The debate surrounding the Scottish Government’s plans to replace council tax with a local income tax (LIT) has intensified, as the consultation process nears completion.The debate surrounding the Scottish Government’s plans to replace council tax with a local income tax (LIT) has intensified, as the consultation process nears completion. The consultation document was published on March 11th and the process will be complete by July 18th. The government hopes to have the new tax implemented by 2012.
Council Tax was introduced in 1993 by the John Major led Conservative Government and replaced the short lived, and much reviled, Poll Tax which lasted only four years. The introduction of the Poll Tax saw mass non-payment in Scotland and rioting in Trafalgar Square, London.
The Poll Tax was introduced in Scotland one year earlier than in the rest of the UK and is often cited as being a key factor of the decline of the Conservative Party in Scotland. The party won no seats in Scotland in the 1997 Westminster election and only one in the elections of 2001 and 2005
At present, local councils raise approximately half of their revenue through council tax. The amount of tax paid by the occupier is linked to the value of the property. It is graded into eight bands, from A through to H.
The tax has always drawn criticism as being regressive, as it is not based on ability to pay. This is the key reason behind the SNP’s manifesto commitment to abolishing the tax.
Local Income Tax
The SNP laid out their plans for replacing Council Tax with LIT in their consultation document. An extract from the document is found below.
“The Scottish Government believes that the Scottish people have the right to change the way local authorities are funded from local taxation and also to change the nature of that local taxation. That is why the current Government stood for election with a clearly stated proposal to abolish the council tax and replace it with a fairer local tax based on ability to pay. This consultation is the first part of making that proposal a reality, and we are asking for your views. Our proposals for a new local taxation system to fund local authority expenditure include:
* A tax free personal allowance that matches the UK personal allowance levels
* A 3% rate applied to the income that is subject to basic and higher rates of UK income tax
* Collection that complements the existing national system of collection through Pay as You Earn ( PAYE) and self assessment
* Exemptions for savings and investment income
* A tax for second homes, which will be subject to local requirements, and broadly comparable to the current council tax on second homes.
We will seek UK Government cooperation in administering a local income tax. We want to deliver these reforms as quickly as possible and within the term of the current Scottish Parliament. This will be a challenging task, but with the cooperation of the UK Government, we can achieve the implementation of the proposals outlined in this consultation document.
For 2007-08, we estimate that under our proposals households would on average be better off in all but the top income decile, although it is important to note that the impact on individual households will vary according to their particular circumstances.”
The only other party in the parliament that supports LIT are the Liberal Democrats, however they believe that the rate paid should vary from local authority to local authority and not be set a national level. Margo MacDonald, Independent MSP, has also stated that she would back the plans if they were put before parliament to vote on.
The fiercest criticism to the SNP proposal has, unsurprisingly, come from the Labour party. The main plank of the argument against the tax is that the SNP’s figures do not add up and that the new tax would not provide sufficient funding for local authorities.
A report published by The Institute of Public Finance has stated that the tax would leave a funding gap of £581 million, whereas the SNP have claimed that the gap would be £281 million. The SNP have stated that any shortfall would be met by the government.
The SNP also want £400 million of council tax benefits to be released to help with the set up costs of the new tax, but the Westminster government has stated that it has no intention of handing out the funds. It believes that LIT is a national tax as it is set at one rate for the whole of Scotland, whereas the benefits are intended to be used for local taxation which vary from region to region.
The Labour party has also been pushing the argument that a higher rate of tax would put Scotland at a competitive disadvantage with the rest of the UK and that many in the financial services industry would seek work elsewhere. The UK Chancellor, Alistair Darling, stated "Local income tax would be a disaster for the financial services industry. If we are going to attract the best to come to and remain in Scotland, to tell them that you are going to be paying more income tax would be the completely wrong thing to do… if you start losing these people who say, 'I think I'll go and work in London or another part of the world', that would be hugely damaging.”
The chance of success for the SNP tax reform is unclear, with one leading law expert speculating that the issue will end up in the courts.
Speaking at the local government committee, Professor Alan Page of Dundee University, said "This question of legality will cast a long shadow over the bill until it's effectively settled one way or another… the nightmare scenario would be if you have a situation like the poll tax where people were refusing to pay because they say the Scottish Parliament does not have the power to do this.”
The one major factor in the SNP’s favour, and one that could ultimately swing the decision in their favour, is that no party seems to be questioning the fact that most households would be better off under the new scheme.
Glasgow City Council created a calculator that they hoped would show most people would be worse off under LIT. The council are against the reform and whilst they admit the council tax is far from perfect, have offered no suggestions as to how the current system could be improved. According to Glasgow SNP MSP Bob Doris, the calculator shows that approximately 72% of Glaswegians would be better off under the new scheme and that the move has backfired badly on the council.
The government also gained backing from the Convention of Scottish Local Authorities, with 52 out of 102 local authorities backing the tax reform. A surprise outcome, which the SNP will believe has strengthened their position. Upon hearing the result, Scottish Government Finance Secretary John Swinney stated "The council tax is an unfair tax and it is time we moved to a fairer system that recognises people's ability to pay - and Scotland's representative local government organisation now agrees with that, which is an excellent step forward.”