Watch out for the new poll tax

Published in the Evening Standard

When Americans speak of an issue that’s too hot to handle, they call it “the third rail”: like the power cable on a train line, you only have to touch it to die. In Britain we have a third rail of our own – and it’s called local tax.

We’ll see it’s destructive power again next week, when Sir Michael Lyons publishes his review of local finance. Leaks suggest he’s going to add a couple of new council tax bands at the top end, so that someone living in a #1m home could see their annual bill double to #4,400.

It’s no coincidence that it’s an unelected official who’s been saddled with delivering this bit of bad news. No politician wants to go anywhere near the issue. Look, they tell you, their voices a-tremble, what the poll tax did to Margaret Thatcher. Call it the rates, the community charge or council tax, it makes no difference. It’s a political killer.

That’s partly because it may be the only tax many people actually feel. For most PAYE earners, income tax is lopped off at source, before they ever know about it: it’s tax under anaesthetic. VAT is included in the price of most goods and services, so we hardly notice that either. But council tax is different. Either you write a cheque, or you watch the direct debit flow out of your account. You feel the paying – and it hurts.

Which is why the government has run a mile from the issue, even though the system is in dire need of reform. The current set-up is based on property valuations that were carried out when the Soviet Union was still standing, back in 1991. Yet ministers have found reason after reason to delay, even postponing re-valuation till after the next election. No one wants to repeat Thatcher’s error.

But they won’t be able to put it off forever. If the government endorses the Lyons proposal, effectively raising the maximum those in the biggest houses can pay, they will face serious heat from two groups whose votes they badly need.

First in the queue will be homeowners in London and the South East, who have seen the value of their properties sky-rocket since 1991. Plenty of middle class families, who would never consider themselves at the top of the heap, are nevertheless living in houses that have entered the top bracket. It’s estimated that tens of thousands of houses in this city and beyond are now worth the magic seven figures. Nor is this just the obvious mansions of Chelsea and luxury apartments of Kensington. One expert I spoke to yesterday said that when you see a substantial family house in Kentish Town or Camden Town, you’re looking at a million-pound home.

Most irate will be those people whose properties may be big, but whose earnings are small: think of the elderly widow, rattling around in a roomy house, but with no way of finding #4,400 a year. If Gordon Brown were to endorse Lyons, he would either have to ensure a battery of extra benefits, to cushion the impact on the poorest – or prepare to face the wrath of those two vital elements in the famed New Labour coalition, the London middle class and the elderly.

But there is another, more radical way. Instead of tinkering with the council tax, he could propose an entirely new way of funding our local services. The clue is in the word local. The answer could be a local income tax.

Under this approach, the Inland Revenue would simply make a note of your postcode, add three or four pennies in the pound to your annual tax bill and send the money to your local council. It may sound outlandish – after all it was part of the Lib Dem manifesto in 2005. But local income tax works well across the world, from Scandinavia to parts of the United States.

Indeed, when I lived in America that was how I paid for my bins to be emptied and my street to be cleaned. At the end of the financial year, I signed two tax returns: one for the federal government and another, much smaller, one for the local city hall. No one ever asked what kind of apartment I was living in.

The advantages of such a system are obvious. Income tax is progressive – with the rich paying more, the poor paying less – while a property charge asks the Duke of Westminster to pay the same as the penniless old lady in a big house. Surely its fairer for people to pay according to what they afford.

Income tax is also what the experts call ‘buoyant’, in that revenue does not stay static but goes up as incomes rise. That would give councils more money to spend on services often starved of cash.

It sounds like an obvious move. But there would be loud opposition. In London, where incomes are high, we’d suddenly be paying much more than we currently shell out in council tax for the same services – while those in poorer parts of the country, where incomes are low, would be paying much less. That would be the inevitable result of the Treasury gathering in all the money, then spreading it around according to need, seeking to equalise between rich and poor.

Alternatively, each area could be allowed to keep exactly what it raises in local income tax from its residents. Great for K & C or Westminster; not so great for Hackney or Brent. The solution then would be to do what I saw in the US: simply draw the municipal boundaries in such a way that no area was all-rich or all-poor, but contained a mix, as many London boroughs do already. That way redistribution would happen locally, without need for Treasury meddling.

If all that sounds too terrifying to our anxious politicians, they could always take it slowly. They could phase in a local income tax, so that it runs in parallel with a reduced property charge. Gradually the blend could change, so avoiding any sudden shock to the system. Then all they’d have to do is find someone else to announce it.