Official Report 254KB pdf
I formally open today's meeting of the Local Government and Transport Committee. As this is the first meeting of the year, I welcome all members back and wish them a good new year. I look forward to an active few months before we break up for the parliamentary elections.
I will start by making three points.
Thank you for those introductory remarks. I now open up the discussion to committee members.
Sir Peter, I will start by addressing an issue that you did not examine but which in my view, and in the view of Andy Kerr, who was the Minister for Finance and Public Services, you should have examined. When he announced your remit to Parliament on 16 June 2004, he stated:
First, that is a misunderstanding. We considered the matter—section 19 of the report deals with equalisation. Almost all the councils that gave evidence expressed unhappiness with the allocation of grant-aided expenditure, and COSLA accepts that the current distribution has its shortcomings. We recommended that ministers look closely at trying to improve the allocations, but paragraph 10 of section 19 states:
If I may say so, although perfection is not for this world there is huge disappointment. I quoted paragraph 4 of section 2 of your report:
Which is what we did.
You directed me to paragraph 10 of section 19, which is on page 185. The first sentence of that paragraph states:
It was intimated to us that the impact of arrangements on the current GAE revenue support grant system was an associated issue. Our remit is set out on page 5 of the report; associated issues are listed at the bottom of that page. We treated the current GAE RSG system as an associated issue.
Addressing that issue was clearly part of the review committee's remit. You said that you did not want to conduct a root-and-branch review, but did not alarm bells ring when councils such as Aberdeenshire Council said that the system—which was agreed between COSLA and the Scottish Executive and cannot therefore be changed—was wrong? You took evidence from COSLA, which said that the system is fine, but councils such as Aberdeenshire Council looked for an independent analysis of the system.
What would that limit be? We did not consider that issue. As I said, Aberdeenshire Council and Orkney Islands Council were the only two councils that gave us detailed submissions. I think that we received submissions from 25 of the 32 councils. Twenty three councils chose not to make a detailed submission on the GAE system or the funding methodology.
Excuse me, I am sorry, but may I make one point?
Just one last point.
Peter Daniels knows as well as I do that more than 120 criteria can be tweaked. The matter is not simply about self-interest; it is about justice. I am surprised by your response, because if COSLA and the other councils said, "The system's fine. We really want more money—the distribution system's not important," should not alarm bells have been set off for your report when, as you said, one or two councils turned around and said that they had been trying for years but could not get past COSLA? We had the opportunity of an independent review, so it is hugely disappointing that, having heard the evidence, the review committee decided not to go there because 90 per cent of councils were happy.
We say in the report that the system needs to be kept under review by COSLA and the Scottish Executive. Cognisance must be taken of authorities such as Aberdeenshire Council and Orkney Islands Council, which make such detailed submissions. However, that is a longer-term issue that was not for us.
I will ask more general questions to start with. Sir Peter, what do you understand by subsidiarity and what are your views on it?
What I understand by subsidiarity is that decisions should be taken at the lowest possible point, as close to the customer as possible. I am wholly in favour of subsidiarity. I do not see why devolution should stop at Holyrood.
At least we agree on that. The McIntosh commission, of which I was a member, recommended in its report that there should be parity of esteem between the Scottish Parliament and local councils. How can we go about achieving that? Is finance part of that?
That is a very good question. My colleagues might like to add to my answer.
We also took some evidence about what the electorate thinks. We undertook two opinion polls—a quantitative survey and a qualitative survey—which tended to confirm that the esteem in which members of the public hold councils depends primarily on the quality of the services that the councils provide. That corroborates the point that the extent to which councils are given discretion to provide a quality of service that directly meets their electorates' needs largely determines the esteem in which they are held. Therefore, to have parity of esteem, councils need as much discretion as possible to determine what they spend their money on to the benefit of the people.
It is interesting that you did not come to a conclusion on whether councils should raise their own finances. I served as a councillor and have known councillors for ages. They feel that they have less power now than they ever did—in many ways, they are just doing the bidding of the Scottish Executive and Westminster—so, if councillors had the power to raise money locally and had discretion over more than 10 per cent of the budget, surely they would feel that they had more manoeuvrability to do their own thing within their councils and might be able to provide a better service than they can under the present system.
That depends on their having more decision-making power over their expenditure. I do not think that the two are connected. In Scotland, the amount that is raised through council tax already accounts for on average 19 per cent of councils' budgets. If our respondent was correct and councils have less than 10 per cent discretion over what they spend, their manoeuvrability could be doubled simply by allowing them discretion over spending everything that they raise in council tax. The critical point is not how the money is raised but that councils should be given responsibility for deciding how it is spent. All the evidence that we saw suggested that giving them that responsibility would go further towards restoring parity of esteem than anything else would.
There is now a growing body of opinion that it is not sufficient for the Scottish Parliament just to spend money and that, if it is to grow in esteem, it should raise its own money too. Can the same argument be used for councils?
With the greatest respect, most of the anecdotal evidence that I have seen suggesting that has come from people within the Parliament rather than those outside it.
We will agree to disagree on that. Is it right that the Scottish Executive should put pressure on councils to keep the rise in council tax to as low a figure as possible every year?
