« Previous | Contents | Next »
Listen
Section 8: Criteria used to Assess the Forms of Local Taxation
Introduction
1. The remit given by Scottish Ministers requires us to "review the different forms of local taxation… against criteria set by the Executive".
2. The previous three sections discussed two of the criteria listed in our remit - namely "local accountability" and "balance of funding". Those sections set out in detail how we have interpreted these criteria and the weight we attach to each.
3. In this section, we complete our framework of criteria against which we assess the different tax options later in this report. The criteria listed in our remit form the backbone of this framework, although we take time to set out how we have interpreted these. We believe that certain other factors, while not set out in our remit, are also worthy of inclusion in our framework, and these are described later in the section. We explain why we attach different levels of importance to some criteria over others. And we discuss tensions that might potentially apply between different criteria.
A. High Importance
Size of Tax Base
What this criterion is
4. The size of tax base relates to the number of people or households who would be liable to pay the tax. This is one of two criteria we have used to test the accountability of councils to their local residents (the other one is "Identifiability as a Local Tax" - see below).
Why it is of high importance
5. A large tax base is necessary to ensure that the burden of local tax is spread over as many residents with the necessary ability to pay as possible, in order to keep the burden on these residents reasonable.
Effects on the Economy
What this criterion is
6. Taxes are not used solely to provide governments with income. The way they are applied, and the levels at which they are set, can affect the choices we make about our working habits, the way we spend money and the property we live in. Taxes are therefore sometimes used to encourage particular behaviour from the public and businesses. The counter-argument is that, when we propose to change or reform a tax system, we must consider how those changes might affect people's behaviour and the broader economy.
Why it is of high importance
7. Any changes that are made to the tax system will not only affect how much income councils can expect to receive from local taxation. They may have a more fundamental effect on businesses, in terms of demand for their products and services and how they develop. They might also seriously affect - for better or worse - the prospects that the public might have about their employment, income and standard of living.
8. It is difficult to anticipate the effects of a particular change in tax on the economy and on people's behaviours. While we can try to predict possible effects in theory, however imperfectly, the extent to which they arise in practice will depend on the extent of change and other factors.
Fairness
What this criterion is
9. While it is clear the public does not hold a single and universally applicable definition of what "fairness" is, there is a clear and very strong association between fairness and the level of people's income and consequent ability to pay tax bills (the Committee's view is expressed below). GfKNOP reported the importance of ability to pay among participants in the deliberative research they undertook for us. 97
10. Looking at the reasons that respondents to the public survey work conducted by MORI Scotland gave for either being dissatisfied or satisfied with council tax, 98 most reasons were associated with either the level of council tax bills or the fairness of the council tax system. Specifically on fairness, ability to pay was perceived as the most important factor ("Takes no account of earnings/ability to pay" (31%); "Hits pensioners especially hard" (15%); "People in more expensive homes don't pay much more council tax than those in cheaper homes" (15%); "Value of property is reasonable basis for taxation/fairness" (22%); "Relief exists for poor people" (5%)).
11. Beyond this, a correlation also seemed to be evident in the minds of some respondents between fairness and:
- a large tax base where most people have to make some contribution to the cost of local services ("Too many people don't pay, so the rest of us have to pay more" (15%); "Takes no account of the number of people living in a house" (13%); "Good proxy of size of household" (5%)); and
- people's use of services ("Bears no relation to the services people use" (25%); "Good proxy for use of services" (2%)).
12. However, the extent of public interest in these factors appears to have been much more limited than in ability to pay. We are separately interested in the size of the tax base for the purposes of promoting public accountability (see above). It therefore seems clear to us that we should consider fairness principally in terms of people's ability to pay local taxes.
13. In this regard, we believe it appropriate to consider ability to pay from two different perspectives. The first is a relative argument that the tax system is progressive and recognises that some households are able to pay higher levels of tax than others.
14. The second is an absolute argument that the tax bill that each household faces is affordable. On this second point, there are links with the criterion "Ease of Assessment, Collection and Payment" (see later).
15. The deliberative focus group work also highlighted a recognition among many members of the public that an individual's ability to pay could be strongly influenced by a range of personal circumstances, as well as income or wealth, and that these should be taken into account. 99 This is a factor that is well recognised within official statistics. The Department of Work and Pensions' Family Resources Survey ( FRS) frequently uses the concept of "equivalised income" in its statistics. This involves adjusting results of household income to allow the comparison of living standards between households that vary in size and composition. This adjustment reflects the fact that a family of several people requires a higher income than a single person in order for both households to enjoy a comparable standard of living. The results of our own modelling work also use this equivalised income adjustment in order to assess standards of living within different types of household.
