Tax Commission Response 3: Devolution

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I’m massively behind schedule on my attempt to blog the Lib Dems’ Tax Commission (pdf), so without further ado…

This chapter is basically wrapped around a single proposal. That is, to radically shift the tax burden of local authorities from 20% local taxes / 80% national government to 80%/20%.

In principle, I absolutely applaud this initiative. One of the deep concerns I’ve had about the party’s local income tax policy is that it didn’t seem to particularly tackle this fundamental imbalance, which seemed absurd.

Of course, I don’t wholly subscribe to the detail. For one thing, people will be unsurprised to learn that I would like to see council tax, business rates and stamp duty replaced with a land value taxation, half the revenue of which would go to the local authority and half would go to the national government. Indeed, it seems to me that a per capita distribution of land values would be a more efficient basis for calculating how much support local authorities get from national government, with the richest areas getting nothing at all. In the short term, I’d see this as being set to raise no more revenue than CT, UBR and SD combined do at present (although I’d want to see it increase over time, replacing income tax in the way I described earlier).

According to the working group estimates, that comes to around £45bn. If half of that went to national taxation, the shortfall would have to be made up by devolving another 6p of income tax.

However, before we get too excited and start abolishing national income tax altogether, the one thing this chapter doesn’t consider is devolving environmental taxation. Just as I have argued earlier for the Tax Commission to consider handing back a portion of the revenue raised through environmental taxation/receipts from selling emission trading rights, so it is that at least a proportion should come back to local authorities, again on a per capita basis.

A major weakness of this chapter is that it explores devolution from the context of the status quo, rather than using current Lib Dem policy as a starting point. For example, the chapter also proposes devolving VED to local authorities. This is fine, so long as we are going to keep VED, but party policy is to replace it, and fuel taxes, with a road user charging system. Personally, I am slightly sceptical about road user charging in general, and extremely sceptical about replacing fuel taxes with it specifically (for reasons I will explore in more detail in my next post), but it certainly makes sense to me that any tax which nominally exists to pay for road use should go to local authorities.

The chapter doesn’t explore whether we should be devolving spending as well as taxation at all. This is understandable given the remit of the working group, but we need to decide exactly how to pay for, for example, devolved healthcare and public transport. In turn, this raises the question of whether we are going to abandon our longstanding commitment to regional government in favour of “city regions” and local authorities. We will have to revisit devolved taxation again when these issues have been thrashed out in much more detail; what the working group should be concentrating on now are some robust principles that will stand the test of time.

2 thoughts on “Tax Commission Response 3: Devolution

  1. While I’m with you in wanting to shift taxation towards socially-created income/wealth (esp. land values) and things we want to discourage (such as carbon/energy usage), I think you underplay the potential of LIT as a means of transferring funding to local authorities. One of the big advantages of LIT is that it enables a transfer of fund-raising powers to a local level via a ‘back end’ transaction – for example by simultaneous reduction of national income tax rates balanced by an equal increase in LIT – with the total rate staying the same. This would enable greater fundraising locally without the problem of there being any winners or losers.

  2. I don’t disagree with that, indeed at one point in the drafting I argued for even more income tax to be localised. According to my back-of-a-fag-packet analysis, if you replaced CT, SD and UBR with LVT and then split the proceeds 50/50 to national and local government, all other things being equal you’d have to localise another 6p in the pound in income tax, leaving us with a national income tax rate of just 9p.

    What I don’t want to see however is local authorities being overly dependent on a single tax, which is why I thought it was important to emphasise devolving environmental taxation as well. With that said, if a significant chunk of transport and health were devolved, local authorities would have to get that extra revenue from somewhere, so it is difficult to look at the whole picture at this stage.

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