Article for Morning Star on local authority taxation

 

morning star logo

One of the most popular policies of the SNP in the run-up to the Scottish Elections last year was their promise to scrap the Council Tax and replace it with a Local Income Tax. The SNP argued that a Local Income Tax would be fairer and based on ability to pay. At first sight this seem like a policy that should be supported by everyone on the left – after all income tax is a central part of a redistributive tax system. However, the SNP finally unveiled detailed plans for the new tax last month and some elements of their proposals have been shown to be far less progressive than might be expected.

So what are the SNP proposing? From April 2011 Council tax would be replaced by a 3% income tax on earned income over the personal allowance (£5,435 at today’s rates). Unearned income, meaning savings and investment income, would not be covered. Those with enough wealth to avoid earning a living would pay nothing. This is because it is easy to identify where in the UK income is earned. For taxes on savings income, for example, banks only keep records of the address the account is registered to, which could be anywhere in the UK. It is therefore felt to be almost impossible to tell what part of savings income was earned in Scotland.

The tax would pay for local services, but the Scottish government, not local councils, would set the rate. The SNP are currently ruling out as impractical the suggestion from the Liberal Democrats that councils should be allowed to vary the rate slightly. The SNP claim this would be too much of a burden for businesses. If all 32 local authorities set different rates, a business in Scotland could end up with staff on up to 32 different payroll tax rates – and many would have staff on four or five different rates.

There is also the complicated issue of the rate at which the tax would be set. In 2006 researchers at the University of Stirling attempted to calculate what rate a Local Income Tax would have to be set at in order to raise the same amount as local authorities receive in Council Tax, including from households in receipt of Council Tax Benefit. They estimated that the tax rate would be around 6.5% if applied to earned income subject to income tax at basic and higher rates.

Worried about the impact of an income tax increase of this size, the SNP have promised that the national rate will be set a maximum of 3%, leaving a massive gap between receipts from Council Tax and from Local Income Tax. However, the SNP have assured council leaders that any gap in council budgets would be filled by an increased grant from Holyrood to local authorities. This cash would still have to come from somewhere and the net effect of the SNP’s proposals would be to cut total tax take from households in Scotland by the equivalent of around 3.5% – a tax cut far greater than anything the Tories have promised in recent years.

It is also worth considering where the tax burden would fall. Council Tax is based on the value of property, with only a small discount for single occupancy premises. It therefore hits hardest one or two- person households on low incomes living in valuable property – significant numbers of pensioners fall into this category. Local Income Tax takes no account of household size or property value. So instead of pensioners, it would be young workers in multiple occupancy houses who would feel the heaviest burden of the new tax.

So for all these reason, the left should be aware that the SNP’s local tax proposals are not necessarily progressive. While some, such as low income pensioners, would benefit hugely other low-income groups would suffer. Many of the wealthiest would end up paying no local taxation, despite the value of the property they own. Local councils would also lose the ability to vary local taxes, giving central government complete control over their finances.

Of course, none of this should be particularly surprising – while the SNP have pushed a range of socially progressive policies, from abolishing tuition fees to cutting prescription charges, their underlying philosophy is too support a low-tax economy. For example, they have suggested that if Scotland were to control corporate taxation, they would follow a similar path to Ireland, cutting corporation tax by at least 10% (from 30% at the moment).

However, none of this should diminish the left’s criticism of the Council Tax. Ever since Michael Heseltine introduced it as a hurried replacement for the Poll Tax its flaws have been obvious. Despite a house in the top band being worth at least ten times as much as a house in the bottom band, its owners only pay three times as much. The top band is also capped at £250,000 (at 1991 prices), so the most expensive properties do not attract a proportionately higher Council Tax. Indeed, the fact that the system is still based on 1991 house prices, because there is no stomach for a revaluation, indicates the lack of any kind of detailed thought when the system was invented.

So we need a fairer way of collecting local tax than Council Tax. The SSP set the ball rolling for a nationally-set additional income tax to pay for local services with their proposal for a Scottish Service Tax, which was taken up by the SNP as the Local Income Tax. The Liberal Democrats propose in Holyrood and Westminster a locally set additional income tax. What is less clear is what Labour will do. At Holyrood, Wendy Alexander, the labour opposition leader, seems to have decided to play the socialist card – a word she hardly uttered when a minister. They have been playing up the ‘black hole’ between the revenue collected from Council Tax and from a Local Income Tax and warning that this will lead to cuts in services. However, apart from vague talk of tinkering with the banding of the Council Tax it isn’t clear what they actually want.

By contrast, the Greens are continuing to push proposals for a system of property tax based on the site value of land. Land is one of foundations of the ruling class in Scotland, yet, with the exception of Council Tax on property, is almost untaxed. A property tax on all land, with no artificial cap as there is with the Council Tax, would start to make the landowners pay properly for the local services they use. A system that taxed both income and property would make sure that the wealthy couldn’t evade tax by tying their wealth up in property.

However, to win support for a properly progressive property tax, support will have to be found beyond the environmental movement, which has traditionally supported resource taxes. So despite the apparent attractions of a Local Income Tax, it is clear that all Star readers should consider the benefits of making the landlords, rather than workers, pay.  Given the fact that replacing council tax is likely to become a live issue at Westminster, as well as Holyrood, we must make sure that all proposals for new taxes have proper scrutiny from the left.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: