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CHAPTER NINE: HOW A LOCAL INCOME TAX WILL BE USED TO PAY FOR LOCAL AUTHORITY SERVICES

DISTRIBUTION

9.1 Local income tax will be used to pay for local authority services in the way that council tax does at present. As mentioned in chapter 7, the Scottish Government proposes that HMRC would collect a local income tax and this would then be distributed to local authorities. The consultation lists three ways in which this money could be distributed:

• according to need;
• according to population;
• according to the amount of tax raised in each area.

9.2 Respondents were asked which method they preferred.

Individual responses

9.3 Question 18 asked "Do you feel that the money raised from a local income tax should be distributed by councils according to ..". Respondents were free to make multiple suggestions and the main answers given were:

• need (41%);
• the amount of local income tax raised in each area (33%);
• population in each area (21%).

9.4 Four percent commented on the need for more information before making a decision; 4% said 'don't know' and there were a variety of comments made by smaller numbers.

9.5 There were no differences across sub-groups of individuals.

9.6 Three out of the 12 free-flowing responses provided commentary here. One individual opted for 'need' as a first choice and one respondent identified problems with regard to the inconsistency of redistribution of tax monies and thus declined to offer a definite answer. The other believed that the amount raised in each area should be a determining factor.

Organisational responses

9.7 Looking at the data from organisational responses, 12 (3 from local government and 9 'others') voiced opinions:

• need (9: 2 local government and 7 'others');
• the amount of local income tax raised in each area (3: one from local government and 2 'others');
• population in each area (one 'other' organisation)
• the need for more detailed information before deciding (2: one from local government and one 'other').

9.8 Commenting on the issue of distribution, 3 organisations stated there is a lack of information on the shortfall/ funding gap in terms of tax yield acquired as a result of local income tax and therefore cannot respond (3 local government organisations). Three other organisations also agreed that, in general, further information was required (one political organisation, one local government and one tax, pay or finance organisation).

Need

9.9 Fourteen organisations did however provide a response which discussed distribution to councils according to need (6 local government organisations, 2 political organisations, 2 representative groups, 2 student organisations and 2 tax, pay or finance organisations). Three local government organisations made reference to the fact that the bulk of the money flowing to local authorities from central Government is already allocated according to need, although, one of these organisations queried how need will be assessed, since most of the Grant Aided Expenditure ( GAE) assessments relate to a need for specific services. Two other organisations also supported distribution by need as the following quotes illustrate:

"The distribution should be on the basis of need reflecting local circumstances to minimise turbulence during the period of change."

(political and local government organisation)

"The money raised from a local tax should be distributed according to need. The [organisation] view is that the tax collection should be independent of distribution and that total resources for all local authorities should continue to be based on need. Any change that did not pool resources across Scotland could be detrimental to authorities, such as [name of local authority] , with a low tax base."

(local government organisation)

9.10 Indeed, in relation to the last quote, 2 student organisations stated "The wealthiest areas are likely to raise the highest amounts of tax, whilst the poorest areas will have the most need for funding. Therefore any money raised from local income tax should be distributed according to need".

Amount of local income tax

9.11 Six organisations discussed the option of distribution according to how much local income tax is paid by those who live in their areas. This consisted of (5 local government and 2 political organisations). This seems like a "logical step" according to one local government organisation, although this organisation also recognised that some Council areas - those with low employment and relatively low per-capita earnings - will have much smaller income streams than Councils with wealthier populations .

9.12 Two different local government organisations suggested this approach would lead to large variances between local authorities in terms of current level of income received through local taxation and that the distribution method would have to be carefully considered in light of this. One political organisation was of the opinion that:

"Local income tax revenues should not have to be distributed by anyone. All money raised by local income tax in a local authority should be revenue for that authority. What will be determined by need is what element of central government grant comes to each authority. The whole method of calculating central government support for local authorities will need to be recalculated. It is patently obvious that even if the rates of local income tax were the same the total "take" in different authorities would differ enormously."

9.13 One local government organisation believed that by distributing local income tax according to how much is paid by those who live in their areas it will ensure that "local residents are contributing towards local services and that the principles of local accountability and local democracy are preserved. Any other distribution mechanism would amount to a Scottish Income Tax, not a local income tax."

