The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
11 Certainty for Taxpayers and Local Government
- Local Government needs revenues to be stable or have a means of managing variation in receipts.
- Property tax receipts tend to be more stable, but also less buoyant, than receipts from taxes on income.
- The amounts of tax people pay need to be predictable.
- The amounts of tax people pay need to reflect their continuing ability to pay.
11.1 Our remit requires us to look at “the impacts…on individuals and households” and the wider “macro-economic… and fiscal impacts” of alternative local tax systems. Part of our work has therefore been to address the degree of certainty that alternative tax systems might provide for taxpayers regarding their bills and the stability of receipts for Local Government.
Stability of Revenues
11.2 Most public services are delivered by employees, so a local authority needs stable revenue streams in order to pay its staff. In Chapter 3, we set out how the greater part of the funding for Local Government comes from the grant from central government, with Council Tax receipts only funding around 12% of council spending. Whilst highlighted as unsatisfactory in the evidence we received, in recent years this arrangement has provided Local Government with a degree of revenue stability to fund public services.
11.3 Volatility in tax revenues can occur as the result of economic shocks, but there is also a degree of volatility that arises in-year, across the economic cycle and during gaps between tax payments being due and the receipt of payment taking place. The lower predictability of income tax receipts, especially the self-assessed contribution that is collected only after the taxable financial year has ended, would also require councils to take appropriate measures to manage such fluctuations in their receipts. Local authorities therefore need the means to manage any volatility in revenues by saving and borrowing.
11.4 The introduction of the SRIT in April 2016 will mean that the funding for public expenditure in Scotland will, in the future, have a direct dependency on Scottish income tax and be exposed to any fluctuations, both upwards and downwards, in receipts. The creation of a local income tax would concentrate that dependency on the Scottish income tax base in comparison to tax receipts deriving from both income and residential property. This should be understood if it was the preferred choice of a future Scottish Government.
11.5 Tax receipts from property tend to be more stable than receipts from income taxes, which fluctuate more with the economic cycle. Overall, the available revenue to fund public services will be more stable if it derives from a range of taxes. This will have been a consideration when the IMF, European Central Bank and European Commission required Greece and Ireland to implement a tax on domestic property as a condition of their 2010 refinancing programmes.
11.6 The different tax alternatives we have considered are associated with differing administration and collection regimes, but we consider that taxes based on property and income can be managed in a way to ensure that a high proportion of liabilities are collected. Overall, a lower proportion of local income tax liabilities could be expected to be collected because of the recognised lower compliance rates associated with the self-assessment regime, although as we described in Chapter 7, the tax gap reported by HMRC for income tax collected under PAYE is in fact smaller than the equivalent statistic for Council Tax.
11.7 The relative stability of tax receipts from property compared to those from income is highlighted in Figure 11.1. Part of the present Council Tax’s apparent stability is in part due to properties not having been revalued. Had a revaluation occurred in 2008 or 2009, then Council Tax receipts might have fallen unless councils had increased the rates. Although a land value tax has never been applied in Scotland, if it was established and administered effectively in a way that was understood and considered to be “fair” by the public, there is every reason to assume that receipts would follow a similar pattern of stability and variation as other property taxes.
FIGURE 11.1: ANNUAL PERCENTAGE CHANGE IN SCOTTISH TAX REVENUES – INCOME TAX AND COUNCIL TAX
11.8 In any of the alternative tax systems (as we noted in Chapter 10), substantial change would require the reconsideration of the formulas for the grants made by the Scottish Government to local authorities. These are intended in part to help local authorities with comparably lower tax bases provide broadly equivalent levels of service to elsewhere. A revised system of taxation means these formulas would need to be adapted to provide the same degree of equalisation, while still allowing the intended scope for local variations based on democratic choice. Ideally, that local democracy and choice should also provide an incentive for each council to grow the local economy. Increased local prosperity would see wages rise and property values increase and thus, receipts from property and local income taxes increase. This is sometimes referred to as “buoyancy”. The key consideration is how those authorities that are less successful or are simply starting with greater disadvantages should be treated by the new central grant mechanisms.
Creating Certainty for Taxpayers
11.9 Our public engagement confirmed that people need to understand how much tax they are going to be expected to pay. They need to be able to budget for each week or for the next year – unexpected increases can cause difficulty and in some cases, lead to people being unable to pay. This is a further dimension to the need for a tax system to be “fair” and based on ability to pay, so that if somebody, for example, loses their job, they need to know that their tax bill will reflect their changed circumstance. A local income tax would, by definition, adjust to reflect a reduction in pay (although would not if somebody’s circumstances changed but their income remained the same). A system of means tested reliefs to a property tax, if adequately targeted, could potentially accommodate either circumstance.
11.10 Our analysis sets out some illustrative examples of the different tax models to help politicians and others involved in the discussion understand the impact of different tax options and where the trade-offs occur. The analysis shows the impact of the tax systems had they been implemented in 2013-14 and does not represent a collective view of how tax systems should be applied or developed. The amount of tax that individuals pay under a new local tax system will be determined by a range of factors including the design of the tax, the tax rates set locally and potentially the wider benefits system.
11.11 Any replacement for the present Council Tax would result in the amounts households pay changing. A fairer, more progressive property tax, for example, would see those in lower value homes pay less but the tax due on higher value homes would increase. The way in which local tax is paid could also change. For example, a couple who presently make one household payment on their home for Council Tax would, under a local income tax, see local tax deducted from their individual incomes.
11.12 Such changes would ultimately be the purpose of making a local tax fairer, but the change should not be introduced in such a way as to impose sudden and extreme increases in people’s tax liabilities. As discussed in Chapter 8, a robust transitional framework is needed to help people adjust. This would ensure that people have enough time to take any action needed to be able to pay their tax bills into the future and would assist in the political challenge that will come from implementing change.