Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Ninth Report

5 Review of Local Income Tax as an alternative


134. The idea of a local income tax has a long history. It has been considered on previous occasions as a potential solution to the balance of funding problem. The Layfield Commission concluded in 1976 that there should be major changes in the financing of British local government. A majority of the Commission argued that a choice should be made between fuller central control and much greater local accountability. In their view the best method of achieving greater local accountability would have been to change the emphasis of the balance of funding from central to local government. They suggested that this additional local taxation would best be provided by a local income tax.[168] More recently, the Liberal Democrat Party has proposed the replacement of the council tax with a local income tax. The basis of the Liberal Democrat proposal is that:

"The scrapping of the council tax and its replacement with a fair local income tax based on ability to pay would significantly contribute to local authority accountability and address the fundamental flaws in the council tax system. It would stop the poor paying more for their local services as is the case under the council tax."[169]

Positive aspects

135. The Balance of Funding Review has commissioned work on local income tax. An initial paper by Professors John Loughlin and Steve Martin from Cardiff University considered the lessons that might be learned from different approaches to the balance of funding across Europe. The report noted that income tax levied and collected by local authorities was found mainly in the Nordic countries (Denmark, Finland, Iceland, and Sweden), and also in Belgium and Switzerland. It pointed out that international experience suggests that a local income tax offered two main advantages: its simplicity both in the basis of assessment and its rate of assessment. It set out differences in the ways the tax can be calculated. The local rate is applied on a proportional basis, which reflects two different philosophical approaches: redistribution on the part of the state and the defence of the common good on the part of local authorities. The report concluded that it was more equitable than the alternatives and could be adjusted for inflation both continually and uniformly.[170] In a later paper for the Balance of Funding review CIPFA considered the implications of the function of local income tax as a supplement to a property tax.[171] The potential consequences of this will be discussed later.

136. Those who support the implementation of the local income tax suggest that its merits stem from its fairness, buoyancy, transparency and ease of collection. As Cllr Bakewell Leader of Somerset County Council put it,

"It will affect those who earn more. They will pay more, and those who earn less will therefore pay less […] Some of the younger people will pay more, some of the elderly people who are on high incomes, because there are some of the elderly on high incomes, would also pay more. It is a nonsense that somebody on a fixed income should pay 10% of their disposable income in council tax and yet somebody on a very high income only pays 1% of their income in council tax."[172]

Replacement for or supplement to the council tax

137. It is not inherently obvious why a local income tax, if introduced, should not supplement rather than replace council tax. CIFPA wrote in evidence to us:

"If it were implemented to supplement rather than replace the council tax, it would be possible to increase local income tax progressively, whilst in parallel making broadly matching adjustments to national income tax rates. In this way it would be possible to demonstrate "neutrality", i.e. no overall increase in taxes, to taxpayers."[173]

And in their research for the Balance of Funding Review they suggested that as a supplement to a local property tax this would create, "[…] a particularly robust local tax base - part property, part income - and therefore a long term solution".[174] Professor Bramley commented: "You could have income tax as well and there are precedents from some of the Northern European countries, for example, for having a locally assigned income tax".[175]

138. Local income tax as a supplementary source of income would be complex. Mr Sugden from the North East Chambers of Commerce told us "We would see that as an overly complex means of raising revenue".[176] The Local Government Information Unit have argued that, "It would not be feasible to supplement the council tax with a local income tax as a result of the current review—given the complexity of its introduction—returning the business rate makes much more sense".[177]

Negative aspects of local income tax

139. The Balance of funding research sub-group concluded that there were some disadvantages to local income tax. For example,

140. It has also been suggested that local income tax would be more costly to collect than council tax, and would impose an additional administrative burden on employers operating PAYE. In response to the first criticism Chris Bilsland from Somerset County Council argued that:

"It is more expensive than council tax collection, because we know one of the benefits of council tax collection is that property is easy to tax, easy to find, nobody disputes that, but it is still an affordable cost in terms of the tax yield and the cost of many other tax collections."[179]

The LGA accepted that:

"[…] there are concerns regarding the administrative complexity and costs to both government and business which would have to be addressed. A possible alternative is to assign a portion of national income tax revenue to local government, which could evolve into a LIT, subject to further review."[180]

141. Andrew Sugden from the North East Chamber of Commerce noted: "our perspective on a local income tax is the burden it would place on businesses in terms of administration, rather than necessarily how it might work in terms of a charging mechanism on the citizen".[181] The British Chambers of Commerce argued that, "making the Inland Revenue responsible for collecting income tax and then passing it on to local authorities is overly complex and invites disaster. Again this proposal fails the transparency and accountability test."[182] Henry Law, Honorary Secretary of the Land Value Tax Campaign warned:

"Complications would arise when taxpayers live in one tax area and work in another. Income tax is often deducted by employers, at source, through the PAYE system. Provisions would have to be made for employers to identify by home address the appropriate income tax rate for every employee, make deductions accordingly and ensure that the Inland Revenue was correctly paid, whilst the latter would have to remit the correct amount to the appropriate local authority. Any conceivable administrative procedure will be clumsy and costly in relation to the sums involved."[183]

142. The Chartered Institute of Public Finance and Administration told us:

"Work undertaken by CIPFA demonstrates that local income tax is a realistic option, but a complex one, with much of the "devil in the detail"—not least the redistributional effects that it would have. It would require extremely detailed planning and preparation—and the time necessary to achieve this."[184]

143. The introduction of a local income tax in 1976 would have been a leap in the dark, which ahead of new technology would have created acute administrative problems for local government. Since then new technology, and a scaling down of the plan for local income tax to that suggested by CIPFA, has created a system that might work. Nevertheless, the evidence is not remotely persuasive. Administration would be costly. There is still far too little known about the practical implications including the cost, redistribution effect, impact on tax payers, including first time buyers, and where people choose to live. It would be unwise to pursue implementation of a local income tax before detailed research on these areas had been undertaken.

168   Department of the Environment 1976 'Local Government Finance', HMSO Back

169 Back

170   BoF Research Sub-Group - Meeting 18 November 2003 - Paper 12 'International Lessons on Balance of Funding Issues: initial paper', paragraph 3.3.5. J. Loughlin and S. Martin Back

171   BoF (7) May 2004 'Reviewing the case for a local income tax - supplementary report' CIPFA Back

172   Qq 285, 258 [Cllr Bakewell, Leader, Somerset County Council] Back

173   Ev 35 HC 402-II [Chartered Institute of Public Finance and Accountancy] Back

174   BoF (7) May 2004 'Local Income Tax: Supplementary Report - Powerpoint Slides' CIPFA Back

175   Q 69 [Professor Bramley, Heriot Watt University] Back

176   Q 502 [Mr Sugden, Director of Policy, Chamber of Commerce in the North East] Back

177   Ev 16 HC 402-II [Local Government Information Unit] Back

178  BoF Research Sub-group - meeting 18 November 2003 - paper 12 'International lessons on balance of Funding Issues: initial paper', paragraph 3.5.5 J. Loughlin and S. Martin Back

179   Q 288 [Mr Bilsland, Corporate Director (Treasury), Somerset County Council] Back

180   Ev 25 HC 402-II [Local Government Association] Back

181   Q 504 [Mr Sugden, Director of Policy, Chamber of Commerce in the North East] Back

182   Ev 28 HC 402-II [British Chambers of Commerce] Back

183  LGR B/P 10 2004 'Options for Local Government Finance' Henry Law p.8 Back

184   Ev 35 HC 402-II [Chartered Institute of Public Finance and Accountancy] Back

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