House of Commons - Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions

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

8 Alternative means of raising local revenue

Central funding: 'IsItFair' Campaign proposals

174. The 'IsItFair' Campaign suggests that the solution to the problem of people on low incomes paying too great a proportion of local taxation lies in abolition of council tax and the financing of local authorities by central Government. It proposes:

"that homeowners and tenants should immediately cease paying council tax and that Central Government should implement a fair replacement system, collected via Income Tax and VAT, based on a person's ability to pay and on their consumption of goods and services."[220]

In oral evidence to us, Peter Webb of the Campaign told us that the Balance of Funding review "should conclude that council tax should be abolished, that the raising of revenue should be separated from the accounting for spending, that local authorities should be financed from central taxes".[221] Local authorities would become local administrative agencies for central Government: "I say that they should be responsible for spending the money, responsible for performance on delivery and spending and be accountable for the use of the revenue".[222]

175. The 'IsItFair' Campaign has also argued that if local authority funding was collected centrally then the cost of collection would be reduced:

"By using existing systems, the only additional work required is a ring fencing mechanism that ensures that the extra tax collected is used entirely for local authority funding. A ring fencing mechanism is already in place (re extra tobacco duty for NHS in 2002 budget), so this could be extended."[223]

176. The obvious objection, that centrally raised and determined funding would destroy any meaningful accountability of local government to a local electorate, is answered by the Campaign:

"Currently, central government provides, on average, 75% of local authority funding, and dictates up to 80% of local authority expenditure. There is very little room for movement here."[224]

Yet the Campaign seems to want to preserve local decision-making: "[…] there will always be a requirement for local decisions and central government cannot do this".[225] It is not clear what form this will take. The Campaign has made outline proposals:

"Local authorities will continue to draw up budgets in consultation with central government (who dictate the majority of spending requirements). These budgets, ideally, should cover three to five year periods. It is recommended that each local authority appoints a representative group of individuals from its area, who can review and challenge the budget requirements. The budgets may then be ratified at either an open public meeting, or via a local referendum. […] If this process were adopted, then central government would find it hard to argue that the budget is unreasonable. Furthermore, if the local people are included, and endorse the local budget, then any adjustment required to the national rate of VAT and Income Tax to fund this, should not be an issue."[226]

177. There are patent defects in these proposals, in principle and in practice: quite simply, they reverse a pattern of local democracy and local accountability which have served this country well for over a century. Although the 'IsItFair' Campaign rightly highlights the problems faced by pensioners and those on low incomes, the Committee believes that these issues can be adequately addressed by changes to the council tax benefit system, and greater responsibility for revenue raising for local government. The Committee fundamentally disagrees with the Campaign's assertion that the best way of dealing with the current problems associated with the council tax is to remove the power to raise revenue from the local level.

Options for local taxation

178. In their paper for the Balance of Funding review the Local Government Association argued that it was important for local accountability that local authorities be given greater freedom to raise revenue to fund local policy initiatives . They pointed out that

"The argument that local government should have access to locally-set taxes and charges for services is underpinned by Article 9 of the European Charter of Local Self Government, which stipulates that "part at least of the financial resources of local authorities shall derive from local taxes and charges."[227]

In their evidence to this inquiry the Local Government Association outlined a range of sources, termed the 'basket of taxes' that might provide alternative sources of revenue, some of which will be discussed below. However as the Local Government Association explained, they did not expect the 'basket of taxes' proposal to provide a complete answer to the balance of funding problem. Cllr Chalke, Leader of the Conservative Group at the Local Government Association, stated that:

"I do think that some of those issues will not raise very much money but can actually have policy direction, for example, charging utilities for lane rental when they are digging up roads […] That has an advantage for traffic flow and cost to industry; so there is a policy advantage and I can accept that."[228]

The Economic Secretary to the Treasury told us:

"When the balance of funding review group looked at the proposals, one thing was clear, that none of them would make a significant contribution to altering the balance of funding between local and national."[229]

The level of revenue generated locally would not be so significant as to require a system of equalisation. As Sir Jeremy Beecham, former Chairman of the Local Government Association, argued:

"You do not want to over-complicate the system, but it is likely to be marginal in the event and I would not have thought it was necessary to take equalisation into account with these subsidiary taxes."[230]

The Local Government Information Unit stated that,

"Local optional taxes should be outside any equalisation system; there would be little point in raising them if they were to be taken account of in grant assessment. However, optional taxes are bound to be marginal—in themselves they can not significantly change the balance of funding."[231]

However, the Audit Commission pointed out that there are some local taxes that might have a more significant impact on the balance of funding.

