COUNCIL TAX REFORM

Council tax will have to rise because of Labour's failure to get a grip on immigration. Advisors insisted there was no way local government could afford the public services that hundreds of thousands of immigrants from eastern Europe would demand. Sandy Bruce-Lockhart, head of the Local Government Association warns the crisis has created 'severe problems' that will lead to council tax rises, local job losses and cuts in services.

Official estimates of the number of immigrants arriving in Britain have badly underestimated the pressure on the communities where they have settled. The LGA claims Labour's inability to calculate the scale of the problem has left local authorities out of pocket. Since local councils are paid according to the number of residents living in their areas, failure to calculate the number of immigrants can lead to critical shortfalls in funds.

This leaves the entire community suffering as schools and hospitals are overstretched. The LGA believes the arrival of immigrants could lead to a 6% rise in council tax, which has already risen by more than 70% under Labour. Labour ministers claimed just 13,000 immigrants would come to Britain when its borders opened to migrants from the new states of the European Union but since 2004, around 700,000 economic migrants have arrived to work here. (Source: Mail on Sunday, Aug/06)

In 2004 Sir Michael Lyons was appointed to head a council tax reform inquiry for Deputy Prime Minister John Prescott, in the face of growing public anger over ever-rising council tax bills. His answer is to introduce a further tax on homeowners because he said they benefit from house price rises while tenants do not. A homeowner tax would mean bigger bills for 18m families and individuals but it would take much of the pressure off 5m who live in council or social housing and another two-and-a-half million in privately-rented homes. They would pay less than homeowners living in properties in the same council tax band.

Christine Melsom, of the Is It Fair? campaign against council tax increases, said, "For years governments have been encouraging people to buy, now they are going to penalise those who have." Sir Michael's recommendations will not affect the revaluation, which will put new taxable values on homes for the first time since 1991. The revaluation will also bring in a 'window tax' by which home improvements such as extensions, conservatories and driveways will be checked by Whitehall inspectors and for the first time counted towards the council tax. The revaluation will show up in council tax bills in 2007. (Source: Mail on Sunday)

Local Government minister Nick Raynsford, revealed that council tax could be scrapped and replaced with a local income tax which could hit middle-class families hard but significantly reduce bills for low-income households. The town hall funding system could probably not be reformed before 2006, but the government could fight the next election on a commitment to abolish council tax. The move would also mean Labour adopting a flagship Liberal Democrat policy. The idea emerged after a Whitehall review of local government finance discovered deep hostility to the council tax among people who thought it was too high and should be reformed.

Several options will be examined by ministers, including introducing a local income tax, reforming business rates and a complete overhaul of council tax. Under the Liberal Democrat proposal, local income tax would be administered by the Inland Revenue at an estimated rate of 3.5p in the pound. The party reckons households with an annual income below £39,000 would be better off while those above that would pay more. Central government block grants would be phased out eventually, but a "safety net" system would ensure disparities between wealthier and poorer parts of the country are evened out.

The party says it will be able to make large savings in administration costs by the move, because 4% of council tax revenue went on bureaucracy alone, compared with 1% of income tax. Edward Davey, Liberal Democrat local government spokesman, called for Labour to announce the end of the council tax immediately saying, "Labour inherited this unfair tax from the Conservatives, so what is stopping ministers addressing the council tax problem directly? Council tax is now so unfair to millions of pensioners, and people on low incomes, that it must be scrapped."

Children who inherit large sums from the sale of the family home when their parents die could also receive their parents' backdated council tax bill. Stephen Byers said, "A deferred-payment scheme would provide all pensioner owner-occupiers with a choice - either to pay the tax as it falls due or to defer payment until the family home is sold ... Such a scheme is simple, not means-tested and uses the value of the home as security for the tax liability." Ministers are worried by the increasing number of pensioners who struggle to pay their council tax bills. More than a million have failed to claim the council tax benefit to which they are entitled.

There have already been widespread protests over this year's proposed council tax rises, but the problem could become far worse in 2007, when the next nationwide property valuation is due. The local government minister, Nick Raynsford, has threatened to force councils to cut spending rather than allow excessive tax increases. Mr Byers's suggestion is modelled on the deferred payments scheme operated by local councils for elderly people who go into residential care homes. The patient is given free residential care for life in return for signing an agreement for the bill to be paid retrospectively from the sale of the family home.

Mr Byers wants the Treasury to lend the money to pay the council tax bills of "asset-rich, income-poor" pensioners. The loan would be repaid when the properties are sold. The idea has yet to be agreed by Gordon Brown. The Deputy Prime Minister, John Prescott, who is in charge of local government, may also think that there are better ways he could use any extra Treasury money. Some heirs may also object to having to settle council tax bills out of what they regard as their rightful inheritance, but the proposal is in tune with Tony Blair's interest in exploring new ways of financing public services, other than through direct taxes.