Common Weal Policy critique the Scottish Government’s new local tax plans
THE Scottish Government has outlined its plans to reform the Council Tax. The key changes are:
– The tax burden for Band’s E-H (the higher valued properties) will increase by PS105, PS207, PS335, and PS517 per annum respectively. This is expected to raise an additional PS100 million for local services. Council tax relief will be offered to pensioners who are asset rich but income poor.
– Band’s A-D (the lower valued properties) will see their council tax rate stay the same, with an increase in council tax relief for low income households with children of PS173 per year on average.
– Local councils will be consulted about 25 per cent of the new Scottish Rate of Income Tax being assigned to local government, which would replace a portion of funds that currently come from the Scottish Government’s block grant.
– From 2017, the Council Tax freeze will end and councils will have the ability to increase council tax by up to 3 per cent per year, which could raise an additional PS70m per year.
Here is 10 key things that Common Weal Policy think you should know about this plan.
1. The Council Tax is still a regressive tax
The changes proposed to the Council Tax takes a regressive tax and makes it slightly less regressive. Band H properties currently pay 3 times as much as Band A properties – under these changes they will now pay 3.7 times as much.
At the time the policy was introduced by the Tories in 1993, properties in Band H were worth 8 times as much as Band A. Today, they are worth 15 times as much. The Commission for Local Tax Reform said that for the Council Tax to be a “progressive” tax it would have to be “proportionate”, i.e tax the wealthiest properties at 15 times the rate of the poorest. This change hardly makes a dent into the basic regressivity of the Council Tax which was built in from the start.
2. The Council Tax still taxes most people incorrectly
The property valuations for Council Tax were carried out in 1991 – a quarter of a century ago. First Minister Nicola Sturgeon has said the Scottish Government has no plans for a revaluation.
The fundamental problem with this is that the property market has changed enormously in that period of time – it’s estimated that 57 per cent of homes are now in the wrong band. The basic unfairness of taxing people incorrectly has not been addressed by these reforms.
3. Council Tax Relief is an admission of failure
The introduction of more Council Tax relief for low income households with children is an admission that the tax hits the poor too hard, especially those who (possibly incorrectly) are in Band B, C or D. A single person on the minimum wage working 30 hours per week in a Band C home would be spending 13.3 per cent of their wages on Council Tax.
Like all benefits that need to be claimed for, a large amount of people who could claim Council Tax Relief don’t do so. As the Commission for Local Tax Reform pointed out, only those on “very low incomes” get this support, while those on “modest incomes or with incomes that vary week-to-week need more help”.
Rather than having a system of means-tested relief, would it not be better to devise a system that doesn’t overly burden the poorest in the first place?
4. Even middle-income households get treated unfairly
It’s not just the poorest who are disadvantaged from the Council Tax, middle income households also pay a disproportionate amount compared to the richest.
As the Scottish Government established Commission for Local Tax Reform pointed out: “Many reasons can be advanced for taxing property rather than, or alongside income, but in the case of the present Council Tax, the evidence shows that the amount being charged is simply too disproportionate to income to be justified. Paying Council Tax bills costs middle income households 4 per cent of their income on average, compared to 2 per cent for the average highest income households.”
5. The money raised does not nearly match the amount that has been lost from Local tax revenue
The Scottish Parliament Information Centre (SPICe) have found that PS3,150 million has been lost from the Council Tax Freeze from 2008-09 to 2016-17. The measures proposed will increase the amount raised from Council Tax by PS100m in 2017/18. In terms of revenue from local tax, the increase does not nearly make up for the freeze.
The majority of Local Government funding comes from the General Revenue budget and non-domestic rates. SPICe said that the freeze had been over-funded from these sources of funding by PS164.9 million up until 2013/14. However, in the three financial years since the Local Government settlement from the Scottish Government has fallen by over PS200 million in real terms, while general Scottish Government funding has increased by PS1 billion. In total, the most recent Scottish Government budget settlement for Local Government will see a PS600 million fall for 2016/17.
The Scottish Government claim PS250 million will also be raised by 2020/21 from 25 per cent of the Scottish Rate of Income Tax going to councils. Additionally councils have the ability to increase the Council Tax rate to raise a possible extra PS70 million per year. None of this will in itself make up the money for falling Local Government revenues, and therefore – unless UK Government austerity ends – either more money will have to be found from other budgets or long-term funding for Local Government will be lower than it was in 2013/14.
6. The SNP could have made these changes to Council Tax in 2007
As local democracy campaigner Andy Wightman has pointed out , simply changing the multipliers on Council Tax bands could have been done through secondary legislation from when the SNP entered minority government in 2007.
At that time, the Council Tax Freeze was intended as a stop-gap measure until the Scottish Government had the power to make more far reaching local tax reform (the intention originally being to introduce a local income tax).
It’s unclear why it has taken nine years to make this change.
7. The Commission for Local Tax Reform
The Commission for Local Tax Reform was established by the Scottish Government to get cross-party consensus on the need for local tax reform. The Commission’s verdict was inconclusive in the sense that it did not propose one new tax model going forward, but it was conclusive in saying the Council Tax as presently constructed has to come to an end.
While the Scottish Government has claimed its proposed changes are based on the recommendations of the commission, it’s not clear how the changes proposed match up to the following unambiguous statements in the Commission’s final report: “We have come to agree that local tax needs substantial reform”; “the opportunity for reform cannot be missed again”; “it was made clear to us that people expect a change”; “the present Council Tax must end”.
8. Portion of income tax – if you don’t control it there’s no power.
The Scottish Government has stated that giving councils 25 per cent of income tax will make them “more accountable” and will act as an incentive for economic growth. It’s not clear how this is the case.
First off, giving a portion of income tax to local councils is not the same as giving local councils power, in the same way that the UK Government giving a portion of VAT does not give the Scottish Government control over VAT. There are very good arguments against devolving income tax to councils as it could deepen regional inequalities and create a race to the bottom, but this proposal should not be mistaken for an increase in Local Government democracy or accountability.
Second, Local Government has no extra powers to grow its economy from this measure therefore endowing them with extra accountability for economic growth is a bit of a stretch. It is true to argue that higher wages will increase income tax receipts and therefore increase income tax revenue, but it is the increase in wages across all councils which will still determine how much each council receives, as income tax revenue will still be based on a national needs-based formula. The link between each councils economic growth and income tax revenue is therefore tenuous.
9. Low-tax Scotland: All Council Tax bands still lower than England
As Sturgeon pointed out in today’s announcement of the local tax plans, all Council Tax bands are still lower than in England. At a time of UK Government austerity where spending on public services has seen its biggest decline in almost 100 years, we don’t believe Scotland being more low-tax than England is something to be proud of. Increased taxes those on low and middle incomes at a time of stagnating wages is not progressive, but there’s no good reason that those in high value properties could not pay a bit more. Post-crash Scotland has seen an enormous rise in inequality, particularly of assets as house prices have continued to rise. Local tax is one means by which government could re-dress the balance.
10. Local tax as an economic lever
The Commission for Local Tax Reform found that local tax measures do have an impact on people’s behaviour over, for example, whether to buy a property. A proportionate and progressive property tax which accurately reflected property values could have the effect of reducing wealth inequality by stemming run-away house prices at the top. However, for all the reasons given above, the changes proposed by the SNP are unlikely to have this effect.
The proposals also contain two subsidiary initiatives that are worth noting: power for councils to end discounts on second homes and consultation over the introduction of a tax on vacant and derelict land. Both of these measures, if introduced, could be positive in reducing wealth inequality and ensuring land is used for productive economic development.