News analysis Scots FDs unconvinced by plans for local income tax

15 Nov 07
Local government finance directors in Scotland are overwhelmingly opposed to plans to replace the council tax with a local income tax.

16 November 2007

Local government finance directors in Scotland are overwhelmingly opposed to plans to replace the council tax with a local income tax.

Their rejection of an LIT was delivered after a lively debate on the future of local government funding, held at Kilmarnock last week. Organised by Public Finance in association with Threadneedle, the asset management company, it involved members of the Scottish directors of finance section of CIPFA and other influential figures.

For more than an hour they quizzed a three-member panel on alternative arguments for an LIT: the Scottish National Party government's plans for a centrally determined version and the Liberal Democrats' proposals for a levy that would give councils a limited degree of discretion on the rate of the tax.

The panel, chaired by Charles Armstrong, director of finance for Aberdeenshire Council, comprised John Morrison, former Liberal Democrat leader of East Dunbartonshire Council; Jim McCafferty, a member of the Scottish executive of the Institute of Revenues, Rating and Valuation and Don Peebles, policy manager at CIPFA Scotland.

After the arguments for and against an LIT were vigorously debated, a vote was taken on a show of hands.

It revealed that not a single member of the audience was prepared to back the SNP plans. However, there were four votes in favour of some form of LIT in principle. The overwhelming majority of the audience backed a reformed council tax.

Although the vote has to be seen in the context of an informal discussion of the issue, it is the first indication of the strength of feeling among leading local finance experts on the problems of introducing an LIT.

At the outset, Peebles said he believed that the SNP government at Holyrood was making progress over its plans to introduce an LIT. Ministers intended to bring forward a discussion paper by the end of the year and introduce legislation in 2008/09.

The debate that followed explored a wide range of issues on the principles and practicalities of the local taxation system. It began with the panellists being asked to comment on whether LIT was just 'another poll tax by another name?' – a question raised by Brian Lawrie, executive director for resources at Fife Council.

Morrison strongly denied that suggestion, emphasising that LIT was not a poll tax. It was an income tax and therefore a progressive tax that would operate in accordance with ability to pay.

The poll tax was a fixed rate and everyone paid the same for services. He believed an LIT would work, and said that as long as there was adequate liaison to ensure that revenues were properly allocated, 'you will get a handle on a local income tax'.

McCafferty agreed that, technically, an LIT could work. 'I do not think there is any doubt about that. The poll tax, for what it was worth, worked in the end, although not without pain,' he said.

His main concern was that an LIT could be easily evaded. There was evidence suggesting that many people were able to avoid taxation. The money for a local income tax would mainly come from those assessed under

Pay-As-You-Earn. 'I think when people reflect upon things they will feel somewhat aggrieved,' McCafferty warned. They would be paying more 'because people are sidestepping things'.

Peebles stressed that there were lessons to be learned from the poll tax. One of these was that in introducing a new tax 'we give ourselves enough time' and ask the proper questions before getting into the details of a new system.

Differences of opinion emerged among members of the panel when Stirling Council's head of resources, Willie Watson, asked what the plan to set a national LIT of 3p in the pound would mean for local democracy.

Both Morrison and McCafferty agreed that it would harm local democracy. Morrison pointed out the key difference was between the SNP's nationally set LIT rate and the LibDems' plan giving individual councils some flexibility. He believed the latter was the proper way to approach it.

As the SNP plan would result in the overall income from an LIT being redistributed among individual councils, presumably through some redistribution mechanism, some authorities would no doubt lose out, Morrison said.

He added: 'That will probably just be a recipe for further concern and internecine warfare within the local government sector. It would have severe implications for local democracy.'

Robin Bennie, director of finance for Dumfries and Galloway Council, said council tax was essentially a proxy tax for wealth – since well-off people tended to buy a large house – and he was concerned that this proxy for taxing wealth was being moved too much on to people who were productive in the economy.

Peebles recalled that property as a proxy for wealth was exactly the conclusion reached by the Burt committee on the future of local government finance.

He said the proponents of LIT saw it as a fairer tax, based wholly on ability to pay. It all came back to why one was raising the taxation in the first place. Was it to fund services or was it to fairly tax people by way of a burden?

McCafferty said that Revenue & Customs was more interested in where people worked rather than where they lived. This sparked a series of questions on North-South anomalies, including the position of Scots who work in England during the week but return to Scotland at the weekend – an issue raised by Glasgow finance director Lynn Brown.

'A number of people work in the financial service industry: they have a flat in London, and fly back to a better quality of life in Scotland. I would like to know how these people fit into a local income tax,' she asked.

Discussion also focused on whether the taxation burden as a whole should be reviewed instead of a single tax in isolation – a question highlighted by Edinburgh finance director Donald McGougan. Although the Scottish government has the power to change the local taxation system, introducing an LIT would need the co-operation of the Treasury and Revenue & Customs before it could be implemented.

Peebles and McCafferty agreed that it would take five years. As the SNP lacks an overall majority in the Parliament, any LIT would need the co-operation of other parties before it could go ahead.


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