Tax Devolution

We were approached by Northern Powerhouse Partnership (NPP) to provide an online data tool to support a wider piece of work commissioned by NPP from EY looking at other developed countries' use of tax devolution powers.

This online tool would allow a user to experiment with different sources of income from a variety of both existing and new tax streams and show how much could theoretically be raised at each local authority level as well as nationally so the question of redistribution of revenues from HM Treasury could be considered.

The work so far has considered council tax rebanding and revaluation, residential stamp duty retention as well as examining tourist taxes and workplace parking levies, and will also consider a local payroll tax in the spirit of that used in Paris.

Council Tax

We’ve started looking at council tax first as it’s one of the two primary taxes that fund local government (alongside business rates) and receives a lot of criticism as being the most out of date in terms of valuations (where bands and house prices were last revised in England when the tax was introduced in 1993).

The initial distribution of council tax bands in 1993 places most properties in the bottom half of the distribution.

But as house prices varied significantly across regions, the initial tax structure means that areas with lower house prices on average have a lower number of properties in higher bands, meaning that they are able to raise less revenue from the tax than areas with higher house prices.

Though each local authority has the power to set its band D tax level (though constrained on the maximum amount it may increase it by since 2012), the ratio of the amount of tax paid on a property in each band is set centrally as a proportion of the band D rate (band A is 6/9 of band D, band B is 7/9, band C is 8/9, band E is 11/9, F is 13/9, G is 15/9 and H is 18/9).

Even as more properties have been built since 1993, they’re assigned a band on their hypothetical value as it would have been when the system started. Which means that the distribution has remained pretty static over time.

The fact that all council tax rates are a fixed proportion of band D tax rates means that we can see this more clearly by looking at the number of band D equivalent properties. As any house in band H pays twice as much council tax as one in band D, and one in band A pays half as much, by reweighting each house to its proportion of a band D house, we can use a single metric to see how many band D equivalent houses there are for tax-raising purposes and how that has changed since 1993.

As northern regions have proportionally fewer band D equivalent properties than the south, this hampers their ability to raise additional revenue from council tax, as they have a greater share of houses in the lower bands meaning an x% increase in council tax rates will raise less than an x% increase in council tax revenues.

The question, then, is how much would a revaluing of house prices for the purposes of council tax banding make a difference, and how would change the ability of different areas to raise revenue.

Using the Land Registry’s Price Paid Data set, we have (almost) every residential transaction in England and Wales since 1995. From this, we can calculate the distributions of house prices across the whole dataset or by individual local authority or region. From this we can see how much of the distribution falls into chosen bands. To begin with, we inflate the original bands by CPI and fit the 2022 valuation distribution model to these. As house prices have risen significantly more than CPI, we see the distribution changes to the higher bands.

From here, calculating revenue to each authority requires simply multiplying the band D rate for that area by the number of band D equivalent properties, which will depend on the bands and valuations year that you can choose in the app yourself.

Explore the data yourself

The first version of the tool is now available online and you can explore how revaluing house prices to current levels and changing bands affects the potential revenue to local authorities against the current baselines. We'll be adding different taxes into the tool over the coming weeks.

The code behind the project is available in a Github repo and we'll shortly publish a technical blog that describes the data sources and methodologies behind the modelling.

We'll be hosting an event on the afternoon of Tuesday 21 March at Munro House in Leeds from 4pm to 5pm to launch the report and the online tool, including a short briefing about it and an opportunity to use it, alongside some drinks and refreshments. If you'd like to come along, please email info@northernpowerhousepartnership.co.uk with your name and organisation.