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It is possible that British local government finance can never be fully reformed. The weight of history is so great and the consequences of failure so feared that politicians of all parties tremble at the thought of even keeping the local tax base up to date by taking into account the changes in house prices over the past 15 years. Budget day saw the overlooked launch of another blockbuster report on the tortured subject of council finance.

Sir Michael Lyons is the latest grandee to offer a solution to the problem. Back in 1976, Sir Frank Layfield had proposed a stark choice between greater local autonomy – involving a local income tax – and accepting central control over councils. In 1977, the then Labour government flunked a decision by doing nothing.

The intervening years saw Margaret Thatcher’s ill-fated introduction of the poll tax that helped lead to her ousting in 1990. Council tax, introduced in 1993, was John Major’s gentle replacement for the hated “community charge”. Its yield has risen by an eye-watering 107 per cent in Tony Blair’s decade.

That steady rise has added to the pressure for reform already evident at the start of New Labour’s tenure. Yet there has been policy confusion. Thus, council tax capping was abolished then subsequently reintroduced. Several buzz-word-crammed policy documents have been published. None has led to concrete reform.

Eventually, local government pushed Whitehall into a review, chaired by the then minister Nick Raynsford. The problem was narrowed down to the fact that too small a share of council spending was funded from local taxation. As a result, councils faced a “gearing” problem: a 1 per cent rise in their spending triggered a 4 per cent higher council tax. After a year Mr Raynsford issued his report and handed the problem to Sir Michael.

He, after three more years – including two extensions of his remit – finally (and heroically) concluded that capping should go and that revaluing the council tax base, to include house prices changes, was essential. He also proposed ways to introduce one or two modest new local revenues. There might also be an independent body to allocate central grants and new incentives for councils to build up their tax base. The business rate, however, was to remain set nationally.

Even these modest proposals were largely killed off on the very day they were published by the Department of Communities and Local Government. Capping must stay. Revaluation will not happen soon (and possibly ever). There should be no new council tax “bands” to increase fairness. There will be no tourist tax. All that remains is a small-but-sensible proposal for a supplementary business rate to fund infrastructure, a possible tax on household waste and limited incentives for councils to build up their tax base.

The government’s fear of any significant increase in local tax bills is revealing. Despite being no more than 5 per cent of all state revenues, council tax is the only government tax most people are aware of. Pay as you earn income tax, value added tax, corporation tax and excise duties are invisible or buried in the price of goods. Such stealthy taxation is a boon for the chancellor. But council treasurers have to send out a bill in a brown envelope that people must pay, often in monthly instalments. Supporters of transparency should praise council tax as Britain’s sole visible tax. But householders, particularly pensioners, hate it.

This latter fact is bad news for anyone hoping to use new charges or taxes to change public behaviour. Ideas such as road pricing, personal carbon allowances and charging by weight for domestic refuse all rely on the idea that people will “feel” the new charge and change their behaviour. What the council tax story tells us is that if people feel a tax or charge, they don’t like it. That was also the message of the 1.8m signatories to Downing Street’s recent road price petition.

Moreover, judging by the swift dismissals of the Lyons proposals, politicians sense they are unlikely to convince a sceptical public that a property-based tax is sensible and that revaluing its base is both fair and logical. If they cannot sell council tax, they will have no chance of getting the public to accept road pricing, waste charges or even air passenger duties. Council tax may be too hot to handle, but so will be any other easily perceived revenue earner. This defeat for transparent taxation may be the death-knell for much other public policy.

The writer is director of the Greater London Group at the London School of Economics

Copyright The Financial Times Limited 2017. All rights reserved.
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