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Scots open council tax Pandora’s box

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Local taxation has been one of the knottiest political issues of the last decade any change produces losers, and every loser is a lost vote.

But an unlikely breakthrough could be on the cards in Scotland, where the Scottish National Party government is pushing through a controversial plan to replace council tax with a local income tax (LIT) (LGC, 11 September).

The SNP’s gamble has plucked local tax reform out of the long grass and put it centre stage. The abolition of council tax is now at the heart of the Scottish Government’s legislative programme for the coming year.

EXPLAINER: How it would work

Scottish Labour , under its new leader Iain Gray, selected earlier this week, has been forced to say it, too, will review council tax, breaking ranks with colleagues in England.

So will we see different local taxes operating north and south of the border? And could events in Scotland reignite the local taxation issue in England, where it has lain moribund since last year’s Lyons Review ?

The replacement of council tax with a local income tax has been backed by Scottish local government. But it is nevertheless the SNP’s highest-risk strategy in its 16 months of power, and not just because of the distributional consequences.

Because the levy will be set nationally at 3p in the pound, councils will be left with no discretion to vary rates locally.

That could change, though, as the parliamentary arithmetic of the Scottish Parliament means the SNP will need to strike a deal with the Liberal Democrats to get the tax through. The Lib Dems support a local income tax, but only if rates are set locally.

A compromise is in the offing whereby the rate is initially set nationally, and in a few years’ time left to the determination of individual councils.

For Tony Travers, director of the Greater London Group at the London School of Economics, it is the question of where the rate is set that will be critical for local government. He warned the SNP’s “so-called LIT” could be part of a wider centralising agenda to rob councils of their financial accountability.

Scottish councils had no choice but to freeze their council tax this year, for instance, because otherwise they would have lost out on a government cash bonus equivalent to what they would have gained by upping the rate.

“It is the erosion of local taxation in Scotland and I’m surprised the Convention of Scottish Local Authorities has voted in favour, albeit along party lines,” he said.

The SNP’s income tax plans would become palatable only if they were amended to allow councils to set rates locally, according to Professor Travers. “Currently, it looks rather a dangerous precedent, but it could be a good one,” he said.

“If they were to go ahead with it, and the Liberal Democrats were to turn it into a proper locally variable LIT, and it worked, it could create pressure for reform in England.”

Prof Travers would prefer to see a locally-set income tax introduced alongside council tax, putting the two taxes at councils’ disposal. That would increase local government income overall and help to redress the balance of funding, under which councils currently receive around 75% of their funding from the centre.

The notion of multiple local taxes was at the centre of the Local Government Association’s submission to the Lyons Review. The association threw its weight behind a reformed property tax, some form of LIT and the relocalisation of business rates, which together would reverse the balance of funding in councils’ favour.

Since then, the so-called ‘combination option’ has, in the words of one LGA officer “just gone away”, and the association has focused its lobbying efforts on simply making councils less reliant on central government for the funding of services instead of campaigning for a change to the way revenue is raised.

Meanwhile, Scottish Labour is hoping the fallout from LIT will be enough to topple the SNP government. In a clear departure from party policy south of the border, all three candidates for Scottish Labour leadership were committed to reforming or replacing council tax.

Two have said it is time to look again at Sir Peter Burt’s independent review of local government finance, which reported two years’ ago under the then Labour administration.

Sir Peter recommended the replacement of council tax with a property tax based on capital values. But, like the Lyons Review in England, it was seen by jittery politicians as a step too far and dismissed almost before it was published. However, it could be dusted off again as Scottish Labour seeks a voter-friendly alternative to LIT.

See also

Explainer: How it would work

Trust proposals under fire

What is certain is that policy makers will be watching developments in Scotland with interest. The trial of a controversial policy in one part of the UK can be a useful litmus test for the rest of the country: the fallout over revaluation in Wales, which saw a third of properties going up at least one band, scared off the rest of the UK from doing the same.

John Curtice, professor of politics at Strathclyde University , said that in the short term reform in England is extremely unlikely. “Unless either Labour or the Tories change their mind, it won’t change in England,” he said. “They know it will create losers instead of winners.”

In the run up to the next general election, though, the Conservatives could seize on reform of the unpopular council tax as a vote winner, as long as no one loses out. “The Tories could well be expected to change council tax,” he said. “Giving permanent relief to older people is the obvious populist way of dealing with it.”

If Labour loses the election, it could build on the unpopularity of council tax to revisit its policy on local taxation in a way it has been unable to do while in government. “It’s easier for parties to rethink in opposition,” Prof Curtice pointed out.

Of course, the last time England followed the Scottish experiment on local taxation was with the introduction of the poll tax. Politicians on both sides of the border will be anxious to avoid that unhappy precedent.

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