The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
10 Local Tax and Local Democracy
- An effective local tax system is fundamental to delivering financial accountability for Local Government and supporting local democratic choice.
- A new system should offer greater flexibility to Local Government.
- Local authorities with lower tax bases should not lose out as a result of the shift in the tax system.
- Broadening the local tax base could also include environmental, resource, sales or tourist taxes, as appropriate to local circumstances and local authority decisions.
- Local taxation only accounts for 12% of total Local Government revenue; the gearing effect associated with this will not be addressed simply by replacing the present Council Tax.
10.1 The ability of any sphere of government to determine the taxes it raises and how they are spent is a fundamental part of the democratic process. Accountability for these decisions is strongest when communities are offered choices about not just their priorities for public service provision, but also about the levels of taxation required to deliver these. An effective system of local taxation can therefore fundamentally strengthen democracy in Scotland and ensure that Local Government is financially accountable to its electorate.
10.2 As a Commission, our remit required us to consider the impact of alternative local tax systems “on supporting local democracy, including on the financial accountability and autonomy of Local Government”. We therefore set out to ensure that our evidence gathering and analysis spanned not simply the technical processes of local taxation, but crucially, the opportunities to ensure that any reform would be capable of strengthening communities and supporting local democratic decision making.
Local Government’s Present Financial Autonomy
10.3 In recent years, the Council Tax freeze has removed variation in local tax rate setting between local authorities. Whilst this policy featured in a number of parties’ manifestos in the 2011 Scottish Parliamentary elections, and has been considered to have been popular with the electorate, it should not be assumed that it will go on indefinitely. Democratically elected councils should be able to make local tax and spending choices by being able to vary the rate of local taxation that applies in their local authority area.
10.4 The present degree of local financial autonomy is also currently distorted by a gearing effect. As we have already highlighted, our analysis shows that just 12% of gross revenue income is currently generated from the Council Tax. Even a large rise in Council Tax would therefore only increase a council’s budget by a small amount. When allied to the visibility of Council Tax – when compared to national taxes – it becomes politically challenging for a council to vary the Council Tax in order to meet a particular local priority. Although the remit of the Commission is not to consider the wider system of Local Government financing, this is an important influence on how the public react to, and think about, local taxation.
10.5 This position was reflected in the evidence we received that argued that the financial accountability of Local Government would be enhanced if it was responsible for raising a greater proportion of its own revenues, and that doing so could help to reinvigorate local democratic participation as a result. Again, this is beyond our remit, but we recognise that simply replacing the Council Tax with a new model of local taxation will not fundamentally alter the current balance of Local Government funding. However, one key attribute for a replacement to the present Council Tax is that it has the potential to raise revenues of similar scale, and that it also provides a suitable basis should a council wish to vary local taxes according to local priorities. Our quantitative analysis confirms that taxes on property, land and income have the capacity to do this, whilst other optional taxes, such as a tourist bed tax, do not, but could nonetheless have a future role in supplementing core budgets where there is local mandate to do so.
10.6 At the same time, our engagement activity highlighted some concerns about the variation in tax-raising capacity in different local authority areas across the country – we also raise this issue in Chapter 6. This points to a key element of the evidence we received in this area; the need for an effective system of equalisation as part of any reform in order to reflect different local tax bases, the different costs of providing services in different parts of the country, and different patterns of need and demand. Indeed, we were not made aware of any country internationally where Local Governments do not require national grant support for these reasons.
Local Tax and Democratic Choice
10.7 A further dimension to the connection between local taxation and local democratic choice is to consider who pays the tax and who votes. A local property tax levied on occupiers who, by virtue of living in that locality have a material interest in local service provision, will clearly contribute to local accountability. However, this relationship can become complex in that not everybody in a household will contribute to the bill; as with the present Council Tax, there can be many consumers of services but only one taxpayer.
