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Local Taxation in Scotland

The UNISON Scotland Response to the consultation by the Local Government Finance Review Committee

February 2005


UNISON is Scotland's largest public sector trade union representing over 150,000 members. Over 90,000 of these work in local government and related services.

This paper constitutes UNISON Scotland's response to the Local Government Finance Review Committee consultation on local taxation in Scotland.

The Local Government Finance Review Committee was established on 16 June 2004 independent of Scottish Ministers to review the options for local taxation in Scotland and to make recommendations to Ministers. The Committee is Chaired by Sir Peter Burt.

The consultation paper is available on the Committee's website www.localgovernmentfinancereview.org


Local government finance has been the subject of many reviews. From Layfield in 1974 to the Scottish Parliament Local Government Committee in 2002. The current review reflects different policy approaches of the Labour/Liberal Democrat coalition to this issue. In addition above inflation increases in the current local taxation system inevitably sparks a debate about the system.

UNISON Principles for Local Taxation

In developing our response to the detailed questions set out below UNISON Scotland has adopted the following principles:

  • Local authorities should raise and control revenue, maximising its autonomy and freedom from central control.

  • The Council Tax should be reformed including regular revaluation and by amending the banding structure.

  • Council Tax Benefit should be reformed.

  • Business rates should be returned to local authority control.

  • Grant support should be allocated with minimum ring fencing.

  • Level playing field between local authority borrowing and private finance.

In summary UNISON believes that the Council Tax provides a stable yield for local councils at low administrative cost. It should be reformed to make it more progressive through revaluation and changes to the banding. The non-property based alternatives (Local Income Tax) are administratively complex and easier for the wealthiest members of society to avoid. A tax on employment when property should have a place in any ‘basket' of taxation.

UNISON Responses to questions posed by the Committee

Core Issues

Question 1: We would like the options set out in Sections 5 and 6 to be considered against at least the issues above. Are there any other issues that we should be considering? If so, what are they?
The core issues set out in section 4 are a fair reflection of the factors that should be considered. It is also important to recognise that many of the responses depend, not on the strengths or weaknesses of the current system, but on the level of taxation - a policy decision. Whilst local government funding has increased in real terms it has increased below the average of other portfolios.

Accountability and Balance of Funding

Question 2: How well do you think that any or all of the options for local taxation set out in Sections 5 and 6 address the issue of accountability?
UNISON believes the issue of accountability is important although this is not limited to the local taxation system. Whilst the Scottish Executive does lay down statutory requirements we operate a system of local government not local administration. Alternatives to the Council Tax offer no greater accountability in our view.

The fact that only 60% of the adult population pay income tax is an argument against LIT systems but not in our view the strongest. We are opposed to the SSP's Scottish Service Tax because it would be set nationally with a consequential loss of local accountability.

Question 3: Is the present overall balance of funding for local authorities between Scottish Executive funding and local (non-business) taxation a reasonable one? What are the reasons for your views?
The current funding balance gives the Scottish Executive a high degree of control over local government revenue finance. Not only is 80% of the revenue provided by the Executive but it also ring fences some of this resource. One possible way of reducing ring fencing is through Local Outcome Agreements (LOAs) under which the Executive and councils agree local service targets that are informed by both national and local priorities.

The balance of funding in Scotland is one of the most centralised in the EU. For example local funding is 60% in Sweden, 57% in Spain and 44% in France. It might also be argued that lower election turnout and the ‘gearing' impact of the current balance are also consequences of the current imbalance.

Question 4: If you think the proportion of funding raised by local government should be increased, what action should be taken to achieve a different balance?
Primarily by returning non-domestic rates to local authority control. We would strongly oppose transferring one or more major services from local government to the Scottish Executive. The growth of quangos and government agencies already undermine democratic accountability. The fact that the Scottish Executive directs the standards in many services such as police, fire and education is not a sound reason for removing local accountability.

Question 5: If you think the proportion of expenditure which is funded by the Scottish Executive should be increased, what do you think the revised balance should be?
If non-domestic rates were returned to local authority control the proportion of income raised locally would increase to around 45%. UNISON believes that this is a better balance giving local authorities greater freedom to pursue local priorities.

