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Section 1: Executive Summary
1. Every household benefits from the services provided by local authorities and almost all households pay council tax.
2. The Committee resolved to find a way to ensure that, as far as possible, local tax bills are fair and that the local services on which we all depend have a reliable source of funds. The stakes are high. The average council tax bill payable in Scotland in 2006-07 is £958. 1 However, council tax provides only 20% of local council revenue expenditure, with 80% coming from the Scottish Executive.
3. While the Committee's remit emphasised local taxation, we quickly concluded that a proper review could consider neither local taxation nor local government finance in isolation. In particular, we cannot separate local government finance from the services it funds or from the broader role of local government. Nor can we divorce local taxes from the basket of UK taxation. The consequences of these conclusions follow.
4. First, there is the fundamental question about what the relationship between central and local government should be. There is long-standing and unresolved debate about their respective roles. The Committee's view is that it is essential that the Scottish Parliament, the Scottish Executive and local authorities grasp the nettle and resolve what appears to be a corrosive argument about their relationship. We hope that the recent debate initiated by Transforming Public Services2 can serve as a catalyst towards this.
5. Next, there is the relationship between finance and the roles and responsibilities of central and local government. The received wisdom, dating back at least to the Layfield Report of 1976, is that local tax-setting and tax-raising powers are essential to ensure local accountability. Some representations to the Committee argued that local tax-setting powers distinguish local government from local administration. The Committee looked long and hard for objective empirical evidence to support this theoretical argument. No such evidence was either produced by any respondent or found by the Committee in our other deliberations. On the contrary, results of public survey work commissioned for our review found that people were much more likely to be influenced by questions over local services and issues and over the use of public money than on the level of council tax.
6. The Scottish Parliament is accountable to the people of Scotland because of the extent of its responsibilities and scope of its discretionary powers, despite having only limited tax-setting powers. We conclude that the extent of discretion over how local authorities actually spend their money is a more appropriate test of local accountability than the existence of tax-setting powers.
7. In that context we conclude that the balance of funding between Scottish Executive support and local tax income is of itself of little importance. To many in local government, moving the balance of funding towards 50:50 would protect local authorities from the effects of perceived under-funding and signal parity of esteem between central and local government. In our view, these concerns are tangential to the real issues, namely clarifying the relationship between the Scottish Parliament, Scottish Executive and local government and ensuring the right level of funding for local services.
8. We also conclude that consideration of local taxation cannot reasonably be separated from the broader context of UK taxes. The UK basket of taxes contains many components, each of which targets specific elements of how people and businesses obtain and use income and wealth. Decisions about the contribution to be raised by each type of tax often require delicate adjustments to be made to optimise tax yield and to minimise unintended consequences in terms of effects on the economy and people's behaviour.
9. A number of consequences follow. Most obviously, a local tax should not distort the overall balance struck by the basket of taxes, in terms of yield and other effects. Furthermore, this balance should be achieved in as efficient a way as is practicable. In theory, a local tax system which replicated and mirrored the national tax system would not upset this balance. However, it would be extremely complex, inefficient and expensive.
10. In this context, the Committee focused its consideration on income and local property taxes. The Committee also considered taxes on transactions ( e.g. sales tax, fuel tax) and on individuals (poll taxes). However, these latter two did not satisfy the criteria we use to assess the suitability of forms of local taxation.
11. Income taxes are apparently regarded by taxpayers as being fairer than alternative forms of taxation because taxes on income are related to ability to pay. However, income tax already makes a substantial contribution to UK tax revenues.
12. The Committee concluded there were objections both in principle and in practice to a local income tax. These include the following:
- The tax base should be as broad as possible. Around one-third of UK tax receipts already come from UK income tax.
- Wealth, as well as income, should be taxed.
- Additional income tax is a disincentive to work, which is economically undesirable.
- Yield would be more volatile than under a property tax; and
- A local income tax would be "fair" only if it was levied on all income but it would be extremely complex and expensive to do so. A tax that applied only to earned income would arguably not be "fair".
13. The UK has no form of annual taxation other than council tax on property or other assets. In a Scottish context, we are satisfied that property is a reasonable proxy for wealth.
14. Property taxes can be seen to be "fair" and progressive, because there is a correlation between property values and ability to pay. Evidence suggests that, where this correlation does not apply, it is more likely to arise from households on higher incomes living in lower-priced homes than vice versa.
15. Property taxes are better suited for use as a local tax than income tax. They are difficult to avoid and suitable for collection locally. They are certain: while they lack buoyancy, they are not susceptible to sudden reductions. This is a major advantage for local authorities whose costs, year-on-year, are fixed in the short term.
16. We considered council tax in its present form and possible reforms to improve its progressivity. We examined and modelled possible changes to the number of bands and the multiplier between the lowest and highest bands. The results failed to meet our criteria. Consequently, we were unable to recommend either continuation or reform of council tax.
17. Having considered and rejected all the options put to us, we concluded that a radical alternative is required. We recommend a new progressive Local Property Tax ( LPT) be introduced, based on the capital value of individual properties and payable by households occupying properties (whether as owner-occupiers or as tenants) and by owners of second homes and unoccupied properties. LPT satisfies our criteria.
18. Around two-thirds of households in Scotland would be either better off or no worse off with LPT than under council tax. The gainers would primarily include households in lower income deciles, and in properties currently in council tax bands A to C.
19. Revaluation of domestic properties is a prerequisite to the introduction of LPT. We recommend routine regular revaluations, which are backed by statute and which would be yield-neutral.
20. We also conclude it is not appropriate for decisions about the shape of a local tax to focus primarily upon the interests of the relatively small number of "asset rich, income poor" households at the expense of most households in Scotland. Nevertheless, we have considered assistance for this group and describe a possible optional deferment scheme which could be valuable to such households.
21. We considered possible changes to non-domestic taxation. In the light of evidence received, we recommend the retention of non-domestic rates and the status quo.
22. We also considered a number of associated issues. Of our recommendations, the most significant is that principles of local accountability and good government demand the removal of the statutory requirement upon local authorities to collect water and sewerage charges alongside council tax bills. We also recognise the role that specific taxes or charges may have in supporting investment activities or encouraging positive behaviour. However, in the context of core funding, such taxes could play only a minor role.
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