That is outside our remit. However, in one chapter of our report, we urge that the decision-making process be improved, as Sir Peter Burt said in his introductory remarks. The relationship between the Parliament, Executive and councils appears acrimonious to the public when the allocation of funding and levels of local taxation are being decided on. That relationship needs to be resolved, which is more important than our commenting on how the tax is set. It is a bigger issue than simply how the tax is set; it is about the nature of the relationship, the total amount of money that is available and the balance of how it is raised. That all comes together in the need to resolve the relationship.
All the evidence we received suggested that what is critical is how well councils deliver services. That is what the electorate perceive as important.
In the previous session, the Local Government Committee considered this issue, although its remit was different. Obviously, if you ask different people about where you want to go with your inquiry you might end up with different answers. The Local Government Committee concluded that the council tax was fundamentally sound but required addressing at the margins. You have said that no amount of change at the margins would improve the council tax. Is there nothing in your modelling to suggest that the council tax could be made more progressive or fairer?
As you might imagine, we considered that in considerable detail. We considered three particular areas: first, expanding the number of bands at the bottom and the top; secondly, changing the multiplier for the top band—the maximum band H—from three times the bottom band to something much greater; and thirdly, revaluations. Interestingly, when we modelled suggested changes to the bands, the difference in the outcome in terms of progressivity was marginal, which surprised us.
We were surprised by that. Sir Michael Lyons, who is doing a similar study in England and Wales, conducted a similar assessment and was equally surprised by the fact that in order to make council tax less regressive it is necessary to move to a huge number of variable bands.
My final point is about revaluations. The last one was performed in 1991, and no one disagrees with the principle of revaluation being part of updating the council tax base.
One of the other fundamentals is the inclusion of property in calculating the basket of taxation. Should that be considered? Most countries have some element of property base at some level in assessing taxation. Is that a fundamentally good principle?
Yes. Indeed, that was one of the foundations of our view that there should be such a basket of tax and that if wealth is being enjoyed in the form of property, as a surrogate for most wealth, it is right and proper that that enjoyment should be subject to tax.
Some people argue that taxation can be progressive and fair only if it is based purely on income. Do you have a response to that? Can there be a genuine basket of taxes that does not include some degree of property assessment?
The review committee's position is that there cannot. It is right and proper that a property tax on some basis—never mind our specific suggestion—should be part of the basket of taxes. If a property tax is not included, the burden falls somewhere else, and there are only a limited number of bases left: people—the poll tax, if you like—but that does not seem too popular; and transactions and sales taxes, but as core taxes for council fundraising, that approach does not seem too clever. Therefore, we are left with income, and that means that those who work are taxed on their effort and have to carry the burden that would otherwise have been carried by those who own property.
We noted that income tax already contributes 30 per cent of total taxation. Therefore, if property were not to be taxed, it would be likely that that burden would be transferred to an income tax. In looking at the options available to us, we considered property and income as the two most likely forms of local taxation. One of our reasons for advocating a property tax was that income tax already contributes 30 per cent to taxation, and therefore to local taxation, given that 80 per cent of local government expenditure is funded from national taxation anyway.
The figure of 6.5p has been mentioned as the level at which local income tax would have to be collected if it was to replace the council tax. Did the calculations that produced that figure include any consideration at all of the burden that would be placed on 32 local authorities doing all the additional bureaucratic work of establishing a database on which to base the collection of that money, or was it purely an arithmetical calculation per capita—X number of people divided by X amount of money? We now know that the pay-as-you-earn system cannot be used to assess local income tax unless there is primary legislation at Westminster, so each local authority would have to establish its own database. Was any consideration given to that in the calculation of the 6.5p rate?
The local income tax rates were those provided by the University of Stirling, which did the modelling work for the review committee on a purely independent basis. The detail of how the figures were calculated comes from the University of Stirling, but there is no reason to doubt the modellers' methodology. The 6.5p is an arithmetically calculated figure. The costs of running a local income tax system, however it is run—whether the rate is set nationally or locally—are dealt with separately in the report, but they do not impact on the figure of 6.5p.
We spent a long time discussing the philosophical objections to a local income tax, including the burden that it puts on to other forms of taxation and the reasons that John Baillie gave. The practical problems of introducing 32 separate local income taxes, particularly given the fact that so much is deducted at source in the UK tax structure, almost beggar belief.
I wish to ask about the immediate reactions to your recommendations following the publication of your report. You will be aware from reports in the media that no sooner was the ink dry than it appeared that your principal recommendation was being comprehensively rubbished by the Scottish Executive, which commissioned the report, starting with the First Minister's spin doctor. Could you comment on whether, in light of the Executive's response, you feel that you have wasted two and a half years of your valuable time on a task that produced recommendations that were not treated seriously?
I return to my opening point. We did not recommend a 1 per cent rate. That was a misrepresentation or misunderstanding of the fact that, if a local property tax had been introduced in 2004-05, the rate would have been 0.94 per cent. That was a statement of fact, not a recommendation. What the level should be is a matter of simple arithmetic, and it depends on the reallocation of expenditure from other areas. You might say that our report was a great success, given that it was comprehensively rubbished by every political party.