"Congestion taxes, workplace parking taxes or tourist taxes would only affect local government income at the margins and would not significantly change the balance of funding. This is not the case with local sales taxes or local income taxes. These could have a fundamental impact on the balance of funding. A key consideration in the introduction of new taxes of this kind would be the extent to which they were open and transparent, and increased accountability to local citizens."[232]

179. Locally raised taxes used locally have strong attractions, and could have policy as well as fiscal advantages. Professor Bramley argued that local taxes:

"[…] are something that can develop incrementally and they may be quite helpful to certain local authorities in relation to certain types of problem they face, particularly on the capital side and the need to facilitate certain types of development, for example, transport infrastructure."[233]

Andrew May from the South West Regional Development Agency told us:

"[…] we have a wonderful physical environment, which is one of the main economic drivers of the region; people come because of the open spaces, because of Exmoor, Dartmoor, the national parks and so on […] It does depend upon this thorny issue of hypothecation of these taxes, that we would raise and spend them wholly locally on specific objectives, not lose them into some general pool of revenue."[234]

180. A range of local taxation options would also create more choice for local authorities, as Dan Corry from the New Local Government Network stated in his evidence to the Committee: "I think at the very least local government needs, at the end of the Balance of Funding Review and so on, to end up with more choice and a spread of taxes".[235] He further suggested that:

"If a local authority had a number of taxes it would have to explain it to its local taxpayers. You could have systems where you said that certain taxes could only be brought in locally if there had been some kind of a referendum."[236]

This could increase the role of local people in the decision-making process of local authorities, and would allow the local electorate a veto over unpopular and expensive projects. On the flipside it would also allow local populations to elect to pay more for an enhanced local service.

181. Some witnesses were cautious. Guy Palmer from the New Policy Institute told us:

"I think one of the worries with all this basket of taxes and so forth is that you introduce a myriad of what are actually very small taxes which does not achieve anything for anybody and merely confuses the issue."[237]

The British Chamber of Commerce was reluctant to endorse any new revenue raising powers for local government without a secure system of checks and balances:

"[…] localising other taxes such as vehicle excise duty, sales taxes, stamp duty, and land value tax are unnecessary. The desire to increase local power is understandable from an organisation representing local politicians. However, there is little accountability at present at local level. Without an increase in scrutiny of local authorities and a larger say for business there is no mechanism for local politicians to take responsibility for their actions in this field. We therefore do not support greater powers for those who do not wish to accompany them with greater transparency and accountability."[238]

182. We believe that any decisions about new taxes should be taken at the local level. As these taxes will be fairly revenue low, there should be safeguards put in place to protect local authorities from any cut in central grant, if they choose not to raise local revenue in this way. The important point is the existence of local flexibility and accountability of local authorities to their electorate for the decisions they take.

Fees and Charges

183. The Local Government Act 2003 gave powers to central Government to grant local authorities the power to charge for particular services. Sir Jeremy Beecham, of the Local Government Association, told us:

"There is scope to do more, but I am not sure we have actually yet got the Order which would facilitate the trading. The department has not actually as yet pressed the Go button on that. It will take time to develop. Although this is significant in the long term, it is more significant in policy than in revenue terms. We would not see that as making a huge difference to the balance of funding and the capacity of authorities will vary quite markedly."[239]

In their written evidence to the Committee, Wandsworth Council identified that

"The other sources of local income, fees and charges, are significant, amounting to about two-thirds of the yield of council taxes. But, though they are described as local income, most fees and charges are tightly constrained by Government. Local authorities have no general power to make charges. Some tariffs are prescribed by Government, many charges must be determined in accordance with detailed Government guidance, and charges for discretionary services must not exceed the cost of provision."[240]

184. Fees and charges can be used to influence behaviour. The Local Government Association noted:

"Extending powers to charge in a wider range of areas, for example graffiti removal, CCTV, home energy services, could generate more income for some local authorities. It would be necessary to consider the political sensitivity of charging for some services and the regressive nature of charging."[241]

They further argued that,

"For taxes and charges that are characterised by dual objectives, namely charging for waste services, utilities street works, road use and taxes on plastic bags, their likely minimal/limited revenue potential raise questions on their relevance in the context of the attempts to shift the balance of funding."[242]

The Local Government Association advise caution with the use of fees and charges. They warn that "charging does, however, raise serious equity concerns, given its regressive nature, particularly when applied to non-discretionary services".[243]

185. We believe that local authorities should have the opportunity to increase their income by extending more fees and charges to a wider range of services. Local authorities should also be allowed to make profit from services. All local authorities should be required to have in place a socially inclusive fees and charges remission scheme.

