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CHAPTER EIGHT: IMPACT OF LOCAL INCOME TAX

IMPACT ON THE SCOTTISH ECONOMY

8.1 The consultation document states that "A reduction in taxes through the abolition of the council tax has the potential to provide a stimulus to the Scottish economy and contribute positively towards the Scottish Government's aim to make Scotland a 'Wealthier and Fairer' place" and asked respondents for their opinion on the economic impact of a local income tax.

Chart 8.1
Question 12 - In your opinion, will the introduction of a local income tax have positive economic impacts for Scotland?

Base: Individuals (418)

Individual responses

8.2 As can be seen in chart 8.1, respondents were fairly evenly split on this question with 42% saying no and 44% yes. Fifteen percent either did not reply or said 'don't know'. Those in the 55 to 64 and 65 and over age ranges were most likely to agree (68% and 55%) that the introduction of local income tax would have positive impacts for Scotland; those aged 45 to 54 were least likely to agree (20%). Single people were more likely to agree (56%) than married or cohabiting couples (39% each).

8.3 Looking at free-flowing individual responses, 3 out of 12 chose to tackle the issue of economic impacts. One respondent agreed that there would be positive economic consequences, whilst one disagreed, yet interestingly, both believed that some higher-income workers would be tempted to leave Scotland. A third respondent felt that the local income tax would ultimately not benefit Scotland but added that there was insufficient evidence to comment conclusively on this point.

Organisational responses

8.4 Twelve organisations gave a direct answer to question 12 "In your opinion, will the introduction of a local income tax have positive economic impacts for Scotland?" Five organisations (one from local government and 4 'others') said that it would have positive economic impacts, while 7 (2 each from local government and tax, pay or finance and 3 'other' organisations) felt it would not.

Tax migration

8.5 A range of organisations (18) referred to the Scottish economy and how the introduction of local income tax may encourage people to leave Scotland (7 local government organisations, 6 retail/ business organisations, 3 tax, pay or finance organisations, one legal, one equality organisation). Phrases such as "fiscal flight" (as described in the Burt Report) and "Brain Drain" were frequently cited. As well as encouraging richer people (e.g. high earners) to leave Scotland, some organisations also highlighted the possibility of skilled workers migrating and the relocation of national and international companies whose headquarters are based in Scotland. The following quotes illustrate these points:

"There is a risk that a local income tax would impact on the behaviour of the working age population and discourage higher earners and skilled workers from living in Scotland."

(local government organisation)

"This open-ended increase in taxation for higher earners would be a serious deterrent to work in Scotland. [the organisation] is also concerned that its introduction could damage our competitiveness both nationally and internationally with firms choosing to base headquarters and senior executives outside of Scotland."

(retail/ business organisation)

"The proposals could undermine the Scottish Government's avowed purpose of growing the economy, its attempts to enhance the competitiveness of indigenous businesses, and in attracting talent and corporate headquarters to Scotland let alone retaining those it already has."

(retail/ business organisation)

8.6 Six organisations were concerned that there may be an incentive to migrate south of the border and commute to work (4 local government organisations, one retail/ business and one tax, pay or finance organisation). A retail/ business organisation noted it might be the case that "where the employment or business remains in Scotland, there will be an incentive to live south of the border and combine commuting with working from home". This organisation went on to say that property prices in the north of England will benefit from local income tax.

Other issues

8.7 Although the consultation document states that 'The Scottish Government is committed to ensuring that there is a fair business environment where all firms are not subject to undue administrative burden', one retail/ business organisation was concerned that the introduction of local income tax could lead to increased bureaucracy which may in turn have an effect on local economies:

"Small businesses are already facing an increase in red tape. If a local income tax were introduced [businesses] would be forced to spend more time on bureaucracy and have less time to develop and grow their business; this in turn could have a negative effect on local economies."

8.8 One representative group felt that insufficient consultation has taken place with the business sector as a whole in order to assess the potential impact in terms of resources. A small number of organisations (3) were also concerned that the introduction of local income tax may act as a disincentive/ barrier to employment for individuals to enter work or return to work. One political organisation noted "What is beyond doubt is that under local income tax, there is an added disincentive to work beyond what exists at the present time as the marginal rate of tax will increase. Local income tax at 3% may or may not affect an individual's working pattern, but it will certainly not encourage working." One representative organisation recommended that further discussion and investigation on this issue is needed.

