The STUC is Scotland's Trade Union Centre. Its purpose is to co- ordinate, develop and articulate the views and policies of the trade union movement in Scotland and to promote trade unionism, equality and social justice, the creation and maintenance of high quality jobs and the public sector delivery of services. The STUC represents over 640,000 working people and their families throughout Scotland. It speaks for trade union members in and out of work, in the community and in the workplace. Our representative structures are constructed to take account of the specific views of women members, young members, Black/minority ethnic members, LGBT members, and members with a disability, as well as retired and unemployed workers. STUC has as particular priorities the maintenance of effective local public services and the continuing role of local authorities as providers of both decent employment and much needed economic impetus.

The fiscal context

STUC recognises that the issue of local taxation was a key election issue in 2007 and that the electoral success of the SNP Government was partially due to the unpopularity of the Council Tax and the consequent attraction of alternative arrangements for local taxation.

STUC considers the dissatisfaction with current arrangements for funding local government to be part of a wider disaffection with the UK’s current fiscal regime, which is both unfair and detrimental to the long term health of its economy.

A fair and progressive tax system must be a key element of any viable attempt to address the massive inequality that persists in Britain. There is also a continuing lack of public awareness of the fact that local taxation contributes only 20% of local government expenditure.

The failure to collect a fair tax contribution from super-wealthy individuals and corporations is unsustainable, if sufficient investment in the economy, public services and welfare provision is to be maintained.

At a time when the income of ordinary people is being squeezed in every direction, STUC has called for a serious examination of the faults within the UK tax system. Wages have not kept pace with the real rate of inflation and the current attempts to impose 2% wage restraint are not sustainable for working families. The pre-tax annual median income of full-time UK workers is around £23,674 and some 25% of full-time employees earn less than £17,000 a year. Millions of workers are not even paid the minimum wage to which they are entitled. Buying a house is a virtual impossibility for many if not most workers. The poorest fifth of UK households pay 36.4% of their income in taxes: 9.5% in direct taxes and 26.9% in indirect taxes. The top fifth pay 35.5% of their income in taxes: 24.7% in direct taxes and 10.8% in indirect taxes.

In this context and given the limited fiscal powers under the Scotland Act, it is understandable that a number of political parties in Scotland have sought to change the system for raising that proportion of local authority spending which is raised locally, through property based taxation.

Fiscal Powers in Scotland

STUC is currently undertaking a wide ranging consultation on the powers of the Scottish Parliament. Its interim report, agreed at Congress 2008, takes the view that significant additional fiscal powers should be vested with the Scottish Parliament. The proposed additional powers include Council Tax Benefit, the administration and payment of which should be aligned with the policy responsibility which is already held in Scotland.

Business Rates

The Scottish Government’s decision to cut small business rates across the board, without robust evidence for the effectiveness of such a measure or any proposals to monitor outcomes, is at odds with its stated aim of reducing the burden on the poorest in society, whilst maintaining local services. STUC sees a strong argument for the return of the responsibility for setting and collecting local business rates to Scottish Councils.

STUC opposes the current proposal for a local income tax

Notwithstanding its view that the current UK tax system is flawed and that significant additional fiscal power could and should be vested in Scotland, STUC opposes the current proposals both in principle and on practical grounds. STUC’s opposition to the proposal can be grouped under the following headings:

• Democracy and Local Accountability
• Support for a property based element within the overall taxation system
• Concern over the financial black hole created by the proposal for a 3p rate and the implications for local authority service delivery
• The absence of taxation on unearned income within the proposal
• The collection difficulties and associated complexities

Democracy

Currently Councils set their own Council Tax rates and are accountable to local electors for this rate and the value for money they deliver in terms of local services. Whilst in reality only 20% of local government expenditure is raised through the Council Tax, it still represents a significant proportion of householders’ income and is certainly perceived as a key factor when votes are cast in local authority elections. It follows from the principle of subsidiarity that not just power, but a level of accountability be exercised as closely to local communities as is practicable.

