Is local income tax back on the agenda?

The problem with a smash and grab approach to cutting government spending is that it can create unintended consequences.  Far too many of the measures in the Spending Review have not been thought through, and some of them are downright nasty.  But there is one measure that may turn out to be good news for Scotland.

Council tax benefit is being devolved.  From April 2013, it will be replaced by grants to English local authorities, though the sting in the tail is that the overall pot will be reduced by 10% resulting in a saving to central government of £0.5 billion per year (see page 51 of the Spending Review document available in the link above).  This means that Scotland’s share of the council tax benefit budget will now form part of the Scottish block grant, before being passed on to local authorities here to help the poorest meet their bills.  But there will also now be local flexibility in determining the criteria for the benefit.  As the Institute of Fiscal Studies points out, this will create a postcode lottery down south with potentially over 100 variations on a theme.

But Scotland can choose its own path and determine a nationwide set of criteria.  And there may well be scope to go further.

What is there to stop Scotland using the devolved benefit pot to help shift from the unfair and regressive council tax to the much more progressive and fair local income tax?  The burd is not the only one to have worked out the potential beneficial consequences for Scotland.  He might have had other more important matters on his mind, welcoming his new son into the world, but even so, John Swinney is ahead of the game on this one.   An article tucked away in a corner of Scotland on Sunday confirms that the Scottish Government is already in discussion with the UK Treasury about the cash transfer, said to amount to £400 million.

But the Scottish Government needs to do more.  Council tax benefit is notoriously underclaimed.  Indeed, the Department of Work and Pensions has estimated that one in three people who could be entitled to money off their bill, are missing out.  Instead of settling for the amount currently received, the Scottish Government should run a council tax benefit take up campaign to maximise the money potentially available to Scotland in two years’ time.  Getting more money into people’s pockets would be a good thing in itself and would give the country a much greater pot to play with after the switch over.

Moreover, work should start now on creating a much more equitable and distributive system of applying the benefit.  Previous research has shown that the taper effect of the benefit – over a certain income level, entitlement is removed at 20p per pound so that people earning just £10,000 have to pay full council tax – acts almost as an additional income tax of 20%.  Applying and calculating the taper is also administratively burdensome – and costly.  A fairer, more streamlined system could mean more people on low incomes getting help and also reduce costs.

These activities should be motivated by an additional purpose, that of freeing up cash to create a transformational tax pot.  Swinney previously shied away – wrongly, in the burdz view – from introducing a local income tax during this term of government.  One of the reasons was the cost, scaremongered out of proportion by the business lobby.  Largescale change is never easy but we must not lose sight of the need to reform public services for the longer term. And a key part of that is changing the income base.  A local income tax has the potential to raise more money to invest in services.  It will also move Scotland on to a much fairer and progressive local tax system.  

Just the kind of unintended consequences we should want, even if the Conservatives don’t.

3 thoughts on “Is local income tax back on the agenda?

  1. Thanks for the reply, Kate. Definitely worth looking into, I think. Given what you have said, I have a suspicion that areas like SBC are maybe underclaiming – we have a larger than average share of the population who are elderly, average earnings are, I believe the lowest on the mainland, there is a positive culture of paying council tax (collection rates are very high) and there has historically been a bit of an aversion to claiming benefits in general.

    Anyway, regardlss, it would be useful to understand the pattern.

  2. Excellent article, Kate. Very interesting read indeed and I would dearly love to see LIT come to pass.

    Is there any suspicion that there are particular areas of Scotland were CB claims are low, in order to target efforts to improve take-up, or is it likely to be uniformly low? Any idea by how much the pot would be boosted if everyone who could claim did claim?

    • I would imagine it is lower in the most deprived areas, as is the case with most benefits. But pensioners in particular are a group that miss out on this benefit too. I checked to see if Audit Scotland gather this information as a performance indicator but they don’t. And some of the research I found in this area is quite old, from 2006 or before, so didn’t use it. Will have a think about where to look for this… might have to resort to the DWP tabulation tool again to work it out for ourselves. But definitely something the Government should look at gathering, would be in their interest if they did!

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