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Analysis  Who dares, wins, Don Peebles

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21 October 2005

Despite universal agreement on the need for local taxation reform, England is still dragging its feet on change. But there's no need for Scotland to wait. It should grasp the political nettle and go its own way

Scotland has been watching and awaiting developments in England on local taxation. It seems, however, we will continue to be kept waiting. The saga of the local government Balance of Funding review, which then became Sir Michael Lyons' review and is now a wider Lyons' inquiry, means that the council tax revaluation scheduled for 2007 has been scrapped. Any decision on local tax reform will also be further delayed.

Perhaps it is time then for Scotland, as a maturing devolved administration, to seek its own solutions and to depart from its traditional reliance on the rest of the UK. It now has the power to implement whatever options it considers appropriate, whether this turns out to be a progressive property tax with an immediate revaluation, relocalisation of business rates, the introduction of local income tax or even all three.

Crucially, these solutions, if desired, could be seen as having been 'made in Scotland', and could finally lay to rest the spectre of the community charge imposed on Scotland in 1989, a year earlier than in England and Wales.

But is local taxation actually an issue in Scotland? There is evidence of a desire for change but still some debate on what exactly the problem is. So far, in all previous local government finance reviews in all parts of the UK, the problem area has been somewhat narrowly defined as the balance of funding.

So should we charge the Scottish reviews with asking largely the same questions — although these have inevitably led to no change?

There is already a lot of policy activity on local tax in Scotland. An independent local government review committee is considering alternatives to council tax. Set up in 2004, it is now at its critical oral evidence-gathering stage. At the same time, and perhaps curiously to some outside observers, the Council Tax Abolition and Service Tax Introduction Bill (Scotland) is making its way through the committee stage of the legislative process. The Bill, introduced by the Scottish Socialist Party, would replace the council tax with a Scottish service tax. The service tax has some of the characteristics of an income tax and signposts a fundamental shift away from property tax as the basis for local taxation.

Now add to this the first minister's recent foray into the world of local tax. His announcement that business rates in Scotland will be reduced was as surprising to some commentators in its timing as it was welcomed by the business community.

Finally, the 'efficiency agenda' is as evident in Scotland as in other parts of the UK. Its impact so far on local authorities is to encourage them to make savings from shared services. An obvious contender for this would be council tax collection — but such services could become obsolete if any fundamental tax reform were carried out.

Some people see all this as evidence of a country with an impressive range of policy intentions on local taxation. But others argue that the review, the separate Bill, the announcement on business rates and the efficiency agenda reflect confusion over what exactly the problem is, never mind what the solution could be.

A further question could also justifiably be asked — does the timing of the separate Bill in parallel with an independent review indicate a mature political scene or just a repetition of 'old politics'? A justifiable question because passage of the Bill would effectively marginalise the work of the independent review committee to the extent that any findings, if different from the content of the Bill, could become immediately obsolete.

Apart from the proposed Scottish service tax, there is support among other opposition parties in Scotland for a local income tax. If the local taxation review concludes that this would be feasible, the devolved government could be faced with a difficult decision. A local income tax would effectively align Scotland more closely with some other European countries, which already have such a tax, than with the rest of the UK.

So, while some people might see local tax as a minor technical issue, there are far-reaching implications for the relationships within the UK — implications that perhaps were neither envisaged nor desired by the designers of devolution.

So the challenge to Scotland is first to be clear on the problem. After this, the choice could become even clearer. Scotland can either continue to postpone difficult decisions on local tax, and therefore follow the meek historic examples from other parts of the UK, or it can introduce a form of local taxation fit for the twenty-first century, whether it be a reformed council tax, a local income tax or both.

In other words, it could become Scotland the Brave.

Don Peebles is policy & technical manager at CIPFA in Scotland