I will make a personal response to that question. I do not feel that I wasted my time for two and a half years—not at all. The report is a very substantial and well-researched piece of work. It is in the public domain and it is a very good piece of information about all the issues relating to local government finance. I have some confidence that, over time, it will be read and considered. I am certainly proud to have my name attached to it. I did not waste my time.
Leaving aside the contentious issue of the rate of a LPT, which got a lot of people very excited, do you think that, judging the comments and reactions that have been given, the principle of an LPT is under active consideration, or do you think that it has effectively been dismissed?
The Local Government and Transport Committee is better placed than I am to answer the question whether it has been dismissed or not. The underlying principle of an LPT is a good one because, regardless of the rate, 45 per cent of households in Scotland would be better off than they are under a banded council tax system, and 20 per cent would be no worse off. The 35 per cent who would be worse off probably include most of us in this room, and that is probably the way that it should be.
It is interesting that, the week after our report was published, the Scottish Executive announced that the average house price for the July to September quarter was £142,355. The 1 per cent figure that was latched on to by the press related to the average house price in Scotland of £101,000 in 2004-05. If we had produced our report a week later, the percentage rate—the illustrative LPT rate—rather than being 0.9 per cent, would have been 0.6 per cent.
That is what it is in Ireland.
Yes.
I will move on from the subject of reactions to the report.
We discussed that issue at considerable length. I return to Ms Watt's comment about subsidiarity. We all believe that things should be managed as close to the customer end as possible. In education, it has been argued that that management is best delivered through local authorities; there are also arguments in favour of Stewart Sutherland's recommendation. I have to say that, in the evidence, I was extremely impressed by the quality of local authority staff. The executives—almost without exception—came across as extremely competent and on the ball. It is easy to assume that, if you change the structure, something will work better. However, I am not sure that changing the structure is necessary in this case. I think that, if the staff were given more freedom, you would see an interesting increase in efficiency.
You will probably not be surprised to learn that my criticism of your report is different from that of most of the other parties. I seem to remember that the detail that I brought to the table in Edinburgh in relation to my proposal was substantially greater than the detail that you received from any other political party in terms of estimates and the range of payment for individuals.
My colleagues might like to supplement what I am about to say, but my answer would be no. I see the Scottish service tax as a variation of local income tax. I thought that it could have an adverse economic impact in terms of fiscal flight, but that is a matter of opinion. In short, we saw it as a variation of local income tax, which we rejected.
The issue goes back to a choice between using those who work for a living as the tax base rather than using property as a tax base, which spreads the basket of taxes. However, on top of that, our work showed that, using a local property tax system, which we recommend, 50 per cent of people would be better off and a further 16 per cent or so would be no worse off—I have rounded off one or two figures in saying that, but that is the general thrust. That means that the people at the lower end of the income scale who have been funding the higher end of the scale would no longer do so, thereby achieving some of the redistribution of wealth that Tommy Sheridan talked about during the review committee's hearings.
I am pleased that you have referred to the redistribution of wealth. I have used the term several times, as members of the Local Government and Transport Committee know, because they scrutinised the Council Tax Abolition and Service Tax Introduction (Scotland) Bill, which was my member's bill.
In terms of your suggestion; not in terms of a local income tax. Two submissions were in favour of locally set local income tax bands. You are quite right to say that your submission favoured a Scotland-wide approach. I still think that that would be the wrong way to go. We do not think that your proposal stacked up against the objective criteria as well as the proposal for a local property tax did. It is a question of evaluation and of weighing the evidence: you weigh it one way and I weigh it another.
I do not have a problem with your rejecting a proposal; I have a problem with your not properly considering it.
Because your proposal would have the unacceptable economic consequence of fiscal flight. That might be different if we were an independent country, but we are not; we are part of the United Kingdom. Indeed, even if Scotland was an independent country, your tax proposal would lead to fiscal flight. We have a limited number of large employers in Scotland and it would be relatively easy for them to relocate.
Are you willing to repeat that point, even though your report states categorically that there is no empirical evidence of fiscal flight?
There is some empirical evidence of fiscal flight, although it is not compelling. For example, in America there has been considerable fiscal flight between states.
You do not provide compelling evidence of fiscal flight—
Not across national boundaries, but—
Even across states, I suggest that the effect is marginal.
We considered that issue and discussed it at length with the economic advisers. The problem is that it is extremely difficult to be sure of the effect. You might well be right and your figures might well be correct, but I think that the risk is too high.
In the report, you say that you considered propensity to work. However, the only detailed proposal that you had before you suggested that a surplus of £300 million would be generated in Scotland via redistribution and that the marginal effects of propensity to consume—
But that was a static state analysis. It did not assume that there would be any loss of economic activity in Scotland.
Danson, Whittam, Cooper et al, who are respected economic researchers and deserve the same respect that you have given to other academics, worked with what they had to hand. We all agree that Scotland needs more rigorous academic and economic data, as we are unable to determine exactly what is going to happen if we change our macroeconomic or even microeconomic levers. However, on the basis of the data that we have, those researchers provided a report that predicted a surplus of £300 million over current council tax revenue generation. I am suggesting that even to dismiss that would have been better than just ignoring it. I think that, in the review committee's report, you should have dealt with what was on the table rather than what people came along and thought out loud. We gave you rigorous academic research that has been around for several years and has been peer reviewed repeatedly—some people have criticised it and some people have supported it—yet you appear not to have given it the consideration that it deserves. Why was that?