8.9 Two organisations agreed that the introduction of a local income tax will have positive economic impact for Scotland:

"We feel that a fair tax, set at 3% or thereabouts, would encourage people to contribute to the Scottish economy, and that a tax at this level would not discourage high earners."

(representative group)

" From a pensions specific viewpoint, and on the assumption that a significant proportion of households will be better off under the local income tax and will, therefore, have more disposable income, this may be channelled into increasing individuals' pension provision."

(tax, pay or finance organisation)

IMPACT ON PEOPLE

8.10 The consultation document states "People decide where to live for a variety of reasons and we [the Scottish Government] believe that the fairer and wealthier Scotland we are building will create an environment where our citizens will want to stay".

Chart 8.2
Question 13 - To what extent would the tax rate influence your decision to live in Scotland?

Base: Individuals (418)

Individual responses

8.11 As can be seen in chart 8.2, over half (56%) of individual respondents felt that the tax rate would influence their decision to live in Scotland to some extent. Forty-three percent said that it would not influence them at all; only 1% said 'don't know' or did not give an answer.

8.12 Looking at the profile of those individuals who said that the tax rate would influence their decision to live in Scotland 'a lot' shows that this opinion is most prevalent amongst those aged 45 to 54 years (62%), the employed or self-employed (47%) and single people (46%). Least likely to be influenced 'a lot' are those aged 65 and over (21%) or respondents describing themselves as retired (18%).

8.13 Three of the 12 free-flowing individual responses to this question believed that the tax rate would indeed impact upon their decision to live in Scotland; while one of these believed it would influence them 'a lot', 2 believed it would potentially influence a move, possibly just beyond the Border.

Organisational responses

8.14 Eleven organisations from the 'other' group answered question 13 "To what extent would the tax rate influence your decision to live in Scotland?"; again comments suggest that it was seen as a question geared towards individuals. Of the 11 answering, 3 said it would affect their decision 'a lot', 2 said 'a little' while 6 said 'not at all'.

8.15 Twenty organisations provided comments in addition to those on tax migration discussed above (6 tax, pay or finance organisations, 5 local government organisations, 4 representative groups, 2 student organisations, 2 political organisations and one retail/ business organisation). Overall, the main focus of discussion was that Scotland would become a less attractive place to locate a business, employ, or be employed (tax, pay or finance organisation). Organisations felt that this was particularly relevant to the following groups of people:

• high earning professionals;
• skilled workers;
• entrepreneurs;
• international students;
• migrant workers.

8.16 The following quotes illustrate this point:

"Local income tax will make Scotland a less attractive place in which to do business. It will be more difficult to attract businesses and talented individuals than is the case at present. We have profound concerns about the negative effects of introducing local income tax."

(political organisation)

"Today's workforce is dynamic and mobile, and many higher earning professionals and entrepreneurs could be reluctant to work in Scotland if it is seen as a high tax environment. The local income tax, whilst intending to promote growth, may well result in the system being seen as a disincentive, making it much harder and more expensive to attract high calibre business people to Scotland)."

(tax, pay or finance organisation)

"Discouraging skilled talent from coming to Scotland is wrong in principle, bad for the economy, and at odds with the Scottish Government's professed policy of encouraging migrant labour and expanding the population of Scotland…'Come to Scotland and pay more income tax' is a message that is unlikely to help persuade migrant workers to come to Scotland, and could hand other parts of the UK an advantage in attracting the skilled, high earning talent Scotland needs."

(retail/ business organisation)

IMPACT ON WORKING PATTERNS

8.17 Changes to the rate of tax can lead to some people amending their working patterns; for instance increasing or decreasing the number of hours they work. The consultation document states that the Scottish Government's assessment is that the introduction of a local income tax is unlikely to cause people to change their working patterns.

Chart 8.3
Question 14 - To what extent do you agree with the following statements about the impact that a local income tax might have on your working patterns ….

Base: Individuals (418)

8.18 Question 14 asked respondents for their assessment of the impact of a local income tax on:

• the hours that they would work;
• whether they would change jobs;
• whether they would choose to work in a different locations;
• or, whether it would have no impact.

Individual responses

8.19 Chart 8.3 shows that almost half (42%) of the individual respondents felt that the introduction of a local income tax would have no impact on their work patterns. Twenty-nine percent did not answer or said 'don't know'; high percentages (27% or more) did not answer across all parts of question 14.

8.20 Respondents were also asked to specify any other work impacts and the following points were made by 5 or more respondents:

• local income tax will have no impact (12%);
• people may leave Scotland as a result of local income tax (8%);
• disagreement with the concept of local income tax (3%);
• local income tax may be a disincentive to work (3%);
• mention of possible tax avoidance (2%);
• local income tax may lead to job losses (2%).

