While council tax increases have been kept broadly within the government's targets this year, nothing has changed to improve the gearing effect. In the long term the question still remains whether councils can continue with only one tax under local control. While the Lyons review ponders this, three new sources of revenue have recently come on line for councils. Could any of these take the pressure off council tax?
The curiously named Local Authority Business Growth Incentive scheme is an attempt to allow councils to keep some of the increased business rates income from new and re-occupied buildings. The business rate is now set by central government, the Scottish Parliament and the Welsh Assembly. The money collected is pooled and redistributed to councils, giving no revenue incentive to encourage new business into their area. Many argue for the return of business rates to local control, but this has so far failed to find favour with either businesses or government. So the incentive scheme was introduced and produced its first payment to councils in England in February 2006.
The scheme is a complex accountancy exercise, based on the business rate tax base of the occupied business properties in a council's area. It compares the rate of increase in the tax base with an historic rate of increase. If the tax base increases at either around or more than the historic rate of increase, then the authority will receive a percentage of the increase. In two-tier areas the money is split between the district and county councils.
This is claimed to be new money because it is generated by the increase in the rate income from new businesses. There is a certain amount of smoke and mirrors in this claim. In the past, the non-domestic rate has increased by inflation each year for five years. Then there is a property revaluation and the new rate is set to produce the same revenue as before, plus inflation. Adjustments were built in to deal with reduced income resulting from ratepayers' successful appeals, partially offset by extra income from new businesses. Effectively, this offset is creamed off to finance the incentive scheme. Meanwhile, rate income still has to keep pace with inflation and the government has removed the inflation cap on the rate increase.
Clearly, there is more scope for scheme income where there is already a large tax base, but there are more basic problems. How much influence does a council have on increasing its business rate tax base? If the town centre has been redeveloped over the last 10 years thus increasing the tax base, how can this be matched or exceeded in the future? Conversely, a new airport runway next year may well bring a windfall.
Who benefited in the first year? The revised figures show the big winners to be Westminster City Council, gaining£732,867, Leeds City Council£467,619, Ealing LBC£291,556, Bradford City MDC£233,719, Sheffield City Council£223,777 and Brent LBC£204,980. Against this, councils with large tax bases which received nothing include the City of London, Camden LBC, Islington LBC, Kensington & Chelsea LBC, Tower Hamlets LBC, Birmingham City Council, Bristol City Council, Gateshead Council, Leicester City Council, Liverpool City Council, Manchester City Council, Portsmouth City Council, Reading BC and Southampton City Council. Among the counties, the big winners were Essex CC£90,509, Hampshire CC£75,384 and Hertfordshire CC£75,004, while Durham CC, Northamptonshire CC, Rutland CC and Warwickshire CC received nothing.
Business Improvement districts
Another new scheme loosely based on the rating system is the introduction in England from late 2004 of BIDs or Business Improvement Districts. Under this scheme businesses can propose to pay for certain service improvements within their area. The proposal is subject to a vote of the businesses affected and may cover any area, smaller or larger than the council. Typical uses have been extra street cleaning, street scene improvements and additional security.
The money can only be used for service improvements and not to replace existing services. It is therefore not a general revenue resource for the authority, but it can be a way of financing improvements which the council could not otherwise afford.
There are around 30 BIDs in progress and it seems that the existing BIDs have been
generally accepted by ratepayers. The difficulty is that a reasonably large rate base is needed to achieve any significant income, so the schemes have been largely confined to London and other urban areas.
There are two congestion charging schemes so far in place, in Durham and central London. A proposed scheme in Edinburgh was defeated by a local referendum. The Durham scheme is a relatively short toll road so it is only the London one that thus far has generated large-scale revenue.
The charge was introduced in February 2003 to the City of London, the West End and a small area south of the Thames. It applies from 7am to 6.30pm Monday to Friday and costs£8. Could it be rolled out across Britain as an additional source of local government revenue with the additional benefits of reductions in congestion, pollution and accidents? Is it a good tax?
Transport for London produces annual reports on the charge, which show that about half the money raised is spent on collecting it, while net income is still far below the anticipated level. Even these costs do not include that of setting up the infrastructure, or the considerable loss of parking income. Many offices within the zone are receiving rateable value reductions backdated to April 2003 as a result of the low occupancy levels, and some appeals based on reduced trade are outstanding. Taking all factors into account, it is unlikely that any net income to local government has yet been generated.
Administration costs are enormous, with every day bringing around 7,000 penalty charge notices, over 1,000 written representations, 100 independent appeal cases, and around 1,000 debts to register at the county court. By December 2004 some 316,000 warrants had been issued to bailiffs, equivalent to about 25% of the national total of council tax liability orders passed to bailiffs.
It makes poll tax look cheap and efficient. It fails nearly all the tests of a good tax .
Can the charge be justified by benefits to traffic flow, pollution or accident levels? TfL's statistics show that all these factors in London were steadily improving before the charge was introduced. Its introduction was followed by reductions in car and tube use, no change in train use and an increase in bus passengers. It appears that terrorism, reduced tourism and job reductions may have had more effect.
TfL claims a 30% reduction in congestion, but the net reduction in traffic entering the zone is actually 18%. During the day, average traffic speed has increased from 8.9mph to 10.7mph. But the longest journey that can be made is about three miles, saving about three minutes. As the gain is so small, where is the logic behind the charge?
Curiously, it was followed by an increase in pollution in 2003, but the previous downward trend was resumed in 2004. TfL concluded that it was not possible to identify a 'congestion charging effect' on pollution. One danger was that increasing both road speeds and two-wheeled road users would increase accidents. Fortunately, the existing downward trend has continued.
The congestion charge is also unpopular with the people directly affected by it. In the consultation on the western extension into Kensington, 75% opposed it. The mayor announced that it will go ahead anyway.
So, overall, the business growth incentive scheme may produce a useful windfall and encourage authorities to become closer to businesses, but it is difficult to predict any income in advance. BIDs provide a method of financing improvements agreed with local businesses, but have no effect on the authority's overall finances. And congestion charge is a poor tax unlikely to generate any significant revenue outside London.
While there may be benefits in large urban areas, none of these revenue sources are much help in small towns or rural communities. The search for alternatives goes on.
Is it time to look at tourist bed taxes, plastic bag taxes and other environmental taxes? Sadly, there is little revenue in these. There is always local income tax, land value taxes, payroll and business activity taxes or just re-localising the business rate. Rate income in rural areas could be increased by bringing agricultural land back into rating.
It will be interesting to see the results of the Lyons Inquiry later this year, but council tax and business rates will still have a large role to play.
Independent revenues consultant