Last week we learned that the council tax freeze is to be extended for another year, a tacit admission by government that the tax system does not work in its current form.

The freeze was initially meant to last during 2011 and 2012, with government providing a grant worth a 2.5% rise in council tax to any local council that chose not to implement a raise. Now it has been extended for a third year and there is no reason to imagine it will not be extended further.

The financial problem councils face is that inflation has run higher than 2.5% for most of 2010-12. Worse still, the grants are not cumulative, so the council tax base is eroded. In terms of democracy, it has led to a heavily centralised system of control complemented by the capping of council tax at around 3.5%.

The system is a largely watered down version of the poll tax, combining the property element of the old rates system with the principle of more individual charging and payment. However, council tax valuations haven't been updated in England since 1993 (they were revised in Wales in 2002) and governments are reluctant to undertake revaluation for fear of a substantial rise in tax which would have a significant impact at the polls. Ironically, this discrepancy was also a problem for the previous domestic rates system.

The system also enables the bizarre situation where Westminster council charges the most valuable properties (Band H) £1,375 in council tax, but Newark charges £1,311 for a terraced house (Band B). Reforms to council tax benefit, which mean that authorities will be able to set the criteria for giving unemployed people money to cover their bill, are likely to exacerbate this problem.

So is there an alternative? Both the Liberal Democrats and the Scottish Nationalist Party (SNP) support a local income tax, through which a percentage of centrally raised income taxes (usually between 3% and 4.5%) would be given directly to local councils. The 2007-2011 SNP government attempted to introduce such a scheme in Scotland, but parties were unable to come to an agreement on how to implement it. Moreover, under the devolution settlement, the level of tax would have been set by the Scottish government.

Local income taxes are already used in US cities such as New York and Philadelphia. In New York, around a 3% tax on the income of residents is paid directly to the city. This solves the issue of tax levels, and therefore revenues, being set centrally. The problem with this model is that as cities, such as Detroit, fall into recession or decline tax revenues plummet and local government faces a financial crisis.

A land value tax is used in the land-starved area of Hong Kong, as well as parts of Australia and the US. This levies tax against the value of land owned and in the UK is supported by the Green party, the Joseph Rowntree Foundation, the Institute of Fiscal Studies and the Organisation for Economic Co-operation and Development. The Scottish Green Party has published detailed plans to tax land according to use and value, with empty urban vacant land hit for 10% of its value. This means certain types of land use, for example forestry, could be encouraged and land used more efficiently.

A report by left-leaning thinktank Compass argued that land value taxes are well-suited to funding infrastructure as it raises property value. The study argues that the Jubilee line underground extension to Stratford in east London raised property values in the area by an estimated £10bn. Such a scheme could have been funded using land value tax instead of the discredited private finance initiative (PFI).

There are other possibilities out there; the challenge is to find a system, or mix of systems that can properly reflect the democratic mandates given in local elections.

Samir Jeraj is a writer and former Green party councillor

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