REPORT

MARCH 2018

Adam Corlett & Laura Gardiner

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Options for reforming property taxation intergencommission.org

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Contents Acknowledgements����������������������������������������������������������������������������������������������������������������������������������3 Executive summary�������������������������������������������������������������������������������������������������������������������������������� 4 Section 1: Introduction��������������������������������������������������������������������������������������������������������������������������11 Section 2: Britain’s property taxation problem���������������������������������������������������������������������������� 13 Section 3: Options for property tax reform����������������������������������������������������������������������������������� 33 Section 4: Wider considerations when rethinking property tax������������������������������������������� 52 Section 5: Conclusion���������������������������������������������������������������������������������������������������������������������������� 63 Annex: Methodology�����������������������������������������������������������������������������������������������������������������������������64

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Acknowledgements The authors would like to thank John Muellbauer (Nuffield College, Oxford University) and Kate Barker for comments on an earlier version of this report, and Donal de Buitleir at Publicpolicy.ie for insights on the Irish property tax system. Any errors remain the authors’ own.

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Executive summary Over the past 18 months research for the Intergenerational Commission has illustrated that, in a range of areas, the assumption that each generation will do better than the one before it is under pressure. This paper is one of a series that moves beyond the diagnosis of these problems to consider what action is needed to address generational living standards challenges. The Intergenerational Commission’s final report later this year will recommend a specific suite of reforms across a broad range of policy areas. In this paper, we present policy options that incorporate ideas from leading thinkers, history and abroad, and set out the strengths and weaknesses of different policy approaches. Our focus here is residential property tax reform. How we tax residential property matters for a range of reasons that are core to the Intergenerational Commission’s diagnosis of a growing generational living standards divide. Property taxation affects the levels of revenue available for public services; people’s disposable incomes; the wealth distribution itself; and the efficiency and volatility of the housing market. A commonly held view, however, is that the main property taxes we have – council tax and stamp duty – leave a huge amount of room for improvement.

Britain’s fiscal challenge in the decades ahead necessitates a focus on our dysfunctional property taxes Despite years of spending cuts and recent signs that the government’s current budget may reach balance next year, Britain faces a fiscal challenge in the coming decades. Our ageing population means a requirement for additional public spending on health and care in particular. In just over a decade (by 2030) the additional annual spending requirement to maintain current levels of state provision amounts to £20 billion per year, rising to £60 billion in 2040. Relying on the usual income and consumption taxes that fall mainly on working-age populations to meet these costs appears much more challenging than it may have in the past, given younger cohorts are experiencing little or no living standards progress on their predecessors at the same age. In searching for ways to sp