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Agenda item 5 is an evidence-taking session on the commission on local tax reform. I welcome Marco Biagi, co-chair of the commission and Minister for Local Government and Community Empowerment; David O’Neill, co-chair of the commission and president of the Convention of Scottish Local Authorities; and Robin Haynes, Emma Close and Adam Stewart of the commission secretariat. Would anyone like to make an opening statement?
We wish to make a joint opening statement, which—with your permission, convener—I will begin.
Please do, minister.
Good morning. Both co-chairs of the commission thank the committee for its invitation, and I should note that we are joined today by officials from COSLA and the Scottish Government who work together to provide the commission’s secretariat.
It has been our privilege and pleasure to chair the commission on local tax reform together. In saying that, we must also acknowledge the committee’s role in the initiative, because the commission’s beginnings can be traced to the committee’s inquiry into the flexibility and autonomy of local government, which reported in June 2014. Its recommendation of a cross-party approach was, we feel, the right one. Other bodies have considered alternative means of local taxation, but the commission was the first to have a membership made up of representatives from Scotland’s political parties and from local and central Government working alongside experts in public finance, law, housing, welfare and equalities.
Our report, “Just Change: A New Approach to Local Taxation”, fulfils a very comprehensive remit that was determined jointly by the Scottish Government and COSLA. Although it sets out the factual position associated with different systems of local taxation, it does not advocate a single preferred alternative. Ultimately, that must be a political choice, but we expect that all parties in Scotland will offer their own proposals for alternative systems of local taxation for the Scottish Parliament election in May 2016. The intention is for our report to inform the design of any political party’s alternative and, more important, to help the public and civil society understand the implications of the choices that they are offered.
Our commission, which was convened in February last year, met in full on 16 occasions. Our remit required us to
“engage with communities across Scotland to assess public perceptions”,
and we invested substantially in that process. Indeed, the steps that we took were perhaps the most comprehensive to date in this country, with 12 oral evidence sessions engaging 58 experts and representatives from a huge range of interests; a formal consultation that received 203 responses; an online questionnaire that was intended to give us a flavour of the views held by the public and which gathered around 4,500 responses; and 12 public engagement sessions across the country. To complement that substantial body of qualitative evidence, we undertook in association with Heriot-Watt and Stirling universities the most comprehensive analysis ever performed of Scottish housing stock, including modelling up-to-date property and land values and examining how property taxes and income taxes relate to household incomes.
The commission was committed to being open; for example, our oral evidence sessions were streamed live on the internet—they are still available online, if anyone wants a box set for Christmas. All the research and evidence conducted by and for the commission have been published in the two companion volumes to our final report. The more than 600 pages of evidence and analysis, which can be downloaded from the commission’s website, set out the breadth and depth of our research in more detail.
That is the briefest of summaries of the commission’s work. We will be pleased to answer your questions as best we can.
Thank you very much. Even I will forgo the offer of the box set, Councillor O’Neill.
Thank you for recognising the committee’s role in the establishment of the commission, which came from a recommendation in our report on flexibility and autonomy in local government. I am glad that your work has now been concluded.
Let us cut to one of the main questions. Why has the commission come to such a strong conclusion that the present council tax must end, and how will the report have a different outcome to previous attempts at reform?
It will deliver a different result to all the previous reports that have ended up sitting on a shelf, because the people who will have to look the electorate in the eye and implement the reforms were sitting around the table when the work was being done.
It is common to get the great and the good—those who often have a “Sir” in front of their name—to take a panel of experts who are quite detached from practice and come up with what, in the abstract, would be an ideal system. However, what we found—because we had all the different interests around the table—was that there is no ideal system. Indeed, it was quite a concrete finding that implicitly refuted past reports that said, “It’s all right—all you need to put in place is this or that form of tax.” None of those reports have ever come through in that respect, and recognising the difficulty involved is a core strength of what we have produced at the end of the process.
