Replacing the Council Tax in Scotland

by Ken Gibb

I think I can (reasonably) safely predict that this will not be the last post by me on this subject. Today the Scottish Government announced its intention to establish an independent commission on a replacement for the council tax as a means of raising local taxation from the domestic sector. I think this is long overdue though I completely understand the political economy of the barriers to rational, progressive reform. As with the Smith Commission’s proposals, the analysis and conclusions and their subsequent implementation should be done right, not quickly. Another recurring refrain is that the ultimate proposals will require durable consensus if they are to stick – and the stakeholders at the table must include local government.

In the Programme for Government released today, the 2011 manifesto commitment to replace the council tax with something better in terms of ability to pay was highlighted. The objective is to set up an inclusive independent commission that will lead to a proposition for an alternative to be put to the people at the Scottish election in 2016. The stress is on ‘collaborative tax policy development’. The intention is that any new such tax should meet the ‘established principles’ of: efficiency, convenience, certainty and progressive ability to pay. The Government hopes that this will involve the full role of local government and seek political consensus across the parties. Although I could not see it in my skim through the large document, one of the briefings I saw suggested that the commission would also investigate or review the council tax freeze.

Under the earlier minority SNP Government there was a short-lived proposal to use the then income tax varying powers (up to 3p in the pound) to pay for local services. This sounded vaguely progressive because it was tied to incomes and seemed a bit of a wizard wheeze – for about 5 minutes. It did not add up and the government decided, wisely, not to proceed with this idea. The desire to move away from a property based tax and move towards a progressive income tax has however remained.

At the same time Scottish governments have become increasingly centralising – freezing the council tax for eight years through a series of carrots and sticks that cumulatively over time reduce local government’s autonomy and accountability (as is clearly expressed in the recent strengthening local democracy report). Remember that non domestic rates are set nationally and that all local government is heavily reliant on grant in aid from Holyrood, in a context of deep austerity cuts now falling on town hall.

There is a lot wrong with the council tax. The tax has a banded structure which compresses differentials so that high value properties that can be hundreds of times more valuable than the median only pay a fraction more. People in low value properties pay a higher proportion of their income on council tax. Outside of Scotland we now have a patchwork of local council tax reduction systems with different means tests driving a coach and horses through the principles of welfare reform and simplified tapers. And, of course, the council tax is fixed at 1991 values. I don’t think the possible introduction of a mansion tax is more than a small and rather poorly aimed step forward.

Actually, the problem begins higher up with the broader system of local government finance. We still operate the poll tax system: it is just we have this hybrid council tax instead but the levers constraining local government are still broadly in place. One should really go up a further stage and recognise that, as the Layfield Commission did in the 1970s, that we need to work out the simultaneous spatial boundaries of local government, the functional split between different tiers in terms of service delivery and the financing system. This is what I have called before a Rubik’s cube problem of multiple dimensions. Tinkering with any one element is highly unlikely to generate a sustainable solution for local government.

What is to be done? The aim must be to give more financial responsibility back to local government and make them not Holyrood responsible in reality for tax setting. It should be a long term goal to have councils responsible for setting at least half of their annual budgets from locally levied taxes. This will take time because it will require more than doubling the current share but there are creative things that can be done let alone reform council tax and non domestic rates. This is surely in line with greater devolution and does not in any way abandon the principle that the Scottish Government should seek to design incentive driven grant equalisation mechanisms.

And the council tax? The starting place must be to assess and evaluate different forms of local tax (including the option of more than one smaller yield taxes e.g. a property tax for local amenity based services and an income tax or nationally-levied land value tax reflecting national services like education and social work delivered locally). I don’t think the Scottish Government has a monopoly on good tax criteria. A succession of different commissions and inquiries proposed a range of criteria with which to judge local taxes but these tend to boil down to: technical feasibility (set-up costs, collection costs, buoyancy, avoid instability); fairness (progressivity but also something to do with paying for benefits-received); accountability (visibility and transparency, connection to voting, local responsibility): and, a wider set of issues to do with economic effects, reducing undesirable spillovers and other unintended consequences).

On such a basis I think there remains a strong case for a property tax to play at least a major role, provided it is well-designed, regularly revalued and this is in statute, and there are proper safeguards for those on low incomes (probably through some form of benefit). It is hard to avoid, is related directly to many local services, and it offers the opportunity to widen the tax base and correct for the critical absences in UK taxation (as identified by the Mirrlees Tax Review). Ideally, I have come fully round to the case in the long term for a land value tax but could also see this play an important role as a national tax alongside a local property tax on more conventional lines. Both could be important tools to help moderate the volatility of our housing market and tax wasteful economic rents.

There are many barriers however that may well frustrate this end but that should not stop us having the debate, making the case and seeking to support more localism, more accountability and better taxes. Then we can start to think about boundaries, sharing services and all that. However, delivering a report by the Autumn of 2015 will be a tall order even with the depth of knowledge, expertise and evidence out there on local taxes.