Question 6: What are the arguments, both in theory and in practice, for and against having all (i.e. 100%) local government finance determined centrally with local authorities having responsibility for expenditure?
If all finance was centrally raised there would be less flexibility for local authorities to pursue local priorities. In practice the ability to move resources between budgets is limited by service requirements to a greater degree in local authorities than the Scottish Parliament that receives most of its income from the Treasury. 100% funding would also strengthen the psychological effect providing the majority of funding has on relations between central and local government. Even the semblance of parity of esteem would be impossible.

Options for Non-Business Local Taxation

Property Based Options: Council Tax

Question 7: How well does the Council Tax address each of the core issues in the checklist outlined in paragraph 28 above? What, if anything, is wrong with the Council Tax?
UNISON believes that a property tax is an important part of the ‘taxation basket'. Whilst property value is not a faultless indicator of wealth or ability to pay, research shows that there is a broad link. It remains a widely accepted and understood basis for local taxation, more difficult for tax avoidance and therefore it would be wrong to exclude it from taxation altogether.

Scotland is a small country that has pressure on space in certain areas and related housing problems. Encouraging over-consumption of housing by leaving it as one of the few wholly untaxed items of consumption is not desirable.

Question 8: Could any drawbacks be dealt with by reform of the Council Tax? Or are the drawbacks so serious that the Council Tax should be scrapped in favour of a different local taxation system? What are the reasons for your views?
UNISON believes that reform of the Council Tax is the correct approach. We broadly support the conclusions of the Local Government Committee's 2002 inquiry including regular revaluation and revised banding.

Revised banding should probably include an additional band at the lower end and one or more at the top end. This would make the banding system more progressive.

Question 9: Would there be advantages in retaining the Council Tax - in either its present form or on a reformed basis - as the local non-business taxation system? If so, what are these?
Yes. See above.

Question 10: Would there be advantage in combining the Council Tax - reformed or unreformed - with some other system of local (non-business) taxation? If so, what?
As a reformed Council Tax is essentially a sound local tax we see no case for complicating the taxation system or introducing further levels of administration.

Question 11: If the Council Tax were retained - on either a reformed or unreformed basis - should there be a revaluation of domestic property? If so, when should the revaluation take place? How frequently should revaluations be held? What are the reasons for your views?
There should be regular revaluations at five-yearly intervals. However, revaluations should not coincide with the revaluation of non-domestic properties because of the effect this would have on the work load of the assessors in Scotland.

The results of research undertaken by Heriot Watt University for the Local Government Committee suggest that property values in Scotland have changed significantly since 1991 - and that relative property values are now much higher in some areas (eg Aberdeen, Edinburgh and East Dunbartonshire) than they were in 1991; and relative values have fallen in other parts of the country (eg Glasgow, Dundee and Renfrewshire). There would therefore probably be a need for transitional arrangements for both individuals and authorities. This would subsequently even out if regular revaluations took place.

Other Property Based Options

Question 12: Would there be advantage in re-introducing domestic rates as a replacement for the Council Tax? What are the reasons for your views?
The case for domestic rates or LVT is similar to the Council Tax. We see no merit in changing the system with the consequential upheaval for marginal if any gain.

Question 13: How well do domestic rates address each of the core issues in the checklist outlined in above?
See 12 above
Question 14: Would there be advantage in introducing the Land Value Tax as a replacement for the Council Tax? What are the reasons for your views?
See 12 above
Question 15: How well does the Land Value Tax address each of the core issues in the checklist outlined in paragraph 28 above?
See 12 above

Non-Property Based Options

Question 16: Would there be advantage in introducing a local income tax as either a complete replacement of the Council Tax or as a supplement to it? What are the reasons for your views?
We see no merit in LIT as it will be fully integrated into the national taxation system, blurring the distinction between national and local spending and accountability.

As argued above property should not be excluded in a ‘basket' of taxation. Its effect would be to shift the burden of local taxation to those in employment. The problems of the ‘cash poor, property rich' should be addressed through reform of Council Tax Benefit.