I confirm that it was given full consideration. You put a considerable body of evidence before us and it was considered as thoroughly and in as much detail as any other evidence that was put before us. I am sorry if you feel that we have not properly reflected that in our report—we apologise. However, there is no doubt that that evidence was considered.
My final point relates to an example in the report that you almost repeated earlier: the assumption made about two adults on the average income. Do you think that it is useful to use that assumption in evaluating my, or any other, tax proposal? According to the Executive's figures, some 78 per cent of households in Scotland have an income that is less than £40,000 a year, so you are talking about only 20 per cent of the population. Why is that assumption constantly used as a totem pole for comparison, although it represents a minority?
You are right to say that we found it difficult to produce evidence about the impact of taxation models on different families. We asked the University of Stirling to give us evidence of the impact of different taxation models on different families, and it found that very difficult simply because of all the different factors that impact on a household's income and expenditure. You are right to say that we quote only one example, although there are many others. We quote that example because it is illustrative of the differential impact of a local income tax as compared with the impact of a property tax.
It is also not a representative example, as it represents only 20 per cent of households.
It would be difficult to find one example that represented the majority of households. Any example is likely to represent a minority of households if we factor in all the different circumstances of a household's income, expenditure, family demands, circumstances, or whatever. That was the problem that we had in coming up with illustrative examples.
Fifty-two per cent of households in Scotland have an income of between £25,000 and £30,000. That is a majority, so would that not have been a better example to work with?
It would have been, but the demands on households' expenditure are all different. A household's disposable income is very much to do with the demands on expenditure, which, we found, vary enormously.
I want to put to the witnesses the terms of a brief letter that all committee members received recently from a senior citizen who puts quite well the case against a property tax and, conversely, the case for some form of income-based tax. The lady says:
Yes.
We are not used to such brevity, here. That is most refreshing.
You can follow the example if you want, Fergus.
Keep it brief.
The holy grail is out there somewhere.
To deal with the last question first, I say that we had no discussions with any minister, either at Holyrood or Westminster.
That is one way of looking at it. However, another way of looking at it is the practical way. At the moment, we have the property-based council tax, and around £500 million is received from the Exchequer to fund council tax benefit. Of course, were Scotland to opt for a local income tax, England and Wales would still continue to receive their payment for council tax benefit from the Exchequer. If the £500 million payment was removed and we did not receive a balancing payment, that could be seen as being fiscally unfair—I would certainly see it as being unfair.
We met DWP officials. I cannot remember the detail, but my vague recollection—my colleagues will correct me if I am wrong—is that the officials said that the issue, which was raised in a low-key way, was outwith their remit and that we would have to discuss it with the Treasury. Is that right?
Yes. Our discussions with the DWP and the Treasury were primarily about the practicalities of operating different tax options, rather than about their implications for the fiscal settlement between Westminster and Holyrood.
So, did you discuss the matter with the Treasury, given that the DWP officials said that it was outwith their remit and, in effect, dodged the question?
I welcome the chance to talk to my MSP, given that I come from Strathspey. It is nice to see you, Mr Ewing.
On a point of information, the report records council tax benefit as amounting to £345 million in 2004-05, although obviously the figure will have risen since then.
It will not necessarily have risen since then, given employment levels.
It is possible that the figure will have risen since 2004-05, when it was £345 million.
I have seen a larger figure, but it may well be the case that it is not £511 million. Although we are talking about a substantial amount of money, I am more concerned about the principle of being able to raise it here in Scotland.
There is another principle, which has always struck me as being the height of absurdity. Whereas the DWP pays for bed-and-breakfast accommodation for homeless people, if a council provides them with low-cost housing, a charge is made on the council's budget. From the point of view of the individuals concerned, they would almost invariably be better off in low-cost housing and it would be cheaper, but because of the absurd way in which the budgets are drawn up, money cannot be shifted from one to the other. That is a long-standing bone of contention—I would be happy to tell you why some time.
I accept that, but you are taking us into territory that I did not intend to ask about in the limited time I have available.
We included in our report figures both with and without council tax benefit. We considered—slightly tongue-in-cheek—whether we should up council tax hugely for people who live in houses in bands A, B and C because most people in those categories would get a much bigger subvention from the DWP. Consequently, instead of getting £345 million, we might get £700 million or £1 billion. However, we decided that that would probably have unexpected and unfortunate consequences. The Treasury's answer is that that is what the rules say and that it will adjust the amount accordingly, but it does not know how.
Am I correct to say that the rules are clear in stating that Scotland should receive a balancing payment if a local income tax is introduced?
The word "appropriate" is used.
I am afraid that we are at cross purposes. The question whether council tax benefit money that is presently paid to Scotland would be retained in Scotland if local income tax were to be introduced is very much a political question which, with respect, has nothing to do with the rules that Fergus Ewing is talking about. The rules were introduced to deal with a situation in which—to give a hypothetical example—the Scottish Executive halved the amount of grant to Scottish local authorities and, to compensate for that, local authorities had to triple or quadruple their council tax. That would have a massive knock-on effect on the level of council tax benefit, which would have to be paid for by the DWP in Whitehall. The rules provide that, if that were to happen and the Scottish Parliament decided that it had financial implications for Whitehall, the Scottish budget would have to pay for it. The cost would not automatically be transferred across to Whitehall. That is what the rules are about.
