The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
09 Understanding Local Taxes
- There is currently no consensus on the single best option for reform, or indeed about whether one option can deliver adequate reform on its own.
- Understanding is strongest in relation to the present Council Tax, and property based alternatives to it. The principles of a local income tax are often readily understood, although our public engagement suggests that people have questions about its operation that could impact on its potential acceptability in practice.
- A tax on land is a new and potentially complex concept for many people to understand, although we found that support was often strong amongst those who have built up their knowledge of it.
- Effective reform must be coupled with clear information about the case for change, what this means for individuals and households and how local government receives funding and spends money.
- Any new system should be designed to minimise the need for complex relief schemes and ensure that any reliefs are straightforward to understand and administer, and that take-up is increased.
9.1 A core part of our remit required us to “engage with communities across Scotland to assess public perceptions of emerging findings”. We invested substantial effort in this process, and the steps that we undertook were perhaps the most comprehensive of their kind to date in this country.
What We Found
9.2 It was clear to us from our engagement with the public that many perceptions of alternative tax systems are heavily influenced by their ease of understanding, and the degree to which their operation in practice is clear.
9.3 These perceptions are all the more important because our research suggests that most people are unclear about the role of local taxation and how Local Government receives funding and spends money at the moment. We of course acknowledge that systems of taxation and public finance are complex, and that most of the people that we engaged with had no reason to have detailed understanding of the breadth of the operation of the current system, let alone alternatives to it. However, we consider there to be significant scope to improve clarity in the future, both in terms of the principles of any reformed system, and the broader links between local taxation and local democracy.
9.4 Indeed, our engagement showed very clearly that, regardless of the alternative that is chosen, people in Scotland have a strong desire to understand the operation of any alternative system and its fairness. In particular, people told us that they wanted to be clear about not just the implications of reform for their own circumstances, but on how equitable and fair any reforms are for others too.
9.5 Our research also suggests that perceptions of fairness are strongly linked to people’s sense of the overall purpose of the system of local taxation. Put most simply, we consistently heard that people support a more progressive system. While not universal, we also heard that a system of local taxation is seen as a crucial component of a well-functioning democracy, and that the line of sight between how local taxes are set and spent should be made as strong as possible.
9.6 To us it follows, therefore, that the core of any successful transition to a new model of local taxation is an effective and comprehensive programme of information to ensure that all those affected can understand the system and its impact on them. This must extend beyond just the mechanics of the tax itself, in order to explain how decisions relating to local taxation are made, and how the money generated is spent to deliver against local priorities.
9.7 Through our series of listening events, we were also able to gauge the extent to which the members of the public that we engaged with had a clear level of understanding about the options for reform.
9.8 We found that no one single option for reform emerged as more popular than the others. However, we did find different levels of understanding in relation to different models, and that perceptions of fairness were often bound up in the degree of clarity regarding how different options for reform would operate in practice. This suggests to us that detailed design issues need to be thought through as early as possible in the transition to any new system.
Public Understanding of Taxes on Property and Land
9.9 With the exception of the short-lived and controversial Poll Tax, property taxes (previously the Domestic Rates) have long been the main source of household taxation in modern Scotland. Perhaps unsurprisingly, we found that having operated for almost 25 years, the present Council Tax system is therefore generally well understood compared with other options that were considered. Responses to our online questionnaire also suggested that the majority of respondents found the payment process for the present Council Tax to be clear. However, we also heard about aspects of the present Council Tax that were not easy to understand, and in particular about the need to simplify what is perceived to be a complex Council Tax Reduction scheme.
9.10 More surprisingly, many of the regressive components of the current Council Tax were often not as well understood, nor was the fact that the tax base had not been revalued for approaching 25 years. However, these deficiencies were readily understood once the current system was explained. We also found that members of the public generally believed that the Council Tax accounts for far more than the 12% of total Local Government revenue that it currently does.
9.11 Land value taxes were the least well understood of the property taxes that we explored. Many people had little or no previous knowledge of this option, despite its relative prevalence as part of the local tax mix in Europe and beyond. In many instances, we found that this lack of clarity translated into concerns about how the tax would work in practice. Common questions related to the application of land taxes in tenement properties or properties with mixed residential and commercial components, their potential impact on the housing market, and their application and impact in rural areas in relation to agricultural land and crofting. We also commonly found there to be unresolved debate about whether land taxes should apply only to land for housing use, or more broadly to non-domestic properties too.
9.12 Despite this, we also encountered many individuals who were very conversant with the concept of land value taxation and were active advocates for it. We conclude, therefore, that much more work is needed to translate the economic theory underpinning land value taxes into easily understood formats before public understanding can match that of property and income based alternatives.
Public Understanding of Taxes on Income
9.13 Our research suggested that the principles of a local income tax system are relatively easy to understand, and, in principle, capable of being perceived as being fair. In particular, at the events that we held, local income taxes were often seen as a potential option for reform because they were perceived to have positive scope to link to an individual’s ability to pay.
9.14 However, outstanding questions about the operation of any local income tax system in practice also caused many to pause. In particular, the fairness of a system that could potentially exclude unearned income was questioned, particularly in cases where it was felt that the consequence of a local income tax would be to remove people from the system who would otherwise be well placed to contribute towards local services.
9.15 Concerns were also raised about the administration of a locally determined income tax. It was generally felt that a system of local administration would be costly and complex to engage with, and that national collection through HMRC, or in time a Scottish body, would be likely to be required. Moreover, concerns were raised that in such a system, it could be unclear how councils would control tax rates locally, thereby weakening rather than strengthening local decision making over tax and spend choices as a result. Our evidence therefore suggests while this was initially considered to be a straightforward option for reform by many, a number of complexities arising from the design and operation of any local income tax system would need to be resolved if it was to be clearly understood and enjoy public support.
Water and Sewerage Charges
9.16 We also heard a considerable volume of evidence highlighting issues of clarity and understanding in relation to water and sewerage charges. Currently, these bills are issued on behalf of Scottish Water by local authorities at the same time as Council Tax bills.
9.17 We heard that while administratively efficient, the impact of this current approach is not only confusing, but potentially harmful too. While we acknowledge that water and sewerage is a charge rather than a tax, and therefore outwith our remit, we do consider it confusing that vulnerable households in receipt of 100% Council Tax Benefit only receive a reduction of up to 25% in the water and sewerage charges that are billed alongside them. We were also particularly concerned by evidence from Citizens Advice Scotland and others which reported that many households do not understand that they remain liable for payment, and that up to one in five households had accrued arrears in water and sewerage charges as a result.
9.18 While we therefore acknowledge the administrative efficiency of the dual billing process, we conclude that as an immediate step the separate nature of these charges, even if they remain on one bill, needs to be made clearer to households in order to help prevent them from falling into debt. While not part of the system of local taxation itself, we would also welcome a further consideration of the system of reductions in relation to water and sewerage charges.
9.19 For all of these reasons, we place particular emphasis on the need to deliver clarity in any system of local taxation because we recognise that successful integration and acceptance of any reform by a future government will require clear understanding amongst those that are liable to pay. The basis for calculating somebody’s tax must be transparent and demonstrate that current shortcomings are addressed. Not only that, but our public engagement highlighted that the relationship between local taxation and the wider system of Local Government finance is not widely understood. We heard persuasive arguments suggesting that clarifying and strengthening the system of local accountability around local taxation, and in particular the extent to which people are able to exercise local choice and control over tax and spend decisions that affect them, has the potential to deliver democratic renewal within communities.
9.20 Together, these issues seem to us to be at the core of the job of building the case for change, and securing support for a reformed approach in future.