David Scott: After the big freeze, parties warm to local tax rethink

Published on 16/06/2010 21:35

A DEBATE is now under way on whether the Scottish Parliament should have extra tax powers. In recent weeks, the discussion has changed from whether Scotland should have greater financial autonomy to how much fiscal freedom it should be given.

With the focus now firmly on national taxation in Scotland, where does this leave the unresolved debate on local taxation?

Will the SNP bring forward new plans for its highly controversial local income tax (LIT) at next year's Scottish elections? And is it right the issue of the future of local taxation be treated separately from the Scottish tax debate?

Since the Scottish Government decided to shelve its LIT plans, after concluding it could not win enough political support, a number of inquiries have been set up to try to find a more acceptable solution.

Scottish Labour is expected to make known the results of its own inquiry into local taxation in October when its policy forum meets and to include proposals for council tax reform in its 2011 manifesto.

A working group set up by revenues and finance officers in the Institute of Revenues Rating and Valuation (IRRV) is due to report the previous month. Meanwhile, the Chartered Institute of Public Finance and Accountancy (CIPFA) – which represents leading finance officers – has put forward proposals in a submission to the IRRV inquiry.

According to CIPFA, the future system of funding local government must be based on a modern and progressive property tax that is more accountable, better understood and updated through regular revaluations. Significantly, it points to the change likely to occur between local and national taxation if Holyrood receives greater powers.

"It is vital the (IRRV] committee of inquiry considers what impact, if any, the routes to reform will have on the financial arrangements within the current constitutional set up. Central to this will be what the changes would mean for the role of local government and the impact upon local taxation," the submission states.

As Holyrood already has the power to decide any changes to local taxation and the UK government is responsible for Holyrood's financial powers, much will depend on the outcome of the 2011 election.

When finance secretary John Swinney announced his surprise decision to shelve the SNP administration's flagship plans for LIT in February 2009, he blamed "parliamentary arithmetic" for the "pragmatic" decision, and said the SNP would go into the 2011 election on a policy of replacing the "unfair" council tax with a local income tax.

However, it could be argued the case against an expensive upheaval of local government finance has been strengthened as a result of the recession and the prospect of severe spending cuts over the next few years.

Even if the SNP makes a further commitment on LIT in its Holyrood election manifesto, there is doubt over its ability to hold on to its fragile parliamentary position or increase it in a way that it could push through legislation that would continue to be opposed by rival parties.

The SNP is not specific about its precise intentions but emphasises it "will continue to advocate" a local income tax. A spokesman for Mr Swinney says: "Scotland needs financial responsibility with control over tax and spending so that we can take the decisions needed to grow the Scottish economy and access the revenue. Equally, we also need a fairer system of local taxation, which is why the SNP will continue to advocate local income tax as a replacement for the unfair council tax, which we have now frozen for the third year in a row."

Labour concluded at an early stage of its inquiry that any future local taxation system should be based on a reformed property tax and not on income.

"We looked at some radical alternatives but we've never diverted from the principle that a reformed local property tax is the best way forward," says the party's local government spokesman Michael McMahon.

"It's a stable system of local government finance and the tax is easy to collect."

The working group set up by Labour is thought to have examined some controversial proposals, such as the council tax being calculated on the capital value of houses and removing education from local government control, a solution that would substantially reduce tax bills.

Of the latter idea, Mr McMahon emphasises there is strong opposition to such a proposal but adds: "When we approached our inquiry we didn't rule anything in and we didn't rule anything out," he says.

The Liberal Democrats, who opposed the SNP LIT plan but backed a local income tax that could be varied by councils, remain committed to a system based on ability to pay. "Now that we're looking at the delivery of the Calman proposals, the implications for local government taxation should be taken into consideration too," says Jeremy Purvis, the party's finance spokesman.

He points out his party wants parity of finance for local government, allowing councils to raise half of the revenue they spend, with the remaining half coming from central government grant and councils having increased revenue raising powers.

Mr Purvis adds: "The council tax freeze erodes further the ability of local government to have accountability because it now means virtually 90 per cent of all revenue comes in the form of grant. We do not think that is healthy. We want to see the Calman proposals go further by strengthening the role of local government."

The Scottish Tories have never wavered from their view that the problem with council tax is not the system itself but the soaring of bills over a ten-year period. Finance spokesman Derek Brownlee says the party's existing policy remains a reformed version of the council tax that would result in the "yield" from the tax being less.

"We've deliberately steered away from some of the things Labour are toying with, like extra tax bands, and we believe that in terms of revenue raising and ability to pay, we are now close to the peak acceptable," he says. "Any reform of the system needs to result in the level of council tax being brought down. There are big issues like the balance of funding (between local and national government] and accountability but we cannot push the tax up further."

The IRRV inquiry has examined a range of funding options, including property-based taxes and other funding. These include "suitable mixes" of options like local income tax, a sales tax and various green taxes.

It seems inevitable the debate on Calman is likely to overshadow the issue of local taxation at a time when public demand for change has already diminished because of the Scottish Government's council tax freeze. However, Brian Jeffrey, Scottish president of the IRRV, says year-on-year tax freezes cannot sustain Scottish local government, even in the medium term, and a way forward must be found soon.

"We are confident that the inquiry's final report will identify an innovative and tailored solution to Scotland's current local taxation dilemma," he says.