10.8 A different set of circumstances exists for a local income tax. The visibility of a locally determined income tax collected alongside national taxes would depend on the design and administration of the system. The introduction of the SRIT in April 2016 may provide some insights into how this might look in practice. A local income tax collected by HMRC, effectively “piggybacking” on the SRIT, would mean that the income tax base would be defined by the UK Government and that some elements such as the personal allowance would have to be accepted rather than subject to local decision making. This kind of constrained local autonomy is not unfamiliar within the Council Tax; while a council can set a Band D rate, each of the other band charges is a fixed proportion of that Band D rate, which along with the bands into which properties are divided, are set nationally in legislation. However, complexities associated with setting and collecting local income taxes were perceived in some of the evidence that we received to suggest that a local income tax could in effect lead to local tax rates becoming determined nationally rather than locally.
10.9 A local income tax would, following the introduction of the SRIT, result in three jurisdictions sharing the same tax base. This is not an uncommon practice in federal countries, but would be a new development in Scotland. Indeed, the review of international literature by Policy Scotland at the University of Glasgow highlights that the local tax base in Scotland is unusually narrow in international terms. Evidence from federal countries indicates that sharing a tax base requires a degree of co-ordination in tax policy to avoid circumstances such as one jurisdiction applying such a high rate of income tax that there was no “tax room” remaining for the other jurisdictions to apply their rate of tax.
10.10 We also noted in Chapter 7 that this system of tax collection means that income from investments and savings could not be easily subject to local taxation and that those who do not pay income tax for other reasons would also not pay. In other words, whilst a property tax levied on households will not connect every member of the electorate to the local tax, a local income tax would not be paid by every voter either.
10.11 Overall, the balance of evidence we heard suggests that a local income tax, if administered as part of the wider income tax system, would potentially not support local accountability as well as a local property tax could. But in drawing this conclusion, we should also highlight that creating a revised property tax would also require the Scottish Parliament to determine the extent of local variation that should apply. For example, should councils only be permitted to vary the tax rate, or could they also choose to apply different exemptions, discounts and reliefs? Clearly, providing more local scope for differences would increase the extent to which the tax system is locally determined. This would need to be weighed against the suitability of local variations, but the evidence we received indicated an appetite for Local Government to have broadly greater flexibility over its local tax system.
10.12 Finally, the evidence that we received described a wide range of potential scenarios and options in relation to local taxes. However, one common theme related to the scope to empower individual local authorities, subject to them securing a local democratic mandate, to have the discretion to apply an additional local tax within the local authority area, or on people who are visitors to it. Broadening the local tax base in this way could include environmental, resource, sales or tourist taxes, as appropriate to local circumstances and local authority decisions. The evidence we received suggested such additional local taxes would not be designed to generate large sums, but could offer an opportunity to generate additional revenues to invest in local priorities. We see no reason in principle why such options should not be identified, developed, and, if found to be workable, made available.
Local Taxation and Democratic Renewal
10.13 Although views differed on the best route for reform, our evidence confirms that a tax that is billed and collected by a local authority can help to build a strong link between how money is raised locally and spent locally. Arguably, the visibility of local taxes means that a well-designed system has good scope to achieve this compared to national taxes.
10.14 Indeed, regardless of specific preferences for reform, we consistently identified demand for debate on the issue of local taxation to involve communities at local level. Rather than our work becoming the end of the process of tax reform in this country, we hope that it can therefore start a new way of thinking about the relationship between local decisions about public services and how these are paid for.
10.15 Broadening the tax base, deepening local democracy and improving local fiscal autonomy are, we hope, therefore inevitable outcomes of the evidence we heard. This debate need not be confined to periodic reviews; the process of reform and dialogue about improvement and change could become much more integral to Scotland’s ongoing process of democratic renewal and participation. We hope that the publication of our report provides an important first step, and that the reforms of local taxation that we expect to see put to the electorate in party manifestos for the Scottish Parliamentary election in May 2016 continue with that process in earnest.