Budget 2011 and Environmental Taxes

Written evidence submitted by the Chartered Institute of Taxation

Background

1 The Chartered Institute of Taxation (CIOT) welcomes the opportunity to comment on the environmental impact of Budget 2011 and green taxes.

2 The call for evidence sets out seven themes. We set out our comments in relation to each of these below.

3 As a professional body concerned with taxation, we have limited our comments to tax issues. In this submission, references to environmental taxes or green taxes refer not only to specific taxes that have an environmental objective, such as landfill tax, but also to tax measures contained in other taxes that have similar objectives, eg the taxation of private use of vehicles by reference to emissions.

4 We have already submitted a paper dealing with the principles of environmental taxes to HM Treasury, which can be found on the CIOT website at http://tinyurl.com/6cfsu7x. This submission draws on that paper.

Executive summary

5 The CIOT believes that green taxes can play a significant role in a modern tax system, and in furthering the Government’s green objectives, but it is important that they are implemented with close attention to sound principles to ensure they are effective. Taxes which merely shift pollution elsewhere, or which leave loopholes which can be exploited, or which fail to lead to greener behaviour because of a lack of alternatives, are failing to do their job. Put simply, green taxes should ideally be easy to avoid (by a change in behaviour) but hard to evade.

6 The UK already has a complex tax system and lengthy tax code which constitute a substantial bureaucratic burden for taxpayers, particularly small businesses. It is important that environmental tax measures do not unduly add to that burden. We would prefer to see environmental tax policy:

· Build environmental incentives into existing taxes where possible rather than creating new taxes;

· Implemented through measures that are transparent, uncomplicated and easily understood by the taxpayer without the need for expert advice; and

· Look at means to broaden the tax base, eg the proposal to extend air passenger duty to aircraft not currently within its scope.

7 Environmental taxes should conform to Adam Smith’s four basic principles of taxation: Fairness, Certainty, Convenience and Minimising the Compliance Burden.

8 For environmental tax incentives to be fully effective, it is important that government gives people confidence that they will be in place for a long period. The Government should put in place an Environmental Tax Framework for the rest of the Parliament along the lines of the Business Tax Framework already adopted.

Extent to which Budget 2011 furthers the Government's green objectives

9 The CIOT sees the key relevant objectives as being:

· Cutting carbon emissions and decarbonising the economy;

· Increasing the proportion of tax revenue accounted for by environmental taxes;

· Increasing the target for energy from renewable sources; and

· Supporting the creation of new green jobs and technologies.

10 The main Budget announcements with a 'green' impact are:

· Changes to the structure of climate change levy (CCL) by the introduction of a carbon price floor from 2013;

· A cut in fuel duty;

· Changes in the rates of the aggregates levy (deferred to 2012), climate change levy and landfill tax;

· Temporary suspension of CCL reliefs pending state aid re-approval;

· Deferral of an increase in air passenger duty and announcement of the intention to tax flights on personal planes;

· A technical change to aggregates levy to deal with a problem arising from ongoing litigation;

· Changes to company car tax to incentivise use of low emissions vehicles;

· Extension of Climate Change Agreements to 2023 and an increase in the CCL discount for participants from 2013;

· Commitment to fund four Carbon Capture and Storage (CCS) demonstration plants from general taxation rather than a CCS levy; and

· Commitment to a Green Investment Bank.

11 Of these only the first two are projected to have a significant impact in terms of government revenue.

12 The green objective which the CIOT is best qualified to comment on is the Government’s target to increase the proportion of tax revenue accounted for by environmental taxes. The red book indicates that the net effect of environmental tax measures announced in the Budget will be a small cut in cash terms in the 2011-12 and 2012-13 financial years followed by a significant increase in 2013-14 and subsequent years. However, if changes to fuel duty are included in the definition of environmental taxes, the effect of Budget policy decisions is a cut in environmental tax revenue for every year covered by the Budget projections.

13 This highlights the need for consistency from the Government over what constitutes an environmental tax. A parliamentary written answer from the Economic Secretary in July 2010 (Hansard, column 545, 12 July 2010) included only landfill tax, aggregates levy, climate change levy and EU Emissions Trading Scheme revenues in a list of environmental taxes. However, the previous month, the ONS’s Environmental Accounts 2010 also included fuel duty, VAT on duty, renewable energy obligations, vehicle excise duty and air passenger duty in its definition. Air passenger duty appears under the environmental tax subheading in the ‘Budget policy decisions’ table in this year’s Budget red book (table 2.1, page 42-3) but fuel duty appears separately. We would welcome greater clarity in this area.

