The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
03 Taxation and Funding for Public Services
- Receipts from the present Council Tax contribute to all local authorities’ spending – they are not a charge for a specific service.
- Council Tax contributes only 12% of Local Government funding – most council expenditure is funded by national taxation.
- Amongst all the taxes we pay, Council Tax is especially visible – every household gets a bill.
Purpose and History of Local Taxation
3.1 The revenues from the present Council Tax contribute towards the funding of public services delivered by local authorities. The majority of Local Government expenditure is used to provide education, social care and support for housing costs. Councils are also responsible for a wide range of other services including environmental and waste services, roads and transport, local planning and economic development, and local culture and recreational services. None of this could happen without the funding from taxation.
3.2 Whilst local taxation can be traced back to the 1579 Poor Law, the current framework has more recent roots. Rates on domestic property were charged throughout the 20th century until 1989, when they were replaced by the Community Charge or “Poll Tax”. This was based on the principle of a service charge, with each adult equally liable to pay. Although it included a means tested rebate system, at least 20% of the standard charge was paid by everyone. The Community Charge was widely perceived as unfair and vigorously opposed by many in Scotland and across the UK, with many participating in a campaign of non-payment. This led to the rapid development of the Council Tax, the design and structure of which has remained largely unchanged since its introduction in 1993.
3.3 For the last eight years, local authorities and the Scottish Government have agreed to keep Council Tax rates at 2007-08 levels. The Scottish Government has provided local authorities with an additional £70 million of funding from the Scottish block grant in each year of this freeze. While views differed, we heard a growing perception that this policy cannot go on indefinitely and that it acts as a barrier to different tax and spending choices being offered in local elections.
Council Tax and Local Government Funding
3.4 Contrary to the views frequently expressed to us at our public participation events, Council Tax makes a relatively small contribution to overall local authority spending. Instead, it is the General Revenue Grant from the Scottish Government that makes up the largest component of Local Government funding as set out in Figure 3.1.
3.5 The introduction of the Scottish Rate of Income Tax (SRIT) in April 2016 will not in itself change this. Nor will replacing the present Council Tax with a new system of local taxation that raises broadly the same amount of money. The principal source of funding for the delivery of local services would continue to be the grant from the Scottish Government, funded in part by receipts from the SRIT and by its own block grant from the UK Government. Thus, the General Revenue Grant will continue to be drawn from receipts of all national taxes applied across Scotland and the UK.
3.6 The size of contribution that locally set taxes make towards Local Government funding – often referred to as the “balance of funding” – has varied over the years. In the late 1980s, for example, prior to the introduction of the Community Charge, the balance of funding was almost 50:50 between central government and local funding, derived principally from domestic and business rates. The research conducted for us by Policy Scotland at the University of Glasgow indicates that local taxes presently contribute well over a third of local expenditure in many countries in the Organisation for Economic Co‑operation and Development (OECD).
3.7 Across Scotland today, total Local Government revenue is around £16.5 billion, of which Council Tax contributes around £2 billion or just 12%. We found this is not widely understood, with many assuming that Council Tax contributes far more towards the funding of local services. Some challenged whether it was appropriate for locally-elected representatives to have so little control over the funding of the services they have to deliver.
3.8 While the £2 billion raised by Council Tax is less than the amounts raised from other sources, it is still a large sum that plays a critical role and which Local Government could not conceivably forego. Council Tax is the source of tax revenue with the most local control, with every council in principle able to vary the rate up or down based on its own choices. However, a consequence of Council Tax being such a low proportion of all Local Government revenues is that for a particular council to achieve a modest percentage rise in overall spending, a disproportionately large increase in Council Tax would be required – this is known as the “gearing effect”.
3.9 Although the wider system of Local Government finance is beyond our remit, these issues, and the level of public understanding associated with them, are very relevant to how local taxation can be reformed in a way that will be broadly supported by the public.
FIGURE 3.1: LOCAL GOVERNMENT REVENUE INCOME BY SOURCE
How Taxes are Paid
3.10 Usually, individuals do not have to make a special effort to pay taxes. For example, VAT is included in the purchase price of the item or service being taxed. For most people, income tax is withheld from salaries by employers under the PAYE system.
3.11 Council Tax is different – it is not part of a price or deducted from a salary. It is a tax that people have to make the physical effort to pay. It is therefore visible – every household gets a Council Tax bill, even if in receipt of Council Tax reduction.
Taxes and User Charging
3.12 Taxes – both national and local – are general contributions rather than charges for the use of a particular service. For example, taxes on tobacco are not specifically for the funding of healthcare. Instead, the receipts are pooled with all other tax receipts and contribute to the funding of all public expenditure. Spending on services delivered by Local Government in Scotland is shown in Figure 3.2.
3.13 We heard some opinions suggesting that a local tax should relate to the public services an individual or household consumes – an example sometimes cited being large households that generate more rubbish should be charged more. This highlights the distinction between a tax – whose receipts are pooled and used to fund services generally – and a charge for a specific service.
3.14 This is important – there are some public services people can choose to use or not, but in many cases, people may not have that choice. We heard compelling evidence that described how some public services can be the difference between thriving versus just surviving, between enjoying fundamental human rights and human dignities or suffering without them.
3.15 We have also heard evidence that there are particular groups who, for differing reasons, are more likely to make use of public services. When spending on public services is reduced, leading to a removal or reduction in the provision of services, there is a disproportionately greater impact on certain groups of people. A system of charging for public services would mean that those groups – often the most vulnerable in society in the need of the most support – would bear the cost of the services they need. Such a scenario would be cause for concern because their need to use particular services is not related to their ability to pay for them.
FIGURE 3.2 LOCAL GOVERNMENT EXPENDITURE IN SCOTLAND 2013-14
1 This includes Housing Benefit payments but does not include expenditure on direct provision of housing.
This is recorded separately through the Housing Revenue Account (HRA).
There is a small amount of expenditure (estimated at less than 1%) on provision of “trading services”. This relates to a small number of services that councils charge for on either a cost-neutral or for-profit basis. This expenditure is more than offset by income from these services, returning a profit for Local Government overall.
3.16 For these reasons, our analysis focuses on alternative tax – rather than charging – systems. But it means we also recognise the importance of a tax being seen as fair and legitimate in allowing sufficient revenue to be raised in ways that minimise the need for local authorities to charge for services that individuals cannot choose to do without. Receipts from fees and charges are and will remain a significant source of funding for Local Government, but we heard evidence of both positive and negative impacts of their uses in different contexts.
3.17 We therefore strongly believe that any replacement to the present Council Tax should not be a system of charges for specific services, but should continue to be a tax that contributes towards the general funding of local services.