8.21 Two of the 12 free-flowing individual respondents opted to comment on this question, but these two arrived at similar conclusions, with one declaring that the local income tax would have no impact whatsoever upon their working habits, whilst the other felt there would be very little impact.

Organisational responses

8.22 Again, question 14 was seen as more relevant to individuals and there were few quantifiable responses from organisations on the impact of local income tax; 7 'other' organisations responded as follows:

• It will have no impact on my work patterns (5 agreed strongly, 2 disagreed strongly);
• I am likely to work fewer hours (7 disagreed strongly);
• I am likely to work in a different location (2 agreed strongly and 5 disagreed strongly);
• I am likely to change jobs to a different sector (one neither agreed nor disagreed and 6 disagreed strongly);
• I am likely to work more hours (3 agreed strongly, one neither agreed nor disagreed and 3 disagreed strongly).

8.23 Of the very few organisations which did provide additional comments, 2 student organisations raised the point that if students were forced to pay local income tax then they will have to work more hours to cover their cost of living and this will mean less time to concentrate on their studies.

8.24 One tax, pay or finance organisation warned that caution is required when interpreting the results of this question due to the way parts of the question is framed. For example:

"If a person answers that they are likely to change jobs to a different sector it will not be possible to conclude that this is due to a change in the overall level of local tax that the person is to pay."

8.25 A different tax, pay or finance organisation was of the opinion that further consultation and communication should be considered if the Scottish Government is concerned that the proposals may give rise to a perception that Scotland is a high tax country.

IMPACT ON ACCOUNTABILITY AND DEMOCRACY

8.26 While the consultation document acknowledges that some may see local income tax as reducing local democracy, it stressed that "locally elected officials will continue to decide how funding for their area is spent and make locally devolved decisions affecting the welfare of their constituents". While individuals indicated, at question 4, their support for a nationally set tax rate, question 15 asked about the importance of local authorities nevertheless having the power to set a tax and chart 8.4 shows the responses from the 418 individuals who replied to the consultation questions.

Chart 8.4
Question 15 - On a scale of 1-5, where 1 is strongly agree and 5 is strongly disagree, how important is it that your local authority has the power to set a tax?

Base: Individuals (418)

Individual responses

8.27 Almost half of individual respondents (48%) disagreed to some extent that it is important for local authorities to have the power to set a tax; as shown in chart 8.4, 29% agreed to some extent and 7% said that they did not know or did not give an answer.

8.28 As would be expected, over half (54%) of those who, at question 4, wanted to see local income tax set locally, agreed strongly that it was important for local authorities to have the power to set a tax; 6% of those who said nationally at question 4 agreed strongly.

8.29 Of the free-flowing individual responses, 3 of the 12 in total addressed how they felt in relation to local authorities setting tax; all three agreed that decentralisation, i.e. local authorities having tax setting powers, was important.

Organisational responses

8.30 Data from organisational responses shows some support for local authorities having the power to set a tax. Twenty-three organisations out of the 86 who responded voiced an opinion as follows:

• 17 (12 local government and 5 'other' organisations) agreed strongly that local authorities should have the power to set a tax;
• 2 (one local government and one 'other' organisation) neither agreed nor disagreed;
• 4 'other' organisations disagreed strongly.

8.31 Organisational comments on accountability have previously been addressed as part of question 4. However, a small number of organisations did provide comments specifically in response to this question (although some points were reiterated). This included responses received predominantly from local government organisations (9), although comments also came from 2 political organisations, one trade union and one tax, pay or finance organisation.

8.32 Generally, these organisations felt that local authorities should have the power to set tax. This was deemed important in terms of responding to local needs and aspirations, accountability and flexibility and the affect this has on votes cast in local elections. The following quotes illustrate these points further:

"Strongly agree that the Local Authority should have the power to respond to local needs/ aspirations and set the appropriate level of taxation to meet these needs. This is a significant aspect of the accountability between the public and their elected members. The Council believes that it is imperative, and indeed embedded in the ethos of local democracy, that there are revenue raising powers."

(local government organisation)

"Currently Councils set their own council tax rates and are accountable to local electors for this rate and the value for money they deliver in terms of local services. Whilst in reality only 20% of local government expenditure is raised through the council tax, it still represents a significant proportion of householders' income and is certainly perceived as a key factor when votes are cast in local authority elections."

