Here's my summary of a fifteen-minute talk I did last weekend, I think that some people understood it, or at least understood that I understood it. What annoys me is that the LVTers don't have a proper plan on how it should work on a tedious administrative level but the Homeys have a favorite KLN that it would require an army of expensive and intrusive surveyors.
All of these steps are quite simple in themselves, but you have to grasp them all to see how they fit together.
1. There is a fairly fixed relationship between selling prices, gross rental values and site premiums
The three concepts are quite different, but we all know what selling prices and gross rental values are, and selling prices are actually just a multiple of rents. On the whole the multiple is about twenty, which means that gross rental yields are about 5%. This multiple is lower in low rent areas and higher in high rent areas, which exaggerates the differences in selling prices, but hey.
However you calculate the site premium, it is a certain fraction of gross rental values, lower in low rent areas (maybe one-quarter or less) and higher in high rent areas (maybe three-quarters or more). The median is about half and the average for total UK site premium divided by total UK gross rental values (skewed by the top end) is about three-fifths.
Clearly, site premiums at the very lowest end are zero, if you do the numbers, the differences in selling price multiple of gross rents and the site premium as fraction of gross rents largely cancel out and you end with with site premium = +/- 3% of current selling prices. This percentage tapers away to 0% at the very lowest end, of course, where site premium is £nil.
Suffice to say, there are different ways of calculating the Site Premium, this is the least of our worries. Selling prices would be flattened by higher LVT, so will be less relevant in future (although a very good checking mechanism).
2. In any smaller area, there is a fairly fixed relationship between the values of different sized homes
It does not matter whether you are looking at cheap or expensive areas; in most areas, the selling price of gross rental value of a one-bed flat is around 60% of the basic unit of housing, which is a 3-bed semi in the same area; a terraced house is 85% as much and a detached house is 154% as much. The ratio between gross rents is much the same. Therefore we can safely assume that the ratio between site premiums is much the same.
3. How Council Tax works
See Wiki.
Homes were originally banded by selling prices in 1991, at the time prices were fairly flat across most of the country, so most 1-bed flats ended up in Band A, most 3-bed semi detached homes in Band C or Band D and the biggest and most expensive detached houses in Band H.
Council Tax in Band A is 6/9 of whatever it is in Band D, so in this local council, a one-bed flat pays £800 Council Tax and the largest homes in Band H pay 18/9 as much = £2,400.
To give an example and cut a long story short, an idealised small local council has a spending budget of £100 million and receives grants from central government (out of income tax, NIC, VAT etc) of £76 million. So it needs to raise £24 million in Council Tax. It simply divides £24 million by the number of Band D Equivalent homes*, if there are 20,000 Band D equivalent homes, the Council Tax for a Band D home is £1,200. Having calculated that, the tax in the other Bands follows automatically.
Note - Council Tax is thus a highly arbitrary amount, it is a balancing figure between two made-up numbers divided by an arbitrary number, LVT can't possibly be worse than this.
* Band D equivalent means that two homes in Band A = 1.33 Band D equivalent homes, a home in Band H is 2 etc.
4. Put the first three together, and hey presto, Council Tax is in fact a low level LVT
Let's take the same local council, where 3-bed semi's are in Band D, paying £1,200 a year on whatever their site premium is; one-bed flats are in Band A paying £800 on a site premium that is about 60% as much; terraced houses are in Band C paying £1,066 on a site premium that is about 85% as much and typical detached houses are in Band F paying £1,733 on a site premium that is 154% as much.
That is a fairly flat tax (always something to be welcomed) - but only if you compare the tax bills within a small area. Across the country, the tax rate is hugely regressive, with an effective rate of 30% or 40% in the cheapest areas and 3% or 4% in the most expensive.
So people a the top end are paying nowhere near enough quasi-LVT but are paying far too much in the 'progressive' taxes on housing, i.e. Stamp Duty Land Tax, Inheritance Tax, the ATED charge and other assorted nasties which all raise surprisingly little money while causing huge amounts of grief to the few paying it and generating loads of work for the pinstriped professionals who leech off the already wealthy at no overall benefit to the economy.
In the spirit of fairness and neutrality, let's assume that our LVT replaces Council Tax, SDLT, IHT, ATED etc. That gives us target revenues of £36 bn a year.
5. Sorting homes/plots by size instead of value
It would be easy to sort homes/plots into bands by absolute size rather than 1991 values. So one-bed flats go into Band A, two-beds into Band B, terraced houses into Band C etc. all the way up to the largest detached homes into Band H. That can be done quickly and cheaply by just walking up and down the streets and looking at them, seeing what kind of homes they were originally (ignoring extensions etc), how wide the frontage is (far more important that how long the back garden is). Each council can develop its own guidelines and rules of thumb, it's doesn't really matter as long as they are consistently applied.
This will be a lot easier and less contentious than the original Council Tax valuations, which were relatively uncontentious themselves. If we just did this and left Council Tax as is, most bills would not change. That is the beauty of maths, maybe in some areas everybody would go up a band; this increases the number of Band D equivalent homes, so the Band D tax falls accordingly.
This is a one-off exercise and does not need to be repeated for the system to work.
6. Dividing each council up into smaller valuation areas
In most councils, there is quite a discrepancy in values between the cheapest an the most expensive areas, so they would have to be divided up into smaller areas where values are similar. My preferred option is postcode sectors, with about 3,000 homes in each, this size is small enough for there to be little variation but large enough for decent sample sizes on selling prices and market rents.
With a bit of interpolation and sampling, it is a doddle to find out what the site premium of a Band D home in each valuation area is.
The find the total tax base, we multiply up the site premium of a Band D home by the number of Band D equivalent homes in each smaller valuation area, add 'em up to local council level and then add those up to national level. We end up with a total site premium for the whole of the UK of anywhere up to £200 bn, but let's call is £150 bn for tactical reasons.
This tells us that the tax rate would have to be 24% of site premiums, 24% x £150 bn = £36 bn, required revenues from 4. above.
The Band D site premium in an area x 24% is then the Band D tax in that area, and the tax bills in all other bands in that area follow automatically - exactly as happens now, see 2. above.
I see no reason why there has to be any great justification of why Band D tax is what is under this system any more than there is under the current system, it is just a tax you have to pay with at least some economic justification rather than being completely arbitrary as at present.
7. But Council Tax is a local tax to pay for local services!
… or so people believe, let them believe it if they want to, it is all smoke and mirrors anyway.
In the examples so far, central government will lose £12 bn in revenues from IHT, SDLT etc, so it can simply reduce total grants to those councils where people are now no longer paying so much SDLT, IHT etc. Central government breaks even.
So if our example local council above has lots of high value areas and a total tax base of £125 million, it will be expected to collect £125 million x 24% = £30 million in revised Council Tax, its budgeted spending is still £100 million so its grant from central government is reduced from £76 million to £70 million, Band D tax on average across the council will be £1,500 instead of £1,200 and so on and so forth.
At the very bottom, there might be a few local councils where Council Tax will go down and their grants will increase and at the very top, there might be a few councils who are expected to collect more in Council Tax than their actual spending budget, this can all be sorted out and will all net off, let's not get bogged down in the bookkeeping between government departments.
8. Having got the ball rolling, we just keep going
Each year…
a) National taxes (income tax, NIC, VAT etc) are reduced a bit (or a lot),
b) This gives us higher targeted Council Tax/LVT receipts,
c) Site premium valuations in each area are re-assessed/updated,
d) These are totted up to give us the total tax base for the whole country
e) Divide b) by d) to get your new tax rate in %, that sets Band D tax in each area, the council enters that into its master list and everything else falls into place.
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