The council tax has a great many problems. Fundamentally, it is regressive, and there is no way of looking at it analytically that makes it look progressive or even proportionate. As the core base for local government autonomous finance, it creates a base for that finance that is regressive. Anybody who wants to ensure that those who have the ability to pay are the ones who are paying is going to find problems in making council tax fit that definition. That is why we need change.
As members will recall, the present system was brought in to replace the poll tax, but it has to be said that it was botched. It was introduced in a hurry, and it was seen as a stopgap measure until something better came along. However, nothing better has come along until now.
As Marco Biagi has said, the current system is regressive. It means that some people, primarily those at the lower end of the income scale, are paying far too much while people at the top of the income scale are paying far too little. There was universal and almost instant agreement among commission members that the council tax as we know it is way beyond its sell-by date and must be changed.
Gentlemen, how long do you think that it will take for any replacement to come into play?
I suspect that there would need to be a degree of primary legislation and possibly some secondary legislation. Realistically, I do not see a replacement coming in before next year’s local government elections; it will probably be about halfway through the next session of Parliament, or even later.
It will take some time to do the necessary work to get in place a new system that is not rushed or botched. The legislative process is at its best when we take our time instead of doing something in a rush.
I largely agree. It partly depends on what each party wants to bring forward. There are different timescales for different types of taxation based on how much change would be involved; the more one wants to change the base of revenue, the more time it is likely to take.
There are quite pressing factors here, and it will be necessary for anybody who puts forward detailed proposals to sketch out a clear route map that shows what is going to change in each year so that people are familiar with what is happening. However, the length of time it will take will depend very much on the desired outcome.
The committee has done a fair amount of going out and about and seeking the views of members of the public, and you have done likewise in the course of the commission’s work. What were the main issues that were brought to bear by members of the public when you were out and about? What were their responses to the survey and in the online work that you did?
It is fair to say that the vast majority of people to whom we spoke had not given the matter a great deal of thought other than that they did not like the present set-up. We found when we started some of the sessions that people had preconceived ideas, but by the end of the session some of those ideas had been turned round. We got good information back from the public about what would be more acceptable. One thing that we are clear about is that, if we end up with a system that we cannot explain to the public, it will never be acceptable.
Minister, do you have anything to add?
At the start, there were different degrees of familiarity with each of the different types of taxation. I found it remarkable watching people who had never been exposed to the most unusual option—land value taxation—go through both the learning and the assessment process in about 45 minutes. That was far more useful in giving us a feel for how people’s thought processes worked than any bit of written evidence that I have ever been given.
Good morning. A few criticisms have been levelled about why the commission did not deal with business rates or non-domestic rates. It was a commission on local tax reform—surely it should have included business rates as well?
Who wants to take that one?
Our remit that was agreed on the basis that we needed a detailed and substantial piece of work on council tax, because council tax is the largest chunk of local government revenue over which councils have the greatest level of autonomy and there was a real identified issue in that respect.
I am not saying that there is not a discussion to be had and work to be done on non-domestic rates. As a Government, we have signalled our desire to have a review of non-domestic rates, and there is on-going dialogue in that respect. However, the amount of time and resource that we had available and the amount of detail that we wanted to apply meant that the report had to be relatively narrow in its focus. That does not mean that we do not look at those issues elsewhere and in parallel, but the commission’s report was designed to be focused on that aspect. That said, many of the people who gave evidence to us raised those wider issues, and there was a great deal of consideration of such matters in the discussions.
Do you think that, if the commission’s work had been broader, there may have been less public engagement?
11:30
It must be borne in mind that the commission followed Ms Sturgeon’s appointment as First Minister and was announced in the programme for government. Hindsight is a wonderful thing, however, and we should have started it three years ago rather than 18 months ago.
The word “parallel” has been used. That is the key. People felt that non-domestic rates should be considered in parallel with the council tax, but that did not really happen. In the evidence, there was a fair amount of criticism about that, if I am not mistaken. Do you accept that?
