Professor Mark Stephens welcomes today’s report on local tax reform, but warns that it is only the first step on the road to replacing the Council Tax in Scotland.

The Commission on Local Tax Reform has published its report which was subject to a low-key launch in a small basement room at Dynamic Earth today.

The Commission was established by the Scottish Government in February as a cross-party body charged with identifying and examining “alternatives that would deliver a fairer system of local taxation to support the funding of services delivered by Local Government.”

The Conservatives declined to join the Commission, but all of the other parties represented at Holyrood were on board, along with COSLA.

Whilst the Commission was not asked to come up with an alternative to the Council Tax, some of us hoped that agreement might be reached at least on the outline of a replacement to this outdated and regressive tax.

Nonetheless, the Commission has made some important progress.

Everyone, it seems, is convinced that “the present Council Tax system must end.”

Good.

The Council Tax could be reformed, but the usual suggestion of adding extra bands for higher value properties would do little to make it more progressive, as there already so few properties in the top band.

The Commission’s “predominant view …is that any reform of local tax has to continue to include recurrent tax on domestic property.”

Whilst this implies that the view is not universally held, it does provide more than a strong hint that the SNP leadership is ready to drop its long-standing proposal to replace Council Tax with an income tax.

This is very significant.

The Commission suggests that such a property should be founded on a “more progressive” liability base, which suggests current property values. In the light of the failure to revalue the basis of the Council Tax for more than two decades, the Commission recognises the importance of keeping values up-to-date.

It also suggests that there must be a system of relief for people on low incomes that is “better” than that offered by the Council Tax Reduction scheme.

A clear departure from previous reports, notably that produced by the Local Government Finance Review Committee in 2006, is that “we are not persuaded that a single tax instrument can simultaneously deliver greater equity for taxpayers and autonomy for Local Government…”

It goes on to suggest that, “Local Government’s tax base should, if it could be proved feasible, be broadened to include income.”

Having worked on reform of property tax reform for some years, and having had the opportunity to discuss it with senior politicians, I have reached the conclusion that income must be built into a system of property tax, so that it becomes an inherent part of it, and not an add on, like the rebate schemes that accompanied the rates and Council Tax. The Commission is amply aware – as were Sir Peter Burt and Michael Lyons who were the chairs of other local tax reviews before them – that to many people, the “ability to pay” means “ability to pay out of current income.”

I therefore welcome the Commission’s recognition of the importance of taking into account income beyond the compensatory mechanism of a rebate.

However, the Commission seems to suggest that a system of local income tax might exist separately from a property tax (which in turn has its own rebate system).

This sounds like the recipe for a bit of a fankle.

In its nine months of deliberations, the Commission has been unable to establish the technical feasibility of a local income tax based on the PAYE system varied at local level.

The system I envisaged, and outlined in oral evidence to the Commission, was much simpler. It was to create a hybrid tax which relates a household’s liability both to the value of a property and to its ability to pay it from its current income. The result would be that (a) for a given property value, a household with a higher income would pay more than one for a lower income; and (b) for a given income, a household living in a more valuable house would pay more than one living in a cheaper one. In contrast to the present Council Tax Reduction scheme, the sensitivity of the tax to income would run across the income spectrum, rather than simply protecting people on low incomes. In contrast to a system of local income tax, it would require income to be identified only within a range in order to determine the rate at which property value should be taxed.

The Commission’s main report is supported by a supplementary report that contains the detailed analysis undertaken by the Commission’s secretariat, who worked with my colleague Chris Leishman. However, they encountered data limitations that inhibited their ability to model hybrid schemes, or indeed a land tax (which the Commission concludes is “promising”).

It is concerning that more than 15 years after the establishment of the Scottish Parliament, policy development should be hindered by lack of adequate data. Particularly with new powers on their way, a review of the adequacy of data available to researchers and analysts should be a priority for the Scottish Government.

Meanwhile, we will have to see what policies the parties adopt in the run-up to the 2016 Holyrood elections.

The Commission’s report marks an important first step in the process of reforming local government taxation.

No one said it would be easy. There remains much work to do.

Cover image: By User Finlay McWalter on en.wikipedia