Land Value Tax

186. Proponents of land value tax argue that if it were introduced there would be no need to retain the existing business rate and council tax, and that ultimately it could replace all taxation. The proponents argue that, "this tax would be fair, would be impossible to avoid, and would have beneficial economic and social outcomes".[244] The positive elements of the tax are outlined as:

"Administration is straightforward and valuation costs are reduced.
The tax is difficult to avoid or evade
Because the tax is tied to property, it can be localised and applied to any form of local or regional government structure."[245]

187. A principal drawback of the tax is that it would penalise people who live on low incomes but are asset rich in property terms, most of whom are pensioners. Proponents of the land value tax state that "Single occupancy relief would be phased out: this encourages under-occupation and is vulnerable to avoidance and evasion. […]".[246] In addition as Paul Woods from the Association of North East Councils identified:

"The concern of a land value tax is that we are talking about a completely new tax, where with business rates you are just bolting something onto an existing, well-known tax system which we know can operate effectively."[247]

Proponents admit that it would not be a quick fix to the balance of funding problem but suggest that it could be an "attractive option for 2009".[248] We believe that there are better ways to improve the current system than a land value tax.

Local Sales Tax

188. As with land value tax a local sales tax could raise substantial revenue for local authorities. But it could have dramatic implications. As Sir Jeremy Beecham, from the Local Government Association, identified:

"A local sales tax could have a significant effect; unfortunately it would not be a progressive effect. I would not support it because it would be regressive and in a small country there would be boundary problems and so on."[249]

In written evidence, the Local Government Association also questioned its legality under European Law:

"It is likely, however, to be complex and costly to administer, and does not appear to have significant political support. Furthermore, a local sales tax is likely to contravene Article 33 of the Sixth VAT Directive, preventing EU member states from introducing turnover taxes."[250]

189. Henry Law, a proponent of the land value tax, suggested, "Differentials in local sales tax rates would promote cross-border and mail-order shopping".[251] This could potentially lead to new types of business developing in particular areas of the country, but only if a number of authorities were imposing a significant sales tax. If that were the case, consumers could in many circumstances vote with their feet and shop over a boundary: as Lucinda Turner from the CBI put it, "[…] sales tax would be a very difficult thing in this country because of the boundary issue and the ease of moving from one retail area to another."[252]

190. Despite being prima facie attractive, we have doubts about the legal and practical possibilities of a local sales tax. We recommend that the Government investigate the implications of introducing such a tax in order to inform local government decision making.

Congestion Charge

191. Congestion charging is one example of a fiscal instrument designed to change behaviour in a particular local area. It allows local authorities to address the problem of congestion in their area, and provides the opportunity for any revenues generated to be reinvested in the local transport system. As Lucinda Turner from the CBI identified:

"In terms of congestion charging, something we have supported in principle, we have supported it mainly as a mechanism to target congestion rather than specifically as a revenue-raiser."[253]

Andrew Sugden from the Chamber of Commerce in the North East told us: "[…] but there may be some very locally specific circumstances where elements such as congestion charging would be totally appropriate, and where those revenues were to be used or hypothecated for public transport improvements".[254]

192. The Local Government Association warned that local authorities might continue to be reluctant to implement congestion charging schemes:

"It is worth noting however, that although power to levy charges in this area was given to the GLA and local authorities in 1999-2000 respectively, to date, no authorities levy workplace parking charges and only London and Durham have introduced congestion charging."[255]

193. We recommend that local authorities consider the experience of congestion charging in both London and Durham and in the light of this reflect on its potential usefulness in their area. However, the most important point is that local authorities should retain the option to implement congestion charges where appropriate to their area.

