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Derek Brownlee MSP: The perils of Local Income Tax

Brownlee_derek Derek Brownlee MSP reviews the SNP plans to introduce a Local Income Tax for Scotland and decides that a reformed Council Tax would be a much better way forward.

Although in many ways politics north and south of the border has diverged since devolution, one common theme you will find is the unpopularity of Council Tax rises over the past eleven years.

Both the Lib Dems and SNP have long advocated a Local Income Tax (LIT) as preferable to property taxes, and now with an SNP Government, for the first time in the UK advocates of LIT are being forced to confront the detailed questions about their plans.

In brief, the SNP plans are for a Scotland wide supplement to income tax of 3p on all income except savings and investment income. Councils would have no freedom to vary the rate.

3p sounds quite attractive to many people – much lower than the 6 or 7p more usually floated. There’s a reason for this: the 3p rate has nothing to do with raising the same amount of revenue as the Council Tax, and everything to do with defusing attacks on LIT.

The SNP Government makes three major assumptions to get to a 3p rate. First, that the UK Government, which spends around £400m on Council Tax Benefit in Scotland, would transfer that money to the Scottish Government if Council Tax was abolished.

Second, that until LIT might be implemented (2011 or later), income tax revenues in Scotland grow at around 5% each year.

Third, that an additional annual £280m of efficiency savings can be found from within the Scottish budget by that date to make up the gap.

All of these assumptions look questionable, but there are two other obstacles: under the Scotland Act, a locally set LIT seems to be permitted – but a nationally set one unlikely to be (ideal territory for another fight between the SNP and the UK Government).

And there’s the Parliamentary arithmetic: the SNP need to get the Lib Dems on board and possibly some the Greens to pass any LIT Bill. Lib Dems say they won’t back a nationally set LIT, so presumably they will, but you never know.

But let’s assume all these hurdles are passable. Is LIT desirable in itself? Or would a reformed Council Tax be better?

We believe the major problem with Council Tax is its level, rather than its underlying principles. It is the massive rises of the past decade which have made Council Tax so unpopular. We supported the SNP in diverting money to freeze Council Tax this year for precisely this reason (and we’d first proposed freezing Council Tax back in 2003).

Secondly, it’s relatively straightforward to reform Council Tax. If there is money available to subsidise LIT, it could be used to reduce the level of Council Tax too. (There are obvious implications around the proportion of their funding that Councils raise, but it could be done.)

We could target a discount on Pensioner Households – in Scotland we estimate a 50% discount would cost around £200m.

So there are ways of tackling the downsides of Council Tax, whilst preserving the advantages: a well understood system, a stable tax base for local government, and allowing Councils to relatively easily alter their tax rate if they choose to.

LIT creates many difficulties: a variable rate would be administratively very complex, with real challenges around tracking changing residence of individuals. Employers already complain about the costs of administering taxes – imagine if they had to operate different tax rates for every council area in the country. A nationally set rate removes local accountability.

LIT revenues are much less stable than Council Tax – if revenues suddenly fall, or even fail to grow as expected, would central government step in and make up the difference, or would Councils have to take the pain (or increase their LIT rate?)

The SNP model of LIT ignores savings income due to the costs of collecting an additional 3% on that, which is pragmatic, but difficult to characterise as objectively fair. After all, advocates of LIT say it is fair because it takes account of ability to pay – taxing earnings but not savings runs completely counter to that.

There are many other problems with LIT – but the biggest one in Scotland is that it is preventing reform of the Council Tax.


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