14 The Finance Bill introduces legislation that had been foreshadowed in a consultation on the carbon price support mechanism (CPSM). In our response to that consultation, we raised a number of concerns including:

· The CPSM may raise concerns about double taxation;

· There are issues relating to its interaction with the EU Emissions Trading Scheme; and

· The CPSM does not apply to imported electricity and the availability of cheaper imported electricity could then undermine the purpose of the scheme.

Our concerns about the CPSM remain.

15 We consider the environmental measures in the Budget to be relatively limited in scale. We do not have a problem with this – it is for Government to determine the speed and extent to which it wishes to move on its green objectives. However, we think that there would be greater commitment to green objectives if a consolidated tax plan was developed providing a better guide as to how the Government proposes use the tax system to achieve its green objectives (see paragraph 30).

16 On specific measures, it is difficult to determine the extent to which taxation rather than any other factor is responsible for behavioural changes and the extent to which other instruments such as regulation have had an impact. However there has been a considerable reduction in the quantity of material being sent to landfill and it seems highly probable that the substantial increases in landfill tax have been the major causal factor behind this.

Approaches to shifting the burden of taxation and factors to consider when designing and introducing green taxes

17 The normal principles of good taxation can and should be applied to all environmental tax measures. A good starting point is the four principles set out by Adam Smith in 'The Wealth of Nations'. These are:

· Fairness;

· Certainty;

· Convenience; and

· Minimising the compliance burden.

Fairness

18 The Government and CIOT share the objective of a tax system which is fair and which is seen to be fair. At a household level, taxes based on consumption – as most environmental taxes are – tend to take a greater share of the income of those on low incomes than of those on high incomes (ie they are regressive). Consequently environmental tax measures are particularly at risk of being judged to be unfair and disproportionate in their effects. This typically leads to protests and calls for exemptions and concessions. (The furore around the introduction of VAT on fuel in the 1990s is a case in point.) It is important to recognise and respond to these legitimate concerns. However, rather than introducing exemptions or exclusions, diluting the effect of the measure and complicating the tax system further, we generally favour offering assistance to targeted groups via mechanisms outside the tax system. This means less well-off households too, get the opportunity to make small gains by adopting greener behaviour.

19 The Government should pay particular attention to the affordability of public transport for people on low incomes.

20 Green taxes have the potential to give foreign suppliers an advantage over British business if they are not subject to similar measures. We understand the frustration of some businesses that see the burden of taxation substituting imported environmental damage for existing local damage. We do not want to see the shifting of "dirty industries" outside the UK to the detriment of UK businesses subject to stricter controls. So far as possible, therefore, measures should apply equally to both local and overseas production.

21 There are limitations on what can be done because of EU and other international law. However some taxes lend themselves to dealing with such problems. Excise duties apply equally to both local and imported goods and services and can therefore serve as a means of ensuring a level playing field for business. There is also a need to re-examine international agreements that prevent taxes being used as an instrument of environmental policy.

22 One further issue around the fairness of green tax measures is the potential for double taxation. For example, it would be possible to 'green' both business rates and council tax but in doing so there may be an element of double taxation because these taxes already include an element of the cost of other taxes. Another situation that could give rise to double taxation would be if country A levied a tax on energy used in production of manufactured goods while country B levied a tax at point of sale or import based on an estimate of energy used in production. Without compensatory measures an exporter from country A to country B would be taxed twice while a firm exporting the other way would not be taxed at all.

Certainty

23 Taxpayers – businesses in particular – benefit greatly from certainty. They want to be able to carry out transactions with confidence, knowing that risks are confined to features inherent in markets and natural phenomena. It therefore needs to be clear to a taxpayer in advance what the tax consequence of their actions will be. The main elements of a tax system that provide certainty are simplicity, transparency, adherence to the rule of law and long-termism. It is unfortunate to note that the Budget had to introduce measures that may suspend certain existing reliefs from the climate change levy for an indeterminate time pending renewal of state aid approval. This can only lead to confusion and uncertainty for those businesses involved.

24 The tax system is already over-complex and the tax code lengthy. If a tax is complex, it will not be understood – or may be understood in more than one way – and will give rise to uncertainty and efforts to circumvent it. The Government is rightly committed to tax simplification. It is difficult to build environmental incentives into the system without adding some administrative burdens and additional clauses to the tax code, but it should be a priority to minimise this.

25 We believe that the two main methods that could be employed to create a greener tax system without unduly complicating the overall system and imposing more burdens on taxpayers are:

· By incorporating green measures in existing mainstream taxes where possible rather than creating new taxes; and

· Widening the scope of existing tax regimes, eg excise style duties, to achieve green objectives.