16. Responses to our consultation from members of the public, and feedback from the deliberative focus groups, suggested a strong dislike of a local tax as a charge for "core" services.
17. The public appear inclined to consider the fairness of a local tax system in isolation. This is particularly true of a visible tax, like council tax, which people have to take positive steps to pay. In these circumstances, it is natural for people to consider the fairness through which their liability for that local tax has been calculated.
18. However, local authorities are more likely to draw a link to the role of local taxes as part of the overall tax system. According to this argument, local tax is one element in a basket of taxes which together fund local and national public services, and it is most important that people are taxed fairly in terms of what tax they pay overall. Even if some people appear to be paying more local tax than might be strictly "fair", this may be acceptable provided it is within the context of an overall tax burden that fairly reflects their ability to pay.
19. We agree with this argument to a large extent. We cannot properly assess the burden on household income and on possible economic and behavioural effects of taxation decisions unless we consider how much tax households stand to pay in total from the full basket of taxes.
20. However, we would qualify this statement in two ways. First, it is important that taxpayers understand how local services are funded. The more accurate their awareness is of how much of the national taxes they pay go towards paying for local services, the more likely they are to accept that meeting the cost of local services depends on more than paying a local tax.
21. Secondly, it is important that the local tax element itself is viewed as at least reasonably fair in itself. For example, it did not appear to matter how small a contribution the former Community Charge made to council funds in the period 1989-93. It still was viewed as being so fundamentally unjust by a significant proportion of the public that many people simply refused to pay and the tax itself became unsustainable.
Why it is of high importance
22. This has been by far the most important criterion amongst the public, as borne out in both of the surveys that our Committee commissioned and in the responses to our consultation. It is also recognised as being an important criterion by local authorities. The importance of this criterion may increase the greater the yield from the local tax. Feedback from Northern Ireland suggests less dissatisfaction about the fairness of domestic rates there, compared with council tax in Great Britain, but average rates bills in Northern Ireland have been notably lower than those in Great Britain.
Relationship to the Benefits System
What this criterion is
23. At present, local authorities receive significant funding as Council Tax Benefit in lieu of payments from local taxpayers. In 2004-05, this amounted to £345 million or 17.6% of total council tax income across Scotland. 100
24. Council Tax Benefit is paid to those eligible for payment and deducted from their council tax bills by local authorities, who administer the scheme on behalf of the Department of Work and Pensions. Responsibility for this Great Britain-wide scheme rests with Westminster, not Holyrood.
25. What is important is how reliant a particular tax model is on a system of benefits underpinning it in order to provide a degree of fairness, particularly to lower income households. For example, Council Tax Benefit is seen as a crucial element of the present council tax system.
Why it is of high importance
26. This was not seen as an important criterion in itself by respondents to our consultation, in that the question of benefit arrangements was not seen as necessary for tax options other than council tax.
27. However, reliance on the operation of a Great Britain-wide benefits system restricts the freedom of the Scottish Executive to shape and refine a local taxation system in line with its view of Scotland's needs.
Ease of Assessment, Collection and Payment
What this criterion is
28. Our remit asks us to consider the "collectability" of different kinds of tax, how easy or difficult such taxes are to avoid and the question of who would collect these taxes. We have merged these criteria together under this category. So, for each of the major tax models we examine, we evaluate how that option would be assessed, collected and administered (including compliance work). We also consider how easy it would be for local authorities to feel confident that they could obtain all, or close to all, of the possible yield from that tax. A separate criterion below considers the related question of the cost of collecting taxes.
29. However, it is our view that these criteria only reflect councils' perspectives on this important issue. For taxpayers, there is an important issue that is closely connected with ease of collecting taxes, which is about how easy it is for them actually to pay the tax.
30. This issue emerged in the evidence we received. 101 For example, it has been argued that offering taxpayers more flexible payment terms than only 10 instalments per year on their local tax bills can make these bills more affordable for many lower income households. Also important is the speed and ease with which lower income households can claim and retain benefits, where they are a central feature of a local tax system.
Why it is of high importance
31. Given that their expenditure levels are relatively stable, local authorities rely upon a tax that is easy to collect and difficult to avoid. This is one factor that provides them with the security of income they need to plan and provide local services with confidence (alongside, for instance, stability).
32. Often, it is in councils' best interests to make taxes as simple for their residents to pay as possible, to maximise tax receipts. However, we equally believe it is important that rules do not make it more difficult than necessary to pay local taxes. For instance, to offer more flexible payment arrangements may in some cases cause more administrative work for councils. But they should be seriously considered where they can make the cost of paying each instalment of tax more affordable for lower income households.
Stability and Predictability
What this criterion is
33. Local authorities must be satisfied that they can expect to receive the funding they require to deliver the services they are expected to provide for their local citizens.
