Briefing No 180: Local Income Tax Consultation Paying for Local Government

March 2008

Introduction

The Government has published its plan to replace council tax with extra income tax. The Consultation entitled "A Fairer Local Income Tax" proposes a centrally set tax on wages. This was a key manifesto commitment from the SNP. The Liberal Democrats also favour funding local government through a tax on wages although they would prefer local government to have the power to set their own rate.

The Consultation

The Government proposes to replace the portion of local government finance raised through council tax with a tax on wages. This will be centrally set at 3%. There will be no tax on income from savings or other investments. They plan to collect the tax through the national system for PAYE and self assessment although no agreements are in place with the appropriate UK bodies to do so. There will still be a tax similar to the council tax for second homes. There is no detail on the allocation to individual councils. The consultation is a very different style offering tick boxes: a referendum rather than the usual space for a debate about the issues. This may be because there is no majority in the parliament for this change and they hope use this style to build popular pressure for change. There are still many questions remaining about how they propose to make this tax work.

Finances

There was a great deal of debate about: how the numbers add up; how much money will be raised; who will pay what and about the council tax benefit. The income tax will not raise the same amount of money currently raised by council tax. The Herald claims a £500million shortfall and the Scotsman £700million. Even with the government's own model, assuming £400 million of council tax benefit is retained, an income tax will raise about £280 million less than current council tax revenue. If the government as promised funds the shortfall for local government this would mean cuts in other public sector budgets. When free personal care was introduced in Scotland the relevant benefits were not rolled into the block grant. It is therefore likely that there would be a shortfall of at least £700million leading substantial cuts in public services

Fairness

Campaigns against council tax claim it is unfair but the fairness of a tax cannot be judged in isolation. Taxing all forms of wealth makes the tax system fair. Increasing the tax on wages pushes the burden of taxes on to working people. Wealth inequality is rising in the UK. Now the top 1% hold 23% of total personal wealth. Income other than wages and salaries is mainly investment income. Top 10% of working age population received 4% of their income from investment compared to less than 1% for the lowest 10%. This income is not liable to the new tax. There are better ways to help people on low incomes living in large properties than abolishing the council tax. Property taxes remain the most common form of local taxation within Europe because of the need for balance in a fair system of taxation and the obvious link between your home and local government.

Household bills

The Government claims that 80% per cent of households will be better or no worse off under the tax. The poorest households will gain nothing as they already get full council tax benefit and so pay nothing now. Verifying this claim is impossible because of the different make up of households, number of earners and dependants, what other perks are received i.e company cars and the complexities of council tax benefit and other tax credits and allowances. The paper itself states that it is impossible to produce a "user friendly calculator" to enable people to work out their own bill.

Assuming average council tax bills and a 3% tax rate houshold incomes of about £45 000 and under pay less and those above pay more. At the 6.5% rate, needed to raise the same money as council tax, a houshold with 2 earners on about £20,000 each would pay about £2000 in extra income tax. Even with council tax benefit the rate would need to be 4.5% as set out in the SNP's 2004 proposal. The 3p rate is choosen to make the plan more palatable to average income families. The council tax was also introduced at a subsided rate. It then rose by an average of 10% in its first four years in order to meet the real costs of local government. The same choice would arise again: cut services or raise taxes.

Practicalities

Apart from the disruption caused by the third change in local government finance in twenty years there are many other practical problems with this proposal that are glossed over in the consultation. There have been no formal discussions with the UK tax service to agree a mechanism to collect the tax. They have no power to instruct employers out with Scotland or UK bodies to do so. There are many practical difficulties in both payroll offices and the tax office. Computer systems will need to be changed and Scottish residents identified. There are enormous opportunities for tax avoidance. The wealthy can take their bonuses in shares rather than wages, they can hide their earnings in overseas accounts, they will invest in property, and people will lie about where they live. Ordinary workers on PAYE will feel the full burden of this tax. When you work overtime, get a bonus, or wage rise you will pay more tax.

The paper is not clear about the mechanism used to distribute the money raised among councils. Councils will have no control over how much money they raise and will be accountable to central government for spending rather than local people. Collecting water charges, currently collected with council tax, will need to be reorganised. They also plan to use a form of council tax on second homes. There is no plan to collect these in a cost effective manner. Much more detail is needed on how the new system would work.

Any cut in local government budgets will lead to job losses. There are also over 4500 people directly employed in work relating to the council tax. Many of these jobs will be lost if the tax is abolished.

UNISON Response

UNISON remains convinced that taxing property is fair and cost effective. Allowing local government to set its own tax rate is fundamental to making it democratically accountable to local people. There are more effective ways of improving local taxation than replacing it with a tax on wages.

Action for branches

Branches should inform members and ask them to lobby their MSPs about this key issue . As a priority branches should make contact with those members and non-members working in directly on council tax to make sure they are fully informed about the implications of these plans and UNISON's campaign.

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

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

UNISON briefing: Council tax
www.unison-scotland.org.uk/
briefings/counciltax.html

UNISON response to Introduction of a Scottish Service tax
www.unison-scotland.org.uk/
response/servicetax.html

The UNISON Scotland Response to the consultation by the Local Government Finance Review Committee
www.unison-scotland.org.uk/
response/localtax.html