I know that the rules relate to rent payments, but it is not explicitly stated that they are restricted to such payments. The principle is stated in the rules and seems to be fairly logical.
I thought that we had made it clear that we rejected local income tax on the ground that it did not meet our criteria as well as a local property tax did. The way it is raised is not particularly relevant, in our view.
I am focusing on whether the burden of a local income tax is fair, which is how many of the people whom we represent will look at it. A local income tax of 7.9 per cent, which you postulate in paragraph 46, would seem to be unfair, but a local income tax at a rate of 3 or 4 per cent would seem to be affordable and fair—an entirely different proposition. Frankly, the public are more interested in affordability than in detail, interesting though it is in your report. Surely the burden of the tax must have been a relevant factor in your decision to dismiss a local income tax. Was it of no consequence?
At the introduction of the community charge, the amount of money that was raised was three quarters of the amount that is raised today as a percentage of local government expenditure rather than in cash terms, so we have seen an increase in the burden of council tax. If you decide that a local property tax at 0.94 per cent is unfair, you can subsidise it down to 0.3 per cent. In our view, it is still a better form of taxation than a local income tax.
The committee had a recommendation to deal with the asset-rich but cash-poor group of pensioners, which is relatively small in relation to the total number of local taxpayers. I do not want to open a debate about the deferment scheme, but it is a possible way forward.
I hope that that will be considered further, but I want to go back to the comment about widows living "in splendour". With respect, Sir Peter, I do not think that that is a fair characterisation of many senior citizen widows or widowers. They may be living in large houses, but the idea that they are living in splendour in some sort of palace is not fair.
I will ask John Baillie to reply, but I point out that there is no capital gains tax on a person's principal residence.
I am talking about wealth. Paragraph 12 of your report says that
I cannot immediately bring to mind where it is in our report, but I think that something like 11 per cent of revenues that are raised from tax represent taxes on wealth, which include the current council tax, business rates, stamp duty and inheritance tax. That 11 per cent compares with the figure that Janet Lowe mentioned earlier of something like 35 per cent of taxes on income. That clarifies what we are talking about.
Perhaps that means that there is not enough wealth.
It means that the amount of tax on it is only a third of the amount of tax on income. The only other point that I would make is that, within that, there is a voluntary tax within the inheritance tax figures, because there are various quite proper ways of planning one's estate, if one is fortunate enough to be in that position.
That is not so much the case for a widow or a widower.
Indeed.
We should add that we note somewhere in the report—although not in the executive summary—in rehearsing the arguments for the different taxes, that inheritance tax and, in some cases, capital gains tax apply. However, if there were not to be a property-based local income tax, there would be no annual tax on property, because inheritance tax is a one-off tax. That is one of the reasons why we rejected an income tax. We thought that there should continue to be an annual tax on the consumption of property, as well as a one-off tax.
There is one other very strong argument in favour of a property tax: such a tax tends to depress the value of property, which is eminently desirable for enabling people to get their feet on the property ladder and for ensuring that affordable housing continues to be available, particularly in rural areas of Scotland.
Recommendation 17 in your report is to pass responsibility for the distribution system to an independent body. What difficulties do you have with the current system, under which there is ministerial responsibility for that role?
For my sins, I chaired the distribution committee for 10 years when I was a civil servant. This goes back to the point that Mr Rumbles made about keeping the system dynamic and under review.
That is an important part of the process. You are saying that a minister and COSLA have vested interests. I note that you make the point about what COSLA said, but COSLA also said that it does not want an unelected quango to be established. You conveniently set up the recommendation by saying that COSLA said something, but COSLA also said in its response to your inquiry that it did not want an independent body.
I do not think that anything in the report criticises Tom McCabe or any other minister. I was trying to say that because any redistribution or any change in the formula produces winners and losers, people are happier to have stability. The trouble is that that sterilises the system and does not allow anyone—such as Aberdeenshire Council—to ask for a review. We noted what COSLA said about a quango, but the alternative was simply to bring an independent element into the existing machinery to try to act almost as non-executive directors do.
Actually, we said merely that that should be considered. I return to Mr Rumbles's point. Some local authorities feel that they do not have a fair shake, but I am not quite sure whether having independent members would make the situation easier. I return to my non-flippant comment: the fact that everyone seems to be more or less similarly unhappy with the aggregate external finance suggests that it works pretty well.
So you accept that, even under an unelected quango, Aberdeen City Council and Glasgow City Council could still say that they have difficulties with the settlement. I have never known a council leader to produce a headline saying, "I am delighted with the settlement I've received." We will never achieve the goal of any council giving evidence that they are delighted with the current system, so the proposal that there should be an independent body—
No—the report just says that an independent body should be considered as a possibility.
So, such a body it is to be considered only as a possibility.
That is what we recommend.
Another possibility that you have thrown in concerns collecting water rates with council tax—that was part of your remit. You recommend considering whether councils should continue to have statutory responsibility for collecting water rates. Why should we implement such a recommendation—which could incur further expenditure—rather than make it clearer to council tax payers under the current system what they are expected to pay in water rates? Why did you make that recommendation?
