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IFS Responds To Scottish National Party Local Tax Proposals

by Jason Gorringe,, London

16 March 2007

The Institute for Fiscal Studies (IFS) on Wednesday responded to proposals by the Scottish National Party (SNP) to scrap council tax in favour of a capped local income tax.

The SNP proposes the abolition of what it dubs the "unfair" council tax payments, and their replacement with a local income tax system based on the ability to pay.

The local tax would be set at a rate of 3p on income excluding savings income, and according to the SNP, represents "a major progressive change to taxation in Scotland and the biggest tax cut for Scots in a generation".

Commenting on the proposal, Stuart Adam, senior research economist at the IFS, observed that:

“The SNP is proposing to cut taxes and spending and virtually eliminate local councils’ ability to decide their levels. Whether voters would see the spending cuts as a price worth paying for the tax cuts remains to be seen – the effects would be very different for different families and in different areas – but the trade-off would no longer be at the discretion of local decision-makers.”

According to the IFS analysis, council tax in Scotland is forecast to raise GBP2,131 million in 2006–07, of which around GBP45 million would come from second and empty homes. Council tax benefit is forecast to cost GBP381 million.

The Institute estimates that, if the local income tax were in place in 2006–07, and all Scottish local authorities set the rate at the maximum 3%, the LIT would raise around GBP1,250 million, assuming individuals’ behaviour did not change in response to the reform.

The reform would therefore constitute a GBP450 million tax cut, but would leave a corresponding hole in local authorities’ finances. The size of this shortfall would depend on whether or not the savings from not having to pay council tax benefit after the reform – savings which would initially accrue to the UK Exchequer centrally, since council tax benefit is centrally financed – were then returned to Scotland and made available to Scottish local authorities.

If this saved money were returned to Scotland, the IFS explained, local authorities’ funding shortfall for 2006–07 would be around GBP450 million, the same as the tax cut; if not, it would be around GBP840 million. Local authorities could only fill this hole by reducing spending or by raising revenue from other sources such as user charges.

The analysis went on to explain that:

"The SNP argue that a GBP450 million reduction in local authority spending could be absorbed with no loss of quality in public services, by councils’ making efficiency savings of 1½% a year for three years. Precedent suggests that such efficiency savings might be difficult to achieve, particularly since they would come on top of any efficiency savings implied by Gordon Brown’s plans for the UK as a whole."

"Local authorities’ reduced ability to raise revenue would constitute a significant reduction in the importance of local government within Scotland. First, local taxation and spending would fall; and second, the level of spending would be almost entirely determined by the level of grant received from the Scottish Executive, since local authorities would lose the ability to increase local taxes if they wanted to spend more. Local authorities would be virtually forced to limit their spending to the level of centrally-assessed needs, so those currently spending a lot relative to their centrally-assessed needs (and so setting above-average Band D council tax rates) would face the tightest spending squeeze."

"Whether individual families are better or worse off from the reform as a whole depends in part on the unknown impact of these cuts in local authority spending. Winners from the tax changes alone would be those with relatively low incomes who pay relatively high council tax (which includes many pensioners), while losers would be those with relatively high incomes who pay relatively low council tax (which includes many single working people without children)."

"Hence the reform would redistribute from those who are relatively rich in terms of their current income but poor in terms of the value of their home towards those who are relatively rich in terms of the value of their home but poor in terms of their current income. Not everyone with a low income would gain: those who currently pay no net council tax – because they receive full council tax benefit, because they are students, or because liability for the tax falls on relatives living in the same household – have nothing to gain from the abolition of council tax, and those in such a position who also pay income tax would lose from the proposed reform."

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