34. The issue of stability arises because the proceeds from some kinds of local tax may vary from one year to the next, depending on prevailing economic circumstances. When the yield from a local tax falls, local authorities either need to have assurance that replacement funding will come from an alternative source (such as another local tax or increased AEF) or they may be forced to cut service levels in order to fit the financial constraints they face. As a result, taxes which apply a fixed, regular payment (such as council tax or poll taxes) will tend to be more stable than taxes that are based on the amount of income or spending during the course of a year.
35. Predictable tax revenues help councils to plan their future expenditure on essential services with confidence. In theory at least, even some less stable taxes could be quite predictable, where a time lag exists between a change in circumstances occurring and that change being reflected in the proceeds from a local tax.
36. A potential conflict exists with buoyancy (see below), in that stable taxes will often tend to be less positively buoyant (in terms of offering additional proceeds in times of economic upturn).
Why it is of high importance
37. Stability and predictability are seen by local authorities as being very important, enabling them to plan for service delivery and investment. Since the very purpose of local taxation is to assist local authorities in providing vital and beneficial local services, we recognise the importance of stability to local authorities. Councils should be able to be confident in the income they can expect to receive towards these services.
38. For the public, stability and predictability have not emerged as important issues. However, it is also desirable for taxpayers to have a reasonably clear expectation of how much tax they might have to pay in future. There is an association for taxpayers between predictability and transparency (discussed later).
39. A possible tension arises with fairness for local residents in that taxpayers will also want their tax liability to reflect changes in their ability to pay (especially if their income falls). At a time of economic downturn, when many households might suffer significant decline in their household income, it would be difficult for a tax system to both recognise changes in people's ability to pay and still deliver a stable funding platform for local authorities (unless AEF or the benefits system were comprehensive enough to cover this risk).
Transitional Issues
What this criterion is
40. We need to consider the nature, complexity and cost of practical preliminary steps that would have to be taken before any reformed or entirely new local taxation system could be introduced and how quickly any new system could be introduced. We also have to consider how best we bring an "old" system to a close and start a "new" system. For instance, should any new system be run in parallel with the current one for a period, and should any transitional arrangements be applied to cushion the impact on individual taxpayers who faced a higher tax liability under any new system.
Why it is of high importance
41. This has not been raised as a major factor by stakeholders. However, we believe this is due in large part to a widespread under-estimation, especially but not exclusively on the part of the public and political parties, as to how quickly change could be introduced. This applies equally to the introduction of a new tax system and to any meaningful reform to the existing council tax system.
42. When, as we believe, any substantial reform could take several years to complete, the trust that people have in the new system could be severely tested by cost, disruption and uncertainty that they might face in the period before it has settled down. This has the potential to create a serious risk to the long-term credibility of a reformed or new tax system, especially in the case of substantial reform if implemented with insufficient planning and preparation.
B. Medium Importance
Identifiability as a Local Tax
What this criterion is
43. This is one of two criteria we have used to test the accountability of councils to their local residents (the other one is "Size of Tax Base" - see above). This criterion relates to how apparent it is to a local resident that the local tax they are paying is being used to contribute to the cost of local services.
Why it is of medium importance
44. We have already made clear that we do not view local taxation as a necessary element of local accountability. Nevertheless, if tax is set and/or collected by a local authority, then it is important that local residents understand the purpose of the tax and, if set locally, how and why a particular rate has been chosen.
Cost of Assessment and Collection
What this criterion is
45. Some of the possible local taxation systems will be more costly to collect than others. It is clearly desirable that the costs of collecting a tax should be as low as possible.
Why it is of medium importance
46. This criterion is closely related to "Ease of Assessment, Collection and Payment" (see above), although there is a distinction between the ease of collection and the cost of doing so. Cost was frequently referred to by respondents to our consultation paper (including local authorities and members of the public) as being a relevant consideration.
47. We agree, although a potential tension exists between collection rates and collection costs. We recognise there will be a point at which it no longer becomes appropriate to chase unpaid bills. 102 Local authorities will become reluctant to pursue unpaid local tax when the cost of collection begins to match the anticipated proceeds. However, in some cases it might nevertheless be worthwhile to chase non-payers, even where the cost of doing so exceeds the outstanding sums, to provide an incentive to residents to pay local tax in future. Results from the MORI Scotland survey indicated a sizeable level of public concern about people who do not pay tax. 103 We would therefore argue that even a tax that was cheap to collect might not be appropriate if the tax income proved difficult to collect or easy to avoid.
48. In our later sections covering taxes on income and on property, we consider further what the costs of collection might be. However, it is worth bearing in mind that our fundamental aim is not necessarily to recommend the cheapest possible system for collecting tax. There are two aspects to this.
