Tinkering with the business rate and promoting Tax Increment Financing are no solution to the problems facing local government funding
It is hardly a secret that the UK lacks satisfactory means for financing local government. Long ago, property owners, then mainly the middle and upper classes, paid a modest level of rates, based on rents from the buildings they owned, which paid mainly for the services they used – police, fire, roads, drainage, refuse collection, parks, libraries and museums.
But the 1944 Education Act raised the school leaving age, and in 1974 local government took on increased responsibilities for social services – and expenditure soon ran far ahead of the income from property rates. A position was reached where three quarters of all local government spending was paid for with grants from central government. Even so the income was insufficient to meet the aspirations of many councils, and so, very often, they raised the rates.
Mrs Thatcher responded first by capping the levels of rate that local authorities could raise, and then by abolishing the rates on domestic properties altogether, replacing them with the poll tax. The rates on business properties were 'nationalised' – set at a standard level and then redistributed to local authorities according to their populations. The poll tax was perceived as unfair, and replaced by the council tax, a form of property rate which retained elements of the principles behind the poll tax, but produced even less income.
This system is unintelligible to the public, unpredictable for council treasurers, often unfair, and raises very little income. But successive governments and their advisors – such as Sir Michael Lyons – have not produced solutions radical enough to deal with the underlying problems.
And now comes another tinkering: an offer by the coalition government to return the business rates to local government. When looked at in detail it does not even do that. The tax will still be levied at the same rate across the country. But some council areas have huge amounts of business property (Westminster, Camden ... or Copeland which happens to include the Sellafield nuclear site for example). Others have very little. So top-slicing is necessary, to compensate the losers.
Some councils will, even then, get more money from council tax and business rates than they need to run their services – so there is another adjustment. And then what is collected has to be distributed to different parts of local government in the area: district councils, counties, police authorities, fire authorities. Add in other policy objectives, such as low business rates for green industries, and we emerge with something which is even more complicated, even more unintelligible, completely obscure to most members of the public – and for most councils will produce very little change or benefit.
Councils will be permitted to keep extra business rates that, over time, arise in their areas. This, the government argues, will encourage councils to support investment. But I have never met a council that did not support more jobs for its residents, especially the young. Most councils employ staff precisely to bring this about. But most of any increase – or decrease - in business rates will be the consequence of decisions taken in boardrooms across the world, very little influenced by the local council, so whether the income from business rates goes up or down will be almost entirely fortuitous as far as most councils are concerned.
The proposal is also to follow US practice and also allow Tax Increment Financing – councils will be able to borrow on the basis of expected extra business rates, to invest in related infrastructure. But if, as seems inevitable, and is the norm in the US, this replaces direct contributions towards infrastructure, our Section 106 agreements, then it becomes a subsidy to the investing business – and any council that refuses to play ball will find it difficult to get the investment. The TIF proposals could have been written by a private sector lobbyist.
Across the big pond, US councils have sales tax supplements, local payroll taxes, bednight taxes and many others. They get little or no grant from federal or state governments, so have to be self-reliant in a context where most of their better off residents have decamped to lower-tax regimes in suburbs or nearby rural areas. They must find ways of taxing those who live outside their areas but use their services – roads, police, communications, arts, libraries, etc.
There are arguments against these specific taxes here. A sales tax would mean even higher VAT. A payroll tax (eg a supplement on National Insurance contributions) would be a tax on jobs. A bednight tax would affect urban tourism (though some conference towns or cities or strong tourist areas might still be interested).
But there are taxes that would do the job. One is a local supplement on sales of fuel. This would discourage unnecessary urban car use, provide support for petrol stations in rural areas, and encourage development of alternative fuels. Another is a tax on non-residential parking – which would encourage people to come to work, or to shop, using public transport where possible, or bicycles. A third would be a local supplement on sales of electricity generated from non-green sources. If levied on bills above a floor level, this would encourage offices, shops and factories to minimise use of air conditioning, turn off lights and computers, and look for innovative ways of generating power.
The above would be easier to implement than Local Income Tax, which would be fine if everyone worked in a settled job, but a nightmare for the many people who get income from many employers, and a huge strain on HM Revenue & Customs.
Good services do not come free. The best stewards of the quality of expenditure are those who have to pay – provided they have the information, understanding, and the means to influence behaviour. The government should not waste scarce parliamentary time tinkering with the non-democratic business rates. It should look for local taxes that will put local government finance on a sound self-reliant footing and make the system easy to understand so that taxpayers can see how their money is raised and spent, and vote accordingly.
Dr Andrew Coulson is an associate of the Institute of Local Government Studies, at the University of Birmingham