26 Both of these have already been done. For example, in relation to motor vehicles, there are income tax, VAT and vehicle excise duty measures that are based on green objectives.

27 Transparency is also important. Taxpayers need to be able to understand what the environmental tax seeks to achieve, how it is levied, how much it costs and what behaviour is needed to avoid paying it. Many of the taxes in this area are not transparent; for example most businesses are not aware of how much CCL they pay because it is a component of energy prices and not captured by most accounting systems. Transparency about tax changes is also important in avoiding environmental taxes being labelled ‘stealth taxes’.

28 A third factor contributing to certainty in the tax system is adherence to the rule of law, as laid down in statute. Codified tax law is preferable to tax law determined only by guidance or case law. In particular, retrospective change is damaging to confidence in the tax system and sends a bad signal to those outside the UK about the stability of the UK tax system. Accordingly, we welcome the Government’s Protocol on unscheduled announcement of changes to tax law, published on Budget day, which explicitly recognises that retrospective changes to tax legislation will be wholly exceptional.

29 Long-termism in government policy is especially valuable if the intention is to change people’s behaviour in ways that require significant investment of time or money. The fact that the last Government were able to announce substantial increases in landfill tax some years in advance has undoubtedly been helpful in encouraging waste producers to invest in measures to increase recycling rates and avoid some waste generation.

30 The new Government has deservedly won praise for the introduction of the Corporate Tax Road Map, which sets out how the Government intends to approach reform of the corporate tax system over the course of this Parliament. The CIOT would like to see the introduction of a similar framework for green taxes – a Green Tax Road Map.

Convenience

31 Taxes should be levied at a time and in such a manner that it is most convenient for the taxpayer to pay the tax. We are not aware of any obvious instances of environmental taxes not complying with this principle.

Minimising the compliance burden

32 One risk with the move towards green taxes is that there will be more taxes – each with its own compliance regime and potentially able to generate penalties for non-compliance. As set out in paragraph 25, where possible legislators should look to the adaptation of existing taxes and use of existing regimes such as that for excise duty rather than the creation of new ones.

Other factors for consideration

33 It is important for the Government to be clear what success looks like for each environmental tax measure. While green taxes can and do raise significant tax revenues, unlike most other taxes their objectives include either or both of altering people’s behaviour and ensuring that the cost of damaging behaviour is borne by those responsible (the 'polluter pays' principle). An environmental tax that raised no money at all could be an enormous success, simply because it has driven out the behaviour it was targeting. (The plastic bag tax in Ireland is perhaps the nearest to achieving this result.) Thus Government needs to be clear for each measure of the extent to which the environmental objective or the revenue-raising objective is paramount.

34 Where the purpose of a tax is to change behaviour there must be realistic alternatives available. For example, if a Government’s objective in raising fuel duty is to shift people onto public transport this will be ineffective – and arguably unfair – if there are wide areas where no public transport alternative exists.

35 Environmental taxes present a particular political challenge. While in theory they have the potential to be a rare popular tax (and in the abstract are often favoured over other forms of taxation), in practice they tend to be particularly unpopular. This is partly because they are, in the case of fuel and flight taxes at least, penalising people for doing something they value highly, for enjoyment or because it is essential to their livelihood. It is also because they are perceived as unfair (see paragraphs 18-22) and because many people believe politicians are not being honest about their motives for introducing them (claiming it is high-minded action against climate change when they see it as just revenue raising).

36 The CIOT recognises the difficulties inherent in hypothecation of tax revenue (especially where the size of the revenue stream is uncertain) but notes that both (a) making green tax increases fiscally neutral by balancing them with visible cuts elsewhere, and (b) earmarking revenues from green taxes for particular related spending, have the potential to mitigate public opposition to green taxes to some degree, and should be carefully considered by the Government. (These two courses are, of course, mutually exclusive for a single revenue stream.) Additionally compensatory measures (see paragraph 18) can tackle the perception of unfairness and focusing on areas where there are genuine alternatives (see paragraph 34) is also likely to help.

A shift to greener transport

37 We have not examined this issue in detail but our instinctive view is that if the taxation is set at a high enough level, then such a behavioural shift may well result. However there are a number of potential problems which may arise.

38 Businesses or individuals that have older forms of transport and have no means of avoiding the tax by altering their behaviour could be unfairly penalised. There may be damage to UK competitiveness. Taxes can lead to rogue traders dumping waste and other products such as old motor vehicles, though these problems are well known and best solved by other legislation.