Workplace Parking charge

194. Workplace parking charges are another mechanism where by local authorities might seek to solve the problems of congested roads in metropolitan areas. Andrew Sugden of the Chamber of Commerce in the North East told us that:

"[…] on some of the proposals around workplace car parking charges, there is a very persuasive argument about reducing the number of people who use their cars to travel to work and simply park outside the office all day and then drive home, but at the same time the proposals are seen as very punitive without any incentive in terms of using that taxation for improved public transport networks."[256]

Lucinda Turner from the CBI argued that:

"[…] we believe it would have very limited impact, given that it targets only a particular section of road-users, and it is likely that if they moved off that road space the road space would soon fill up with those who were not paying it."[257]

She concluded that:

"[…] we are fundamentally opposed to the work place parking levy as it is simply a tax, there is no effort to incentivise more environmentally friendly ways to get to work. It is a blunt instrument that will not achieve any gainful progress in reducing pollution or congestion."[258]

195. Local authorities could choose to invest income from workplace parking charges in local transport infrastructure as they can from congestion charging: there is no good reason to limit their freedom to do so.

Tourist Tax

196. A tourist tax as a means of raising revenue is an attractive option in various regions including the South West. The Local Government Association argued: "Levying a tourist tax on bed nights by domestic and foreign overnight visitors would be worthwhile in some areas, being relatively easy to implement and funding services used by tourists."[259] Peter Lacey from Somerset Association of Local Councils stated:

"My members would say that the parishes pick up a significant part of the tourist costs in terms of local provision of public conveniences, in terms of tourist information centres, in terms of all sorts of support that the parishes give which is not related to the people of the parish who pay the tax. It is related to the businesses of the parish."[260]

But he also warned that a bed tax could be a serious disadvantage to those who run small bed and breakfast businesses, potentially forcing these businesses to close. "I do not see a hotel as the problem; it is the bed and breakfast that is the problem. That is a significant part of the market."[261] Francis Cornish from South West Tourism noted:

"Our research has shown that for every pound the tourist spends only 21p is spent on accommodation. You are hitting only part of the target with a bed tax. […] About 45% of the £8.3 billion per year which visitors spend in the south west is spent by day visitors, people who do not stay in hotels."[262]

197. He also warned of the potential disincentive to tourists:

"For the average American family of four going to any of 52 prime cities in the world, the tax burden on London is the second highest of the 52. In other words, there are 50 places cheaper in tax terms to go to. In terms of competition, the tourism business, hotels, restaurants, catering for tourists, the attractions or whatever in the south west are already facing an uncompetitively high rate."[263]

Andrew Sugden from the North East Chamber of Commerce was also cautious:

"Tourism is growing in the north east and we are very proud to see it grow at the rate it has, but at the same time it is very much emerging and to threaten that by levying additional charges on tourists is something we would feel very nervous about."[264]

198. The Committee believes that a tourist or bed tax could generate funds to reinvest in services for tourists, thus bringing fringe benefits for local people and businesses.

199. Overall we believe that local authorities should have the opportunity to introduce a 'basket of local taxes'. However, it is important to acknowledge that they will not raise enough revenue to replace the existing council tax and that they should be seen as nothing more than a supplement. It should also be acknowledged that the primary role of such local taxation should be to generate behavioural change, i.e. a congestion charge should lead to reduction in car usage, rather than just seek to generate revenue.

220 LGR B/P 07 2003 'Local Authority Funding A Fairer Tax Raising System' 'IsItFair' Campaign p5 Back

221 Q 340 [Mr Webb, Chairman, Surrey Tax Action Group] Back

222 Q 344 [Mr Webb, Chairman, Surrey Tax Action Group] Back

223 LGR B/P 07 2003 'Local Authority Funding A Fairer Tax Raising System' 'IsItFair' Campaign p20 Back

224 LGR B/P 07 2003 'Local Authority Funding A Fairer Tax Raising System' 'IsItFair' Campaign p20 Back

225 LGR B/P 07 2003 'Local Authority Funding A Fairer Tax Raising System' 'IsItFair' Campaign p22 Back

226 LGR B/P 07 2003 'Local Authority Funding A Fairer Tax Raising System' 'IsItFair' Campaign p23 Back

227 BoF (23) April 2004 'Other taxes and Charges' LGA p1 Back

228 Q 806 [Cllr Chalke, Leader of Conservative group, Local Government Association] Back

229 Q 667 [John Healey MP, Economic Secretary to HM Treasury] Back

230 Q 810 [Sir Jeremy Beecham, Leader of the Labour Group, Local Government Association] Back

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