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 © Institute for Fiscal Studies

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 © Institute for Fiscal Studies

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 © Institute for Fiscal Studies Taxing housing as an asset

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) © Institute for Fiscal Studies

A ‘housing services tax’ illustrated for England Note: rough guide only – see Chapter 16 of Tax by Design for details

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!) © Institute for Fiscal Studies

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: On housing taxation: On business rates: © 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