There would be a wide range of administrative difficulties. Registration or declaration of residence would be required, which has not until now been an issue in the income tax system in the UK. People are taxed through pay as you earn, on the basis of information that is supplied by their employer without the Inland Revenue needing to know where they live. With a LIT, the system would need to record accurately the residence of individuals, both to charge them the right amount of tax and to attribute the right revenue to the right local authority. That would have to be enforced, or else some people would choose to declare residence in places with low tax rates. As with other forms of income tax it is rich who are better able to avoid taxation.

Most experts argue that the power to vary LIT should be confined to earned income. A large proportion of the tax on investment income is deducted at source, without any need to be sure of residence. It would be administratively complex to collect and allocate this income but again it would be the wealthiest members of society who would benefit.

In addition to administrative problems there could be significant variations in yield making it difficult for local authorities to maintain services. Scotland would also lose some £300m in Council Tax Benefit.

Question 17: What would be the optimal form of any local income tax scheme? How should it operate in detail, particularly in terms of setting the tax and its essential features?
See 16 above
Question 18: Should it be separate from the national income tax system or fully integrated with it? Would a local income tax operating within the national income tax system obscure the link between council spending decisions and the levels of local tax? What are the reasons for your views?
See 16 above

Question 19: How well would a local income tax address each of the core issues in the checklist outlined in paragraph 28 above?
See 16 above

Question 20: Would any form of poll tax be worth considering as part of the future local taxation system - either on its own or in combination with some other tax? What are the reasons for your views?
The case against the regressive poll tax was well made at the time the last Conservative government introduced it. To return to it in any form would be unthinkable.

Question 21: How well would a poll tax address each of the core issues in the checklist outlined in paragraph 28 above?
As above.

Question 22: Would a local sales tax be worth considering as either a full or partial replacement for the Council Tax? How well would a local sales tax address each of the core issues in the checklist outlined in paragraph 28 above?
Sales Tax is already in the basket of taxation through VAT. This is essentially a regressive tax, mitigated by exemptions, and therefore does not meet the most important of the core issues outlined above.

Question 23: Is a tax on motor vehicle fuel appropriate and worth considering as a local tax? How well would such a tax address each of the core issues in the checklist outlined in paragraph 28 above?
We remain unconvinced of the merits of this proposal for the same reasons as set out above for a sales tax. It would have a disproportionate impact on rural areas.

Question 24: Would a tourist tax be worth considering as a supplement to the Council Tax or any alternative form of local taxation?
We would not reject out of hand this option as a supplement, not a replacement, for the council tax. Councils have to provide services for tourists who do not contribute through the Council Tax. Therefore some form of ‘bed tax' would seem reasonable and is used elsewhere. Further research would be required on the economic impact on the tourism industry that is so vital to Scotland's economy.

Question 25: Are there any other models of local taxation that the Committee could consider? If so, what?

Options for Business Taxation

Question 26: How well do non-domestic rates address each of the core issues in the checklist outlined in paragraph 28 above?
We believe the system of non-domestic rates is essentially sound and meets most of the tests set out in the core issues.

Question 27: Would there be advantage or disadvantage in returning responsibility for setting the non-domestic rate poundage to local authorities? If so, what?
UNISON strongly supports the return of non-domestic rates to local authority control. Whilst business organisations continue to oppose this reform they have produced very little evidence that there would be a negative impact on local firms.

As set out above we believe this is the most straightforward way of achieving a shift in the balance of funding creating greater financial independence and autonomy for local councils.

However, the grant distribution system would need to take account of differences in councils' taxable capacity - so that low rateable value areas were not disadvantaged by the change.

Question 28: If responsibility for setting the non-domestic rate poundage were returned to local authorities, how would this affect the relationship between local authorities and the business sector?
It would help to re-establish effective links between businesses and local authorities to complement councils' community leadership and economic development roles and reduce the gearing affect of the council tax. Businesses would have immediate access to the point of collection and be able to discuss locally the impact of the tax and services those taxes pay for.