The problem is that it is unclear to the payer of water and sewerage rates that the council collects those payments purely as an administrative convenience. The other disadvantage is that the council has its statutory powers, which are far greater than those that apply to any other utility bills. That is wrong.
If there is an increase in water charges as a result of the introduction of the new system that you recommend, will taxpayers say, "Fantastic, my invoice is much clearer, even though I need to pay out much more money. I welcome the fact that councils no longer have a statutory responsibility to collect water charges"? Surely taxpayers want to pay as little as possible for all their utility bills. If the council can carry out its functions in that regard, why should it not do so?
The approach would not necessarily cost more. We agree that any system that has higher administrative costs needs to be questioned. Our primary concern is that it should be clear to taxpayers what their liabilities are and whom they pay. We found evidence that taxpayers currently do not differentiate between their council tax payments and their water and sewerage payments, which of course eventually go to Scottish Water, so we advocated that water and sewerage charges be collected separately. It is perfectly possible that Scottish Water could collect the charges separately at no additional cost, or that Scottish Water might continue to subcontract collection to local authorities at no additional cost. The issue is clarity, but we would not want that necessarily to lead to extra expense. There is no reason why collection could not be as efficient as it currently is.
One council said that it would like to collect water and sewerage charges for many councils. It thought that it could do so efficiently.
Different ways of collecting the charges could achieve our objective.
We do not recommend that collection be done by someone else; we recommend that the statutory requirement be removed.
You say in your report that it is not clear whether Scottish Water's collecting the charges independently would cost the same or less than collection by councils. For clarity, will you confirm that if Scottish Water said that additional funds would be required, councils could continue to collect the charges?
That would be fine. All that we recommend is that we break the link with statutory powers.
On cost, we are not starting with a clean sheet of paper. Scottish Water already has a huge billing operation because it bills, for example, business customers, people who have septic tanks and people with special arrangements. Scottish Water would have to expand its existing billing system rather than start from scratch.
Whether the charges are collected by Scottish Water or by someone else—we hope that it would be done by whoever could do the job most efficiently—councils should not have a statutory requirement to collect water charges.
Fergus Ewing talked about people who are property rich but income poor. You said that an effect of a local property tax might be to bring down prices, but an elderly person's property might be in a hot spot, such as the centre of Edinburgh. Given the accessibility of services in the area, the person might find it easier to live there than to move to a slightly cheaper area, although their house or flat was expensive when compared with properties elsewhere. Will you comment on that? Could you also say a bit more about deferment? You started to talk about that, but we did not get much detail.
If I may, I will divide my answer in two. The first question concerned the extent to which it is equitable that people who live in relatively expensive properties—the shorthand that is often used is the asset rich, income poor—should be subsidised by the population at large. We discussed the subject ad nauseam. Frankly, it comes down to a question of personal preference—it is not even one of morality. The answer depends whether we consider that it is right for elderly people to continue to enjoy living in their own homes—where they may have lived for many years—or whether society is entitled to say, "If you can't afford to stay there, you have to move." The question of where the line is drawn is personal. I suspect that we would find half a dozen divergent views on the subject round the table. If Marie Antoinette were here, she might say, "Let them eat cake, but they will have to move". We would not go that far.
We gave considerable consideration to pensioners. An indication of how seriously we took the issue is that we devoted a whole chapter of the report to pensioners. On balance, we came to the conclusion that we should not distinguish between low-income pensioner households and other low-income households. The evidence suggested that, in general, pensioners are not more likely to live in a larger house or to be on a low income. There are lots of other categories of the population that have low incomes. We did not see why a pensioner with a given income, in a given house, should be treated more favourably than a working-age household with the same income in the same type of house. There seemed to be no justification for that. After all, there is a council tax benefit system that deals with low income.
The evidence from Help the Aged was very convincing about the problems that some elderly people face. One of the issues was that of older people living in the family home once the family had all gone off to do their own things and start their own families. After a bit of evaluation, we were persuaded quite readily of Help the Aged's argument, which was that, for the elderly person, staying in the family home promotes a sense of well-being and a sense of identity. We recognised that as quite a significant factor.
In a sense, that point was turned round by Help the Aged, which said that forcing elderly people to move to a smaller house or residential accommodation increases the cost to the community.
I can offer a little bit of contextual information. The committee considered long and hard the scale of the issue of households, particularly pensioner households, which, to use the jargon, are asset rich and cash poor. The committee may find table 12.4 quite interesting. It shows that, for instance, for households among the lowest three income deciles, around 20,000 have homes in council tax bands F to H, compared with close to 500,000 households in bands A and B. Figures 16.2 and 16.3 suggest that the distribution of households does not differ a great deal between working households and pensioner households. Clearly, as other members have said, the committee was deeply concerned about the plight of pensioner households, but in that context it was important to think about ways in which their issues could be addressed through special means rather than by building an entire system around their needs.
I am pleased that you said that. When you answered Fergus Ewing's question, you seemed to indicate that the groups we are discussing were living in very big houses and were very wealthy. I shall consider all that—I know that you have considered it in detail.