39 In some areas transport taxes can be vulnerable to merely displacing environmental damage rather than reducing it. For example, an airport tax introduced at Schipol in the Netherlands reduced the number of people travelling from the airport, but increased the number of commuters between the Netherlands and Belgium and increased air traffic in Belgium, thus increasing emissions overall.

40 Accordingly, in our view, any attempt to use taxes to achieve such a shift needs to be planned and implemented over a period of years and may need to be accompanied by other measures. For example, if tax is used to discourage the retention of old vehicles or aircraft it would be desirable to provide a transitional measure to help those affected to dispose of those items.

41 It is also clear that unless and until there is a ready availability of low carbon alternatives – such as access to affordable public transport in rural areas – so that there is a real alternative, such taxes will have a limited effect as a deterrent but a powerful effect as an agitator.

The scope for the taxation system to protect and increase stocks of natural capital

42 The CIOT believes that there is considerable scope for the tax system to be used to deter the use of scarce and finite natural resources (land in particular) as well as reducing emissions of carbon and other contributors to climate change.

43 The UK already uses the tax system to encourage efficient land-use. The landfill tax has been successful in reducing the amount of material being sent to landfill, which consequently reduces the amount of land needed for this purpose. More directly the taxation system rewards efforts to reclaim contaminated land through enhanced allowances (land remediation relief). These incentives work well and could potentially be built on.

44 The 2010 Mirrlees Review of the tax system looked at the potential for a land value tax (that is, a levy on the unimproved value of land, rather than property value).  While recognising that reform of the planning system would probably have greater influence over land available for particular uses than the tax system, the Mirrlees Review concluded there is a strong case for introducing a land value tax, with priority to be given to considering its use in the context of land used for non-domestic purposes as a replacement for business rates (see http://www.ifs.org.uk/mirrleesreview/design/ch16.pdf). The introduction of such a tax – either for all land, or just for that used for non-domestic purposes – would clearly present a substantial practical challenge (potentially including the valuing of all plots of land within the UK separate from any structure on the land). Should the Government be minded to move in this direction – and the CIOT does not take a position on what we see as a political question – the first step would sensibly be a feasibility study of the kind recommended by Mirrlees.

45 Notwithstanding the apparent success of landfill tax, we believe that tax can be used more aggressively to ensure that the real cost of consuming natural resources is reflected in consumer products and the tax so raised is used at least in part to develop technologies to restore what was lost.

46 At present, environmental tax policy seems focused on low carbon objectives. We take the view that a more holistic approach is necessary.

Impact of the taxation system on sustainable development

47 We see the three key responsibilities of the tax system in this respect as being:

· To underpin a strong, sustainable, internationally competitive economy, that delivers growth and prosperity and does not unduly deter investment, hard work or other beneficial economic activity;

· To sustainably fund the services, infrastructure and social security needed for a strong, fair and inclusive society and economy; and

· To play a part in incentivising and rewarding environmentally responsible actions.

48 Getting the right balance in the tax system is fundamental to achieving the first two of these, and can be highly significant in the third.

Impact of policy proposals in 'The Plan for Growth'

49 A key objective stated in the Plan is to create the most competitive tax system in the G20. The CIOT and others in the tax world have said for a long time that the corporate tax system needs serious reform and modernisation to be internationally competitive. It is good to see that the Government agree and that reform is going ahead with a sense of urgency. We are particularly supportive of the benchmark of a simpler, more certain tax system. The benefits of this for environmental sustainability are set out in paragraphs 23-30 of this submission.

50 Another key objective of the Plan is to increase investment in low carbon technologies. A key policy proposal to achieve this is the introduction of a carbon price floor. Our views on this are as set out in paragraph 14 of this submission.

51 The Plan notes:

'The Stern Review made clear that the costs of effective international action to tackle climate change are dwarfed by the costs of inaction.'

We agree that there is a need for international action. Action includes the need to review international treaties to ensure that a balance can be achieved between the prevention of the use of the tax system to give local businesses a competitive advantage and the need to be able to introduce and apply effective environmental tax measures that do not put domestic businesses a disadvantage to foreign businesses.

52 We note the formation of the Green Economy Council. Further, we note that with the exception of the TUC all of the members appear to be from industry (including bodies representing industry). Some of those members are from businesses that are particularly high energy users. While we note that the Council is specifically formed to discuss how government and industry can work together on green objectives, it is important that there is similar consultation with those most directly affected by green policies – consumers, including those on lower incomes who will be least able to pay higher energy bills.

Green Investment Bank

53 We have no comments on the Green Investment Bank.



The Chartered Institute of Taxation

54 The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

55 The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, Government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.

56 The CIOT’s 15,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.

20 April 2011