than in England and Scotland, where they are based on values in April 1991. But it is still enough time for the relative values of different properties to change significantly. For example, the Office for National Statistics’ House Price Index implies that average property values increased by over 270% between April 2003 and April 2023 in Blaenau Gwent and Merthyr Tydfil, but by less than 135% in Conwy, Flintshire and Wrexham over the same period.
Moreover, while the difference in (2003) values between a property in Band A and a property in Band I is at least 9.5-fold, the difference in tax bills is just 3.5-fold. Council tax is therefore both increasingly out of date and arbitrary, and highly regressive with respect to property values. In other words, it is ripe for revaluation and reform.
Following on from a previous consultation on the broader principles for reform, the Welsh Government’s new consultation document sets out three possible approaches:
- Minimal reform: a pure revaluation, where properties would be placed into one of nine bands based on estimates of their up-to-date values, and where band thresholds would be updated so that the same fraction of properties would be in each of the nine bands as now across Wales as a whole.
- Modest reform: a less regressive, revalued 9-band system, where in addition to the steps taken in (1), the tax rates applied to Bands A to C would be reduced relative to the Band D rate, and those applied to Bands E to I would be increased.
- Expanded reform: a less regressive, revalued 12-band system, where properties would be placed into one of 12 new bands based on estimated up-to-date values, and where there would be one additional band at the bottom (A1) and two additional bands at the top (J and K) of the value distribution, with Bands A1 to C facing lower relative tax rates and Bands E to K facing higher relative tax rates than presently.
The Welsh Government’s consultation document sets out illustrative tax bands for each of these approaches, based on the initial estimates by the Valuation Office Agency (VOA) of property values as of April 2023. The consultation document does not provide information on the relative tax rates that would be applied to these different tax bands, reflecting the fact that the Welsh Government is seeking the widest possible views on the scale of reform that should be undertaken. In order to model the quantitative effects of the different approaches, the IFS worked with the Welsh Government to help identify a set of illustrative example tax rates for each tax band for the three approaches, which we use in this report. The rates and thresholds used in any eventual reform, however, may differ from the examples analysed here.
The ‘minimal’ reform (a pure revaluation) would bring council tax up to date, so that the bill for a property reflected its current value rather than its value 20 years ago; but on its own it would do little to reduce the regressivity of the system. The example ‘modest’ and (especially) ‘expanded’ reforms would somewhat reduce the regressivity of the system. But both would still be some way short of making council tax liabilities proportional to property value (a benchmark against which we compare the different example reforms).
A revaluation would reduce bills for properties which have seen their value increase by less than average over the last 20 years, and increase them for properties which have seen their value increase by more than average. The potential reforms to make it less regressive would reduce bills for low-value properties and increase them for high-value properties.
The impact on bills, though, would also depend crucially on how Welsh councils respond to the changes in tax bases and grant funding generated by any reforms enacted – and, in particular, on the Band D council tax rates that they set. The Welsh Government intends the reforms to be revenue-neutral, not a revenue-raising exercise; but that is not within its control, unless it dictates the Band D rates that councils set. While the Welsh Government would not use the revaluation and reform of council tax to change the total grant funding provided to councils, grants would be redistributed among councils in line with the changes in their council tax bases in order to reflect changes in their assessed ability to raise their own revenue through council tax. Councils seeing a change in their grant funding might respond by adjusting their spending on local services or by raising more/less in council tax to offset the change in grant funding. If councils seeing increases and decreases in grant funding respond asymmetrically, overall average bills and therefore aggregate council tax revenue (and spending on local services) may go up or down.
In this report, we assume that councils hold spending on local services fixed – adjusting the council tax they raise to offset changes in grant funding and thus keep their total revenue the same as in the absence of reform – implying that revaluation and reform in themselves would be revenue-neutral across Wales as a whole. As in years without reforms to council tax, though, the overall amount raised from council tax in the year any reform is implemented would likely increase in cash terms as rising costs and demands increase councils’ revenue requirements. Such increases would be likely irrespective of whether revaluation and reform take place.
Impacts on different parts of Wales
Impacts on different household types
Impacts on rents and property values
Our overall appraisal
The Welsh Government’s proposed direction of reform is very welcome.
Council tax revaluation is unambiguously a good idea, and legislating for regular revaluations in future is even better. It is indefensible to continue to tax people based on the value of their property more than 20 years ago, and setting out firm plans for future revaluations would not only help to prevent council tax from getting so out of date again, it would also reduce the risk of people being surprised by unexpected future revaluations and changes in bills.
The appropriate degree of progressivity in the tax system is a political choice. But a stated aim for reform is to make council tax more progressive (or, at least, less regressive). The expanded approach would fulfil that aim better than the others suggested in the consultation document, though it would still fall short of making tax bills proportional to property value – perhaps too big a change for the Welsh Government to want to introduce in one giant leap.
Adding more bands would allow for a more fine-grained relationship between property value and tax liability, a helpful improvement. Ideally, the Welsh Government would go further and move away from a banded system altogether, levying the tax as a percentage of an exact property valuation, as many other jurisdictions (including Northern Ireland) do. We are not well placed to judge whether the Welsh Government’s argument for sticking with relatively wide bands – that it would minimise challenges associated with valuation – is a good one. However, we note that when it comes to appeals, in principle the effect is ambiguous, as giving properties more precise valuations might leave more people believing their valuation was wrong but would also mean generally smaller changes in bills if an appeal was successful, reducing the incentive to appeal.
A banded system also creates unfairness between households just either side of the thresholds, who have very similar property values but must pay very different amounts of tax. With a given number of bands, making the tax rates less regressive would actually exacerbate this particular unfairness, as the jump in tax bills at thresholds would be bigger. It can be alleviated by having more, narrower bands, so that the jump in liabilities at any one threshold is smaller – or again, ideally by moving from a banded to a continuous system.
A separate review of council tax discounts is ongoing, but the consultation document says that the Welsh Government intends ‘to retain the one-adult discount and to keep the level of discount at 25%’. Keeping the current structure of the discount would be unfortunate. Since the cash value of the discount is higher for properties in higher bands, it encourages inefficient use of the housing stock, with single-adult households living in bigger properties, and multi-adult households living in smaller properties, than they otherwise would – contributing to both under-occupation and overcrowding. If the Welsh Government wants to continue providing a one-adult discount of similar overall generosity to the current one, it would be better to reform it so that the size of the discount did not depend on the value of the property: setting the discount equal to, say, 40% of the Band A rate (or 20% of the Band D rate, or similar), regardless of what band the claimant’s property is actually in. Such a change would also go further towards making council tax less regressive, increasing the generosity of the discount for those in low-value properties and reducing it for those in high-value properties.
Notwithstanding any minor quibbles, the direction of reform set out in the consultation document is a good one. It is only a pity that the consultation document opens up the prospect of potential delay from the previously stated intention of implementing revaluation and reform in 2025, creating more uncertainty for households and councils. There is no obvious advantage to delay (as opposed to having a gradual transition for households seeing large changes in bills, for which there is a case). Reform is politically challenging, as it creates losers as well as winners, but delay would not make it any easier. Both Labour and Plaid Cymru committed to reforming council tax in their 2021 election manifestos, and that shared commitment was repeated in the Co-operation Agreement between them; it is hard to imagine more propitious circumstances in which to proceed. The Welsh Government should go ahead with revaluation and reform in 2025 as originally planned – and the UK and Scottish governments should follow suit.