(trade union)

Question 16 comments

8.33 Continuing this theme, question 16 asked "Please provide any comments you may have about local income tax and accountability and democracy".

Individual responses

8.34 Comments on this particular question were submitted by 225 individuals and themes identified in over 2% of these responses included:

• disagreement with local income tax (17%);
• that there should be local accountability (13%);
• negative experiences of local authorities handling of tax/ finance (10%);
• that tax collection should be local (8%);
• that local income tax should be set centrally (7%);
• that local authorities need to have their spending controlled (5%);
• support for local income tax (4%);
• the need for transparency in decision making (4%);
• that the Scottish Government should be seen to be accountable (4%);
• local income tax penalising specified groups e.g. workers, higher paid etc (4%);
• that different areas need different amounts of tax (3%);
• that a specified group should pay more e.g. second home owners, higher income groups etc (2%).

8.35 This question proved especially popular with the individual free-flowing responses, with half (6 out of 12) providing detailed responses. Five of these 6 expressed concerns over the issue of local accountability and the potential implications for local council autonomy, with 3 also arguing that the tax should be described as national, not local. One respondent was favourably disposed towards the concept of a local income tax, but also demonstrated reservations about accountability. The fifth responded generally, merely stating that local council accountability could become an issue. One separate response explored the issue of income inequality and what it perceived as inequitable discrimination in favour of those with pensions or other savings and investments.

Organisational responses

8.36 Question 16 was an open question asking respondents to provide any comments about local income tax and democracy. This issue has already been covered as part of question 4 and question 15 and the comments provided from respondents answering question 16 echoed those already reported.

8.37 It should however be noted that several organisations quoted from the Layfield Report on local government finance which states "local authorities .. to be accountable they should be responsible to their electorate for both the expenditure they incur and the revenues they raise to finance it" (local government organisation). One local government organisation went on to suggest that the local income tax proposals break that link as far as revenue accountability is concerned because there would be a single local income tax rate of 3% which would be determined nationally. A different local government organisation also noted that the relationship between local tax raising powers and democratically elected members has always been viewed as a strength of local authority accountability.

IMPACT ON EQUALITY ISSUES

8.38 In the consultation document, the Scottish Government states they want to make sure "we do not make tax changes that will unfairly impact on people simply because of their race or ethnicity, their disability, their gender or sexual orientation, their age or religion". They intend to undertake a full equality impact assessment of local income tax proposals which will be reported to the Scottish Parliament as part of the legislative process.

Individual responses

8.39 Respondents were asked "If you have any specific comment about the impact of our proposals on equality issues, please tell us what these are" and 142 respondents replied although there were few comments specifically on equality issues. The main issues identified included:

• agreement with proposals, that they are fair or will increase equality (5%);
• there would not be equality, proposals have not catered for equality issues (4%);
• the proposals would have no impact on equality issues (4%);
• the proposals penalise workers or the employed (4%);
• local income tax will benefit or favour those who choose not to work (4%);
• disagreement with local income tax (3%);
• negative comments about council tax (3%);
• tax should be based on share of services used (3%);
• criticism of, or comments on, disadvantages of a local income tax (3%).

8.40 Two of the free-flowing responses contained concerns about income equality but for different reasons, one enquiring as to how distribution would work in deprived communities and the other citing the unfair omission of savings and financial investments and one brought up issues of ethnic and gender inequalities.

Organisational responses

8.41 A small minority of organisations provided specific comments about the impact of the proposals on equality issues. One reason for the lack of responses may be due to the fact that the issue of equality was addressed in response to question 6; ' In your view do you think there should be any special exemptions or discounts from a local income tax?' Of the organisations which did comment, 2 (one local government and one tax, pay or finance organisation) were of the belief that there are no specific equality issues and that local income tax would not appear to affect any one group more than another.

8.42 A few organisations made specific reference to the same groups of individuals as mentioned at question 6. These include:

• learning and other disabilities;
• young people living at home;
• low income families;
• carers;
• students.

8.43 One political organisation noted:

"A move to local income tax would involve a significant change in the tax burden between different groups… We accept that local income tax is not designed to create specific problems from an equality perspective. However, there may be unintended consequences which arise."

8.44 Two local government organisations were of the opinion that equality impacts will depend on the proposals for "distribution arrangements" which are yet unknown as well as government support to address "shortfalls on current funding".

8.45 Finally, 2 organisations suggested a detailed Equalities Impact Assessment will need to be carried out in respect of any detailed proposals (local government and tax, pay or finance organisation).

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