You will gather from our reply to Mr Sheridan that we do not accept that it would be as positive as he thinks it would be. It depends very much on the level at which the income tax is pitched. In today's world, any increase in income tax will have a greater economic disadvantage than even a relatively high property tax impost.
Why?
Excuse me—
Through the chair, please. Sylvia Jackson may—
Through the chair, then: why?
Behave yourself, Mike.
I suspect that Dr Jackson was about to ask that question anyway.
This is probably a statement of the obvious. If, say—and to be silly for a moment—we were all paying income tax at a rate of 100 per cent, there would be no incentive to work. It is a question of degree. As we come down the taxation scale to the rates that we actually have, the disincentive comes down, to the point at which we all work. If other additional bits of income tax are added to the existing regime, a number of people will say that enough is enough. That is the margin we are discussing. We do not know how elastic or inelastic the position is. We think that there would be a disincentive to work should income tax be added to—that is almost a truism.
Many of the questions that I wanted to ask have been covered by colleagues. A graph on page 139 shows the relative progressivity of the proposed local property tax and the council tax. Does the percentage of household income that is shown as being paid towards each tax take account of council tax benefit?
That is an extract from the Stirling University modelling report, which uses an equivalised net income, taking account of all income and expenditure incurred by a household.
It takes account of council tax benefit and any other benefits that households receive.
It shows the proportion of the household's disposable income that is taken by council tax or local property tax. Is that right, David?
That is our understanding. Professor David Bell, who led the modelling team, had a challenge with the figure for decile 1, which is somewhat higher than the deciles around it. The figures seem to be based on people with a regular income, who may not necessarily have qualified for council tax benefit—at least, over a long duration. In answer to your direct question, our understanding is that council tax benefit is included.
You are saying that it is included as an income for the person; obviously, they also have expenditure. However, I suspect that most people who receive council tax benefit in full do not perceive that as an income; they perceive it as paying their council tax, and they would feel that they do not have an outgoing in terms of council tax if it is being paid in full.
I think that it is treated as a reduction of their expenditure.
It is treated as a reduction of expenditure. That is why the term "equivalised net income" is used—the model balances off households with different types of income and expenditure, so it is a fair comparison.
My second point relates to the same graph. Part of your pitch for the local property tax is that you believe it would be more progressive than the council tax. However, it seems that there is not a great variation in the shape of the graph between council tax and the local property tax. Is that just my perception from looking visually at the graph?
No, you are quite right. From a visual point of view, the variation does not appear to be significant. However, taking Janet Lowe's point and ignoring the first income decile—because that is based on people who are in temporary unemployment and who therefore have not yet got council tax benefit—the real line is probably further down the graph. Those equivalised income figures come from the family income survey, and in the top decile of income we start to see a significant increase in the amount of tax that they are paying, even though it remains relatively low as a percentage of the tax.
The graph illustrates that the majority of people would be better off or no worse off with a local property tax, which was one of the main conclusions of our study. Such a tax increases progressivity for the majority of people—or it does not reduce it.
However, a significant number of the people who would be no worse off would presumably be no worse off because their council tax or local property tax would be paid by the benefits system, not because of the change in the system.
There is a flat line of about 20 per cent of people who are no worse off, and we understand that roughly 18 per cent of households are on full council tax benefit, so they do not pay council tax.
I see that you recommend a more frequent revaluation of property, but I think that your aspiration is for revaluation every year. Have you calculated the cost of that?
Yes, we have.
It is in the report.
I must have missed that; I am sorry.
It is quite okay. I cannot remember where the figure is or what it is.
The initial cost is £12 million.
Then, I think, it is about £6 million a year.
It is just over £6 million a year, compared with the council tax system as we have it, which costs £4.7 million.
It seems likely that, after the first valuation under such a scheme, a significant percentage of people would appeal against the valuation of their property. What assumptions have you made about the rate of appeals?
As you would probably expect, we discussed that with the assessors. They gave an interesting answer that stands up to scrutiny. They said that, if the banding system were removed, the monetary benefit in appealing would be less because it would not be a matter of being over or under a threshold, as would be the case with appeals under a banding system. Given the fact that the financial benefit might be less, there would not be the same incentive to appeal.
Obviously we are speculating, because you would not know how many appeals there would be until the system was put into practice.
That is right. There is little available evidence to demonstrate how many appeals there would be.
The trouble with banding is the cliff-edge effect. If a band breaks at £300,000, someone whose property is valued at £290,000 pays tax at one level and someone whose property is valued at £310,000 pays an awful lot more; therefore, the latter will appeal and argue that their property should be valued at £290,000. By contrast, if the difference in valuation was £20,000 and the tax rate was 0.5 per cent—a difference of £100—they would be much less likely to fight the decision.
I have another question, which I meant to ask earlier when I asked about council tax benefit. It relates to the questions that Fergus Ewing asked about council tax benefit and whether it would be right for that amount of money to be diverted to the Executive in order to mitigate the cost of a local income tax. The money that is in the council tax benefit system is there primarily to assist people who are on low incomes, whereas Mr Ewing suggested that the money could be used to assist people on a broad range of incomes—including people on high incomes—in mitigating their tax expenditure. Do you agree that that would not be a logical use of money that is currently given to the benefits system?
