Responses to Local Income Tax Consultation Paying for Local Government

Briefing No 189 September 2008

Introduction

The Scottish Government have announced that they will move ahead with their plan to introduce an extra tax on wages to replace the council tax in Scotland. While the government has not yet published the responses to the consultation, a wide range of organisations has highlighted problems with the tax. This briefing gives an overview of available responses. For background information see P&I briefing 180 and UNISON's response to the proposal.

Responses

A general theme is that the consultation did not contain enough detail to enable full analysis. Chartered Institute of Public Finance and Accountancy (CIPFA) & Society of Local Authority Chief Executives (SOLACE) in particular focused on the lack of detail on how the tax would be collected. This meant it was impossible to comment on cost effectiveness in any detail.

Finances

A key concern for UNISON is that the tax will not collect sufficient money to deliver public services at the current level, far less improve them. The government's own estimate is a £280 million shortfall. The treasury states £750 million, similar to the figure in the SOLACE & CIPFA responses. Royal Institute of Chartered Surveyors (RICS) states that the current tax proposal would only raise 40% of the current tax revenue. This will lead to cuts in services, increased charges for those services that remain and of course cuts in public sector jobs.

Even CBI, a supporter of tax cuts, is concerned about the threat to public sector finances. They calculate that the money that the government proposes to use to top up local authorities could be used to reduce council tax by 15%. They, like UNISON, point out that is not new money and ask what other budgets will be cut to make this £280 million available.

Fairness

The government, like UNISON, believes that taxation should be fair and based on ability to pay. But ability to pay is not just what your wages are. Ability to pay is complex. Taxation requires a system of allowances and disregards to ensure fairness. It also needs all forms of wealth, not just wages, to be taxed. It cannot be one size fits all. If for example you have children, other caring responsibilities or a disability then a fair system makes allowance for that. Citizens Advice Scotland (CAS) and the Royal Institute of Chartered Accountants (RICS) and the Law Society in Scotland all raised the issue that many families in receipt of tax credits will be paying this extra tax and there is no plan to protect them. The Low Incomes Tax Reform Group (LITRG) states that low income groups, including pensioners, who have incomes from more than one source are often given the wrong tax code, especially if they have more than one job. They then end up paying too much tax. The extra income tax will make this worse. The new tax will add to the tangle of taxation and benefits they are already in.

Carers Scotland state that carers will lose out under the tax plan as it does not take into account their current protection under council tax. Carers can still get all or a proportion of single persons' discount. Carers' allowance is a taxable benefit, therefore liable to the tax, unless an exemption is made. The same will be true for other taxable benefits. The tax also takes no account of the high costs of caring for those carers who are in work. They are concerned that this tax will be a further disincentive to work for carers who already face multiple barriers to work.

The NUS states that the plan does not exempt students unlike the council tax. Students from low-income families will be hit hardest: they work the longest hours as their parents are less able to give them financial support. Young workers who live in with their parents will find they also have to pay.

CAS, CBI Scotland, CIPFA & SOLACE all highlight the omission of any plans to deal with water and sewerage charges. The proposal offers nothing to tackle the difficulties people on low incomes have in paying these charges, nor a way to collect the money without council tax. CIPFA and SOLACE, ICAS, the Law Society of Scotland, and STUC all point out that exempting investment income and other forms of wealth from the new tax means that the wealthy will pay less tax and this is unfair. Even the PCS and the Scottish Action Against the Council Tax who support the government's plan believe it is not fair to exempt investments and savings income from the tax.

Practicalities

The Institute of Revenues, Rating and Valuation (IRRV) and LITRG emphasise how complex collecting income tax is. It is not just a case of "flicking a switch on a computer". They believe there would need to be a register of Scottish residents in order to know who to tax. RICS ask how non-Scottish employers will deal with a tax on Scottish-only staff. Who will check if address is correct? IRRV state that property taxes are efficient and effective. 37 out of 39 European administrations use them. SOLACE & CIPFA state that collection would cost HMRC in the range of £12 to £26 million annually. They also quote the figure from the Burt Report of £17 to £28 million in costs to employers to collect the tax. CBI say it may be difficult to get staff to transfer to Scotland particularly for shorter postings and that it may lead to claims for a Scottish weighting. They claim this will be complex and open to fraud. Council tax has very high collection rates. SOLACE & CIPFA state council tax collection rates of at least 98% and collection costs at less than 2% of yield. The CBI asks what wages would be taxable: Is it gross wages? Is it after pension contributions? Is it after charitable giving? What about wages in other forms: store vouchers, child-care vouchers or company cars? If these are not taxable will people start to move to these to avoid tax? Will they take shares instead? CBI complains of moving the costs of collection on to business, but they are not the only employers: public and third sector employers will also have to bear the burden of these costs.

Property based taxation

UNISON remains convinced that taxing property is fair and cost effective despite the consultaion not offering this as a route forward. There is in fact widespread support across the polictical spectrum to fix the real problems with the current local tax regime. Scotland could move quickly and effectively to a real solution before any more time is wasted on an additional tax on wages

Contacts list:
Kay Sillars
k.sillars@unison.co.uk

Dave Watson
d.watson@unison.co.uk

@ The P&I Team
14 West Campbell St
Glasgow G26RX
Tel 0845 355 0845
Fax 0141-307 2572

Further Information

Consultation document
www.scotland.gov.uk/Publications/2008/03/11131725/0

UNISON response to the consultation
www.unison-scotland.org.uk/response/localtaxresponse.pdf

UNISON briefing 180 on the consultation
www.unison-scotland.org.uk/briefings/localincometaxbrief1.html

Burt Report
www.scotland.gov.uk/Publications/2006/11/06105402/0