Which taxes could be devolved to local government in England?
March 21, 2019
The latest report from the IFS local government and finance consortium highlights a key question local councils and central government are facing: what other sources of finance could be devolved to help meet local expenditure needs? The headlines will no doubt focus on the IFS conclusion that a share of local income tax is possibly the most effective and credible means for raising significant levels of income locally. The concern remains that any decisions about devolving taxes should not be made in isolation; the best decisions are made when the full picture is considered and all the consequences are understood and evaluated.
The attraction of devolving some share of income tax is partly driven by the conclusion that other potential local taxes like tourist tax are not likely to raise enough income to make a significant impact on local government finances, given the scale of the challenges they face. Indeed the concern in this particular example, is that only certain areas in the UK would have sufficient tourist footfall to make the endeavour worthwhile. So the obvious challenge is whether this is a good enough rationale.
While this is a very sensible contextual conclusion, it masks an unspoken truth within local government finance that despite there being enormous annual expenditure that can run into the hundreds of millions, in reality small-scale, marginal revenue raising is critical to local authorities. Indeed, whilst local councils plan their services at a strategic level, some of their most contentious decisions are actually relatively marginal in quantum. That is because large parts of a local authority’s budget are in practice already committed in advance. These would include the costs of supporting adults with learning disabilities in care, meeting commitments to child asylum seekers, providing services like refuse collection, or indeed servicing debt and meeting pensions commitments, to name but a few.
In practice, what seem like relatively small revenue-raising powers, could (in aggregate) provide councils with a revenue stream that is not linked to central government allocations and be the means to help fund important services that support businesses and tourism. In this context, it is understandable why councils see such taxes as attractive and worthy of consideration when addressing the wider question of the fiscal devolution.
However, in considering the potential benefits of any such new local taxes (including the question of devolving larger taxes such as income tax), we need also to bear in mind the obvious trade offs like the potential for such devolution to create additional complexity and to have an impact on competitiveness. There is no doubt that introducing a system of local income tax would create additional complexity and (as the recent fair funding review has shown) any revisions to a national formula will always result in winners and losers. We can expect therefore that there will also be a need for additional mechanisms to ensure a less dramatic transition to those winning and losing positions.
At a time when simplifying the tax system is a priority, we need to be clear as to the rationale for introducing any further complexity. A good tax policy should be judged on consistent, transparent criteria, and the benefits must outweigh the additional burdens. For some, the case for fiscal devolution is clear with the goal of increased accountability. And, as the IFS points out, with local services under pressure, if the government does not devolve new revenues to councils, the other options are to raise more revenue centrally, centralise some of local government’s current spending responsibilities or accept further cutbacks in local services.
However, concerns around the potential for incremental change to lead to a more inefficient, complex picture that reduces competitiveness for the UK without achieving the benefits of a devolved tax policy that can support both local services and local business, also need careful consideration. Arriving at the right balance will not be an easy road but the outcome - a rebalanced tax system that helps to address funding needs - is a very worthwhile objective.