49. First, a nationally-collected tax scheme (whether it is based on income or on property values) might generally prove less expensive to operate than an otherwise identical system in which local authorities collected their own taxes. But a local scheme may have other advantages (such as making the tax more locally identifiable) which we should also take into account.
50. The second point is that a tax that is cheap to administer might not be very user-friendly from the taxpayer's perspective. We shall not want to rule out features that might make a tax less burdensome for people to pay, simply because it might increase overall collection costs.
Comprehensibility
What this criterion is
51. We have treated this criterion as meaning how easy it is for a person to understand how a tax operates in general terms, rather than how easy it is to calculate liability (which we have covered as "Transparency" - see below). So, for example, most people have a good feel about how VAT is calculated in general terms, even though very few would be able to work out how much they themselves pay in VAT.
Why it is of medium importance
52. We believe that the public are unlikely to trust a tax if they do not understand how it works, at least in basic terms. Provided that basic understanding is in place, we would be minded to concur with the finding from the deliberative focus group work undertaken for us by GfKNOP, that the simplicity and transparency of a tax system is of less concern to most than ability to pay/fairness or accountability, although it might impact on accountability. 104
Transparency
What this criterion is
53. This factor relates to the ease with which a person can calculate how much local tax they are paying.
Why it is of medium importance
54. As a matter of principle, many members of the public would support an argument which stated that taxpayers should be in a position to know how their liability to local taxes year-on-year is changing. This would be particularly important if financial accountability is seen as an important element of local accountability. There is a strong counter-argument, that the visibility of an identifiable tax might affect its collectability.
55. The examples of income tax via PAYE and of VAT show it is possible to have a tax which, in principle, is easy to understand but where the taxpayer is relatively unlikely to know how much tax they are actually paying for local services.
C. Lower Importance
Balance of Funding
What this criterion is
56. Section7 set out our views about the Balance of Funding. In practice, the relative importance of different criteria might vary, according to whether the balance of funding is weighted towards central government or local government.
57. For instance, if the local tax element was large, then it would be especially important that a local tax system was considered fair in its own right, that its economic effects would be positive (or at least the negative effects were minimised), and that local authorities could look forward to some stability of income.
58. However, the importance of these factors might not be as high under a system where the local tax only made up a small proportion of overall council revenue (although the public might require some convincing that a local tax that was not obviously fair in its own right could still be acceptable even in these circumstances). Against that, it would become more important in such a situation that a local tax was relatively cheap to collect, so the collection costs were commensurate with the proceeds from the tax.
Why it is of lower importance
59. We have taken as a "given" the current balance of funding. Ultimately, we believe a good local taxation system should exist to support an effective system of local government. We recognise that there is a debate to be held on the role of local government, and the outcome of this will affect decisions about the most appropriate balance of funding. An effective tax system should be able to operate across a range of scenarios, and we shall consider later how effectively different options might work under different balance of funding conditions.
Buoyancy
What this criterion is
60. This criterion relates to the yield of a local tax system rising under beneficial economic conditions. Such conditions might include growth in income levels or property prices.
Why it is of lower importance
61. Local authorities view buoyancy as important. In particular, they state they would like to be able to take advantage of buoyancy in property values. They argue that this would provide a direct incentive and financial reward for their efforts to stimulate the local economy.
62. The principle of buoyancy has not been highlighted directly by the public as a prominent element in their minds. However, it could be argued that the buoyancy is still an important underlying issue to the public. One of the apparent public dislikes about the council tax, which appears to raise its profile relative to other taxes, is its year-on-year increases. It seems clear that the public is more aware of the council tax rise they face each year than in the increase they will on average face in their income tax payment. This may be because council tax rates have to be announced annually in pounds and pence. In contrast, the public seems to look upon income tax in terms of percentage rates that have stayed constant over a period of years, even though the amounts they are actually paying have been increasing in line with wage inflation.
63.ODPM's Balance of Funding Review report referred to competing arguments. 105 On the one hand, a more buoyant local tax would give local authorities a greater degree of flexibility and allow them to benefit from increased tax revenues delivered by economic growth. On the other hand, the lack of buoyancy reinforces accountability and stimulates efficiency because it ensures that changes in spending levels require changes in council tax rates which are clearly perceived by local taxpayers.
64. We are not convinced by either argument. The latter argument is predicated on the perceived importance of financial accountability, which as already stated is not persuasive to us. As for the perceived benefits of buoyancy, they tend to come at the expense of stability and predictability. Buoyancy can be negative as well as positive, meaning that in times of economic hardship councils might not receive the funding they expect and, as a result of which, local services might suffer. To us, it is more important that councils should be able to plan and budget for the services they provide with confidence, than expose them to the financial risks of buoyancy.
« Previous | Contents | Next »