Question 29: Should a local payroll or employment tax be considered as either a full or partial replacement for non-domestic rates? How well would such a tax address each of the core issues in the checklist outlined in paragraph 28 above?
Question 30: Should a local tax on corporate profits be considered as a full or partial replacement for non-domestic rates? How well would such a tax address each of the core issues in the checklist outlined in paragraph 28 above?
Both of these sources of taxation are covered by UK taxation systems and therefore would be seen as a double tax on employment or profits.

Question 31: Are there any other options for local business taxation? How well do they address each of the core issues in the checklist outlined in paragraph 28 above?

Related Issues

Question 32: Should local authorities be given the power to charge for a wider range of services than is currently the case? If so, for which additional services should authorities be able to charge? What are the reasons for your views?
The only other option considered in our own research has been the extension of charging for non-core services. However, this again has the potential to be a regressive form of taxation unless applied in very limited circumstances.

There is a case for local authorities to charge above full cost recovery for a very limited range of commercial services and they should have the power to do so. The income is likely to be marginal and therefore supplementary to other taxation systems.

Question 33: Is there a case for a system under which particular local services would be fully or partially paid for by direct fees or charges as an alternative to funding from local (non-business) taxation? If so, to which services should such a system apply? What are the reasons for your views?
No. Business rates are a contribution towards essential public services for the whole community.

Question 34: Are the current arrangements for the collection of water and sewerage charges alongside the Council Tax satisfactory? Do the billing arrangements blur accountability? What are the reasons for your views?
Question 35: If you believe the current arrangements are unsatisfactory, what changes would you propose?
Question 36: If a new (local) taxation system were to be introduced, how would this affect the current arrangements for collection of water and sewerage charges?
There is an element of blurred accountability, although the documentation has improved significantly in recent years. In theory Scottish Water could collect water charges separately and have the powers to do so. However, the additional collection costs would be significant for very little gain.

Question 37: What are the strengths of the present system for distributing Grant Aided Expenditure (GAE) among local authorities?
Question 38: What are the weaknesses?
Question 39: What are the consequences for the distribution system of moving to an alternative system of local government finance?
Question 40: Is equalisation necessary? If you think that it is necessary, to what extent should it apply? What are the reasons for your views?

Grant distribution has also been the subject of as many reviews as local taxation. In essence the losers complain and the gainers keep quiet. Any proposed changes to the system are viewed in that light.

UNISON generally supports a formula based grant distribution mechanism that focuses on local need and is not used a means of directing resources to Scottish Executive priorities.

The review should also address the issue of ring fencing. The Welsh Assembly has rightly abolished this practice and UNISON believes Scotland should follow more quickly

Any Other Issues?

Question 41: Are there any other issues that you feel are not covered in this consultation paper and that you feel the Committee should be covering in its review? We look forward to receiving your views.

The questions above focus on revenue yet capital finance is also important. The Scottish Executive has steadily increased capital expenditure over recent years and plans to do so again in the next budget cycle. In addition the abolition of s94 consents and the introduction of a prudential borrowing regime will give councils much greater flexibility over capital expenditure.

However, PFI remains a concern as the Executive does not provide a level playing field between prudential borrowing and private finance. Councils only get the subsidies for new schools if they go down the PFI route. Similar considerations apply to housing stock transfer. One of the main constraints is the obsession with achieving off-balance sheet solutions that do not count against the Executive's block grant.

UNISON therefore believes that the solution is a level playing field between PFI and conventional borrowing so that local authorities can choose the option that genuinely provides the best value for money.

Whilst Council Tax Benefit is a reserved matter it is vital in ensuring that there is a relationship between household income and the amount of Council Tax payable. Low take up of this benefit remains a concern largely due to the stigma of a means tested system. We therefore believe there is merit in reviewing the system by raising the savings limit and moving towards a simple and understandable ‘maximum liability to Council Tax'.

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For Further Information Please Contact:

Matt Smith, Scottish Secretary
14, West Campbell Street,
Glasgow G2 6RX

Tel 0845 355 0845 Fax 0141 342 2835

e-mail matt.smith@unison.co.uk

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