If we moved to an income tax system with allowances, people on low incomes would not pay the tax. If more money was coming into the system, there would be more money for other uses—you could use it to reduce the level of taxation to ensure that people in Aberdeenshire were happier, or to do I do not know what.
I am not sure whether this is the point of the question but, as far as we understand it, council tax benefit would apply to local property tax on very much the same basis as it currently applies to council tax. We think that that is wholly appropriate.
I noted that in your report. I was discussing Mr Ewing's point.
As I have said, the committee took a neutral view on what should happen to that money. A lot of the confusion in the debate arises from the fact that council tax benefit is presented as a grant to Scottish local authorities, although it is nothing of the sort. It is a payment to a lot of individuals who are on low incomes, which happens to be set against their council tax. The DWP pays the money to offset the cost of that to the local authorities. It can be presented as local authority grant, but it is not really that. It is a payment to a lot of individuals whose circumstances can change.
My next questions relate to the potential impacts of a local income tax. You raise the issue of fiscal flight. In paragraph 104, you state that there is
There is undoubtedly a level of taxation at which people would move. Whether that level is 5, 15, 25 or 50 per cent, we just do not know. It would depend on where they lived.
It is an individual choice, I guess. Prior to coming here, we were discussing whether someone who was particularly wealthy and lived in a nice part of Scotland would move if there were a 1 or 2 per cent increase in the tax rate rather than paying the premium. That comes back to what I said earlier about the disincentive to work. There are some people who would be influenced by that disincentive. However, we have no comprehensive objective evidence about how significant that margin is.
We considered the issue in relation to the local property tax, too. There is a broad relationship between income and the size of property. Given that our proposals would remove the cap on the taxation of property, it is arguable that local property tax might create an incentive for fiscal flight. Although we are advocating the local property tax, arguments can be made—
You are anticipating my next question.
If a taxation system is made more progressive, there is always the possibility that those who are asked to pay more will seek to limit their liabilities by moving.
I was going to ask about the line in the report that says that the phenomenon of rich people moving from higher-taxing to lower-taxing states in the United States of America had been found in relation to inheritance and property taxes as well as income tax, but you have answered that.
If less money is raised, there will be a gap. Conversely, if more money is raised, the aggregate external finance could be reduced. If the tax were levied at 15 or 20 per cent, quite a lot of money would be generated and if it were levied at 3 per cent, there would be less.
Our work was based on the existing level of tax that is raised. Our remit was not to determine the level of tax that should be raised, but to determine what the form of taxation should be. At all times, we assumed that the same amount would continue to be raised. That is why we have produced the figures that are before you. Clearly, if one wanted to raise a different amount, one could produce a different set of figures.
If one wanted to redistribute income, one would come up with a totally different structure.
A point that has not yet been made is that local authorities told us that they need stability and predictability about the amount of income that they are able to raise. The existing council tax system, without any changes, provides that stability and predictability, as does the local property tax that we propose.
Even on the lowest of the three estimates that we gave, which assumes that local income tax would be applied to earned income at basic and higher rate and to unearned income—and we think that it would be quite difficult to achieve a local income tax system that included unearned income—the rate would be 5.7 per cent. That is still higher than the 3 per cent figure on which you questioned us.
I think that you also assumed in that calculation that earned income at the starting rate would be included. Paragraph 47 shows that the family of two adults earning £20,000 would pay more under the 5.7 per cent rate than they would pay under the 6.5 per cent rate, because the first would apply to income earned at the starting rate as well.
Yes.
I presume that the 6.5 per cent rate would be an average across Scotland. Did you estimate what the variance would be between the lowest and highest local income tax rates?
No; we did not do that for several reasons, one of which is that funding from central Government provides the bulk of local authorities' expenditure.
The tax base would change from the current one, so local authorities would have to make their own calculations.
Some people have made the case that there has been an impact on cities from people moving outwith them because of the relative council tax rates. Would fiscal flight from council areas that had higher local income tax rates than other nearby areas also be possible?
It would depend on the differential.
That point was made by my organisation, the Institute of Chartered Accountants of Scotland. There are issues with staff living outside but commuting into areas to work and companies with a high turnover of staff or casual or seasonal workers. It is not that the issues cannot be resolved, but they are significant and expense is involved.
Tracking people is more expensive than tracking houses. Houses do not move.
I promise that this will be my final question. In the course of considering Tommy Sheridan's Council Tax Abolition and Service Tax Introduction (Scotland) Bill, we received evidence from HM Revenue and Customs indicating that to implement Mr Sheridan's proposals would require primary legislation at Westminster and that the systems and legislation required would take several years to develop. Your report seems to suggest that, even if it was not absolutely essential, it would be desirable to give HMRC a legislative underpinning to collect a local income tax on behalf of Scotland. You also seem to suggest that implementation would take considerably longer than the two years that some proponents of a local income tax suggest. Is that correct?
We are not sure about the legislation requirement—you can get evidence to argue both ways—but I think that implementation would take some time.
Our estimate is six years.
We received estimates that the legislation at Holyrood alone would take three to four years, but you may be better placed to judge that than we are.
Thank you. I know that your report received a rough ride in the media from several sources, but it has added to the considerable debate on the form of local government taxation that Scotland should have. Your time on the committee was not a waste.
Thank you for giving us the time; it has been very useful.