Population

9.14 The implications of distribution by population in each area were discussed by 4 organisations: 2 local government, one political and one tax, pay or finance organisation. One organisation was concerned that population does not reflect the differing needs of cities, for example, a rural area with low density population but large area to support. This organisation questioned how the relevant administration would keep track of changing demographics (tax, pay or finance organisation). One local government organisation felt that using population as the basis for redistribution would have the effect of taking money away from Councils with high employment and high earnings and passing it to those with low employment and earnings. A different local government organisation also referred to the unique socio-economic environment in which they are located which includes a high level of affluent "in-commuters" to the city.

Other issues

9.15 One political organisation offered an alternative option:

"It would be possible to allocate local income tax receipts to individual councils based on their current share of council tax revenues. This would seem to be the simplest method of allocating local income tax receipts while the current allocation formula for Scottish Government support remains in place. This method might be suitable as a temporary measure only."

9.16 In relation to the timeframe for Councils receiving local income tax, one local government organisation commented:

"It may well emerge that transitional provisions in the distribution arrangements will be required. Any suggestion that local authorities should be placed in a position where they have to await the receipt of unknown amount of money, or unknown date, as and when it is collected by HMRC from the residents in their respective areas appears to be a recipe for difficulty. A mechanism for ensuring adequate cash flow will be required."

ADDITIONAL FUNDING

9.17 The consultation document states that the Scottish Government believe that Scotland should continue to receive from the UK Government the level of funding currently paid as council tax benefit once the council tax is abolished.

9.18 Question 19 asked to what extent respondents agreed "that Scotland should receive equivalent monies to council tax benefit, after the abolition of council tax".

Chart 9.1
Question 19 - To what extent do you agree that Scotland should receive equivalent monies to council tax benefit, after the abolition of council tax?

Base: Individuals (418)

Individual responses

9.19 As can be seen in chart 9.1, above, over half (51%) of individual respondents agreed strongly that Scotland should retain monies equivalent to council tax benefit; 22% disagreed to some extent and 13% did not give an answer or said 'don't know'.

9.20 Four out of 12 free-flowing individual responses chose to provide comments on the issue of council tax benefit and its potential replacement under local income tax. Two respondents summarily rejected the notion of replacing the council tax benefit, arguing that it could not be justified, whilst one countered that equivalent funding should be allocated, citing the precedent of Northern Ireland receiving non-council tax benefit funding for its rates-based system. One final individual felt that there were many complex funding issues which must first be resolved before any further commentary can be made.

Organisational responses

9.21 Fourteen organisations responded to question 19:

• 8 organisations (2 local government, one from tax, pay or finance and 5 'other' organisations) agreed strongly that Scotland should retain monies equivalent to council tax benefit;
• 2 'other' organisations agreed slightly;
• 4 (2 local government and 2 'other' organisations) disagreed strongly.

9.22 Comments from organisations also showed agreement with this proposal. This included responses from 8 local government organisations, 2 tax, pay or finance organisations, one legal organisation, one representative group and one other organisation. It was suggested by these organisations that negotiation between the Scottish Government and the UK Government is essential for these issues to be resolved. The 2 tax, pay or finance organisations noted:

"[the organisation] would agree that the continued flow of monies equivalent to the Council Tax Benefit, either in full or in part, is a matter for negotiation between the Scottish Government and the DWP, however we would observe that it is essential for these issues to be resolved and the funding gap addressed to avoid uncertainty, particularly in the current financial climate."

"It is difficult to envisage how local government could be funded sufficiently without the continued receipt of such a sum. We suggest that a clear undertaking from the UK Government is obtained by the Scottish Government that equivalent funding will be made available before local income tax is implemented."

Other views

9.23 In contrast to the above, it was the view of 6 local government and one political organisation that there is no "need" or "justification" for the continuation of payment of council tax benefit as the replacement income tax is based purely on ability to pay and does not need a benefits system. One political and one local government organisation noted that "If a shortfall [in funding] arose directly as a result of local income tax this must be fully funded by the Scottish Government, without reducing the spend on the local government sector."

9.24 Four organisations consisting of 2 tax, pay or finance organisations, one local government and one political organisation were in agreement that changes to the current system would require further consultation.

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