The way we fund local services in Scotland is outdated and in need of reform. Council tax is both inadequate to the needs of local authorities, and creates real risks of harm for low income households. The Scottish government says it wants “greater fiscal empowerment for councils” – this should include fundamental reform of local taxation, not just tinkering with the conditions and reporting requirements for central funding.

Council tax risks harm to low income households

In a report commissioned by the Robertson Trust, we explored the impact of debt to public authorities on low income and vulnerable households. As the cold weather continues to pressure energy bills, the risk of more households falling behind financially continues to grow. The Scottish government’s decision to uprate benefits in line with inflation will help, but households have to wait until April. The expanded Fuel Insecurity Fund will likewise provide relief for those in the most dire circumstances, but the draft budget included nothing to help families deal with non-energy bills.

Even before the current cost of living crisis, money advisors had seen council tax arrears grow to become the most common reason households sought advice. Why is this? Faced with a deficit budget, households will often prioritise paying energy bills and housing (rent or mortgage) for fear of losing these essentials. Some may also hope that their local authority would be a relatively compassionate creditor - but this may be a costly assumption to make. The default process for local authorities to recover unpaid instalments of council tax can be brutal: if a bill is not paid within seven days of a final reminder a household can lose its right to pay in instalments, have a 10 per cent surcharge added to their outstanding bill and be referred to sheriff officers. Money owed can be recovered through deductions to benefit payments, taken out of wages, or even taken directly from a person’s bank account.

Council tax arrears is overwhelmingly an issue of low income.Polling for the Robertson Trust report shows low income and vulnerable households fall behind on their bills at much higher rates than the rest of the population. More than one in 10 households in the bottom two income deciles report being behind on their council tax bills. By contrast, only one in 100 households in the top two income deciles report being behind.

Households who are behind on council tax are much more likely than the rest of the population to have cut back on leisure activities (75 versus 52 per cent), skipped meals (42 versus 12 per cent) or not put on the heating (71 versus 51 per cent) in response to debt. While Council Tax Reduction supports around a fifth of households, there is clearly a significant number of households who the support doesn’t reach or for whom it is not enough.

In this context, with pressure on household budgets growing, public authorities should be at the forefront of alleviating the strain. An immediate moratorium on forced recovery of council tax arrears (so called “diligence” actions) would create breathing space, both for households to rebuild their financial position and for councils to assess which debts should be written off.

The council tax system is outdated and inflexible

These sticking plaster actions would help families avoid falling into financial difficulties in the near term, but the council tax system itself needs to be reformed. It is an outdated system that makes a minority contribution to local government’s byzantine financial arrangements (around £2.6 billion as compared with £11 billion grant funding from Scottish government in 2022-23). Rates are based on property valuations undertaken in 1991, since when whatever relationship may have existed between bands in the 1990s and households’ resources has moved on.

Around three quarters of all homes are in bands A-D, including more than a third of the homes occupied by the richest 10 per cent of households. While higher income households are more likely to live in bands E-H, a sizeable share of lower income households also live in these homes (figure 1).

Figure 1. Distribution of council tax bands across households by forecast 2023/24 income decile

Source: IPPR Scotland analysis using IPPR tax and benefit model

Council tax increases are generally regressive, and the distribution of bands across income groups mean the system resists attempts to make it more progressive. In our briefing ahead of the Scottish government’s budget, we modelled the effect of increasing council tax by increasing margins across bands E to H, and still found the impact to be regressive. Households in the lowest income decile would see a proportional hit to their disposable income higher than the top two deciles, even after council tax reduction is taken into account.

Ambitious reform is needed

The need to reform local tax has long been recognised. In 2015, the cross-party Commission on Local Tax Reform was set up by the Scottish government. It explored replacing council tax with a new local property tax, a land value tax and a local income tax. Since then, and despite manifesto commitments, we are yet to see any fundamental reform of council tax in Scotland.

Failure to reform the system means local government’s powers to fund its activities through local taxation are more rhetorical than real. This year’s budget may not include a council tax freeze, but local authorities’ room for manoeuvre is constrained. Inflation means councils need more money to deliver services, but the regressive council tax does not allow them to share this burden across their populations without loading higher bills onto those on low incomes.

Furthermore, the ossified council tax system is unable to progressively tax property wealth in Scotland, where inequalities are reaching extreme levels. The top ten percent of households now have over two hundred times the wealth of the bottom ten percent, and there exist no effective mechanisms to reverse this.

Bold action is clearly needed. The Scottish government should be ambitious in making good on its commitment to “work towards agreeing a Fiscal Framework with Local Government which will strengthen engagement throughout the budgetary cycle and establish a clear process to progress greater fiscal empowerment for councils". It should cut through this caveated and prevaricating formulation and put on the table bold proposals on local taxation as part of a fundamental reform of all taxes under its control.

As we have previously argued, Scotland needs a basket of local taxes which should include a percentage of value tax property tax. In the near term the effectiveness of Council Tax Reduction to mitigate the regressive harms of the legacy system should be enhanced by automatically passporting Universal Credit recipients into the scheme and extending coverage to include water rates.