The view of the Scottish Government that further powers should be vested in Scotland following the subsidiarity principle is directly contradicted by its current support for a centrally collected tax when it comes to local government.

Property based taxation

Within a basket of taxation methods, property based taxation remains a reasonable if imperfect proxy for wealth. This is particularly clear, when property based taxation is compared to the other forms of indirect taxation which are flat rate and together contrive to ensure that that overall tax burden is higher for the poorest in society than for the most affluent. The link between living in better housing and enjoying better social outcomes is well established. Equally, and notwithstanding the current concerns over the housing market, home ownership has tended to confer significant financial advantage.

Property based taxation is particularly well suited to local tax gathering it being easy to identify those liable for payment and being hard to avoid.

Property taxes remain the most common form of local taxation within Europe, because of the need for balance in a fair system of taxation and the obvious link between one’s home and local government.

Financial black hole

By common consent, the Local Income Tax based upon a 3p rate would be a complete impossibility were the Scottish Government unable to secure agreement from the UK Treasury that the £400 million in Council Tax Benefit be retained in Scotland. It is highly unlikely that without a wider ranging alteration of powers between Holyrood and Westminster that such an arrangement will be reached. Even assuming that the £400 million of Council Tax benefit is retained, the Local Income Tax would raise an estimated £280 million less than current Council Tax revenue. Any attempt by the Scottish Government to make good the shortfall would affect non local authority Scottish public services and impact thousands of local authority jobs.

A Local Income Tax set above the 3p rate to counteract the funding shortfall would act progressively to lessen the number of “winners” amongst Council Tax payers. Glasgow City Council estimates that a 4.5p rate would be necessary to counter the funding shortfall and that such a rate would completely eliminate any advantage with as many suffering and benefiting.

Unearned Income

Those deriving income from investments and shares, interest and dividends or property portfolios would not be liable for the payment of local income tax. Such a fundamentally unfair arrangement cannot be tolerated and, given the STUC’s view, that far reaching reforms of the tax system are necessary at a UK level, it cannot support a new tax which enshrines such an iniquity.

Collection difficulties

The Scottish Government consultation lacks clarity on key issues in relation to collection and clearly support has not been forthcoming from the UK Treasury for the collection system the Government appears to favour. There are clear problems associated with any attempt to identify locally a tax liability which is collected nationally. There is no clarity on how a Local Income Tax would deal with those who;

• Are of no fixed address
• Have more than one address
• Are frequent movers
• Tend to move frequently to and from Scotland

There are many practical difficulties in both payroll offices and the tax office. Computer systems will need to be changed and Scottish residents identified. There are enormous opportunities for tax avoidance. The wealthy can take their bonuses in shares rather than wages, they can hide their earnings in overseas accounts, they will invest in property, and some will lie about where they live.

One clear collection inefficiency centres on the fact that the collection of water rates would presumably still be a local affair, increasing the collection cost of this rate proportionate to the monies accrued.

There is also no clear position on those who own two homes in Scotland, presumably they would pay only once and a form of Council Tax is envisaged for second homes. Collection of such a rate would be enormously inefficient. Equally problematic is the situation of those who own a second home in Scotland, whilst their primary dwelling is in another part of the UK.

The alternative?

As previously intimated STUC recognises that the Council Tax as currently formulated is neither popular nor perfect.
Reform of the current system is essential. The current band system limits how much those with more expensive properties contribute. A new banding system is needed, particularly with a wider range of top and bottom bands and a change in the multiplier rate between bands.

Property values have altered radically since the original bands were set, therefore regular re-evaluation of the band is required to ensure the system continues to match wealth with bills.

In the longer term, the devolution of Council Tax Benefit payment to Scotland could allow a reformed Council Tax banding system to operate even more fairly within a Council Tax Benefit system which holds fewer poverty traps, particularly for low paid workers.

July 17th 2008