I have been in discussions with local government. We have had regular meetings with local government and with the cities alliance, and the issue of non-domestic rates has often come up and been discussed in both spaces. There was a recognition of the priority of the issue that we are discussing, but work has been done before, after and alongside that, on non-domestic rates.
The two things are qualitatively different. They are both parts of local government finance and revenue, but the experiences of individuals and households that pay their domestic tax are rather different—they have rather different challenges and questions of fairness and administration from those that businesses or non-domestic entities have in paying their charges.
Had that work come together, trade-offs would have been made. I agree that, given more time, that approach would be worth while. That is why the Government wants to have a further review of the non-domestic rates system.
The two things are very different. If my memory serves me correctly, there are 2.5 million domestic properties in Scotland and around 60,000 non-domestic properties. We are looking at two very different creatures, and there should—absolutely—be continuing dialogue about non-domestic rates.
That is very interesting. However, to the councils and the public the two are one and the same thing, as the issue is how councils raise their money through non-domestic rates and the council tax.
With all due respect, by and large, the public were not aware of how local authorities raised money. The vast number of people thought that the bulk of their money came from the council tax. In fact, only around 12 per cent of revenue expenditure comes from the council tax.
One of the criticisms that has been made of the commission is that it tried to work within the existing financial parameters of local government and looked at raising the same level of revenue. That should be seen particularly in the light of demands that will be made this afternoon by two political parties that will ask for more money to be raised at a local level. Why did you want to work within the existing financial parameters rather than consider the possibility of increasing the amount that is raised through implementing a new taxation system other than the community charge or council tax system?
Initially, we looked at something that would be cost neutral but different from what exists currently. Would that remain cost neutral in the future? Who knows? That would be a matter for individual local authorities and Parliament. In my experience, the rate of taxation will always change either up or down at some point. Initially, however, we looked at something that would be cost neutral.
I would not say that we took a view on that. There is clear recognition of the fact that there is a positive way of not taking a view on something. For example, we excluded from our detailed work those taxes that clearly could not match the council tax’s revenue-raising potential. If something would be worth only millions or tens of millions of pounds, it simply could not fill the gap of around £2 billion a year that the council tax currently occupies. In the analytical work that we did, we looked at the consequences of that and found implicit messages about scaling council tax up should we wish to do so. For example, all the things that we found out about council tax suggested that it would be a bad idea to try to scale it up to provide £4 billion of revenue and reduce the grant by £2 billion.
What you want your taxes to add up to is a separate question. We have said, “Here are the ups and downs and the consequences if you raise money through this mechanism.” It would be entirely possible for a party to put forward proposals that together added up to more than 12 per cent of local funding coming through local taxes. However, we have created an analysis of each of the major revenue-raising tools that exist for local authorities under the various options that we looked at, which involved roughly benchmarking each to about £2 billion of revenue.
Minister, you talked about the 45-minute session in which you looked at the land value tax issue. Not only for political parties but particularly for the members of COSLA, how has the learning from the experience of the commission been translated so that people—particularly elected members of local government—can understand the issues around how we raise local taxes and the impact that they might have on the residents of local authorities?
I think that everybody who was involved knows a lot more about the process than they did before. Certainly, those who came along to our participation sessions left with an understanding and appreciation of some of the difficulties, and the commission’s legacy of analytical work can be accessed by individuals and practitioners. The Institute of Revenues Rating and Valuation recently held an event at which most members of the commission spoke and presented findings in order to continue to disseminate that knowledge.
A great deal of work was done on land value tax that had not been done before. I pay tribute to the academics at Heriot-Watt University who did that modelling work, which will provide a basis for the analysis of potential land value taxes. There is now more evidence than there has ever been before in Scotland on the question of whether those taxes would be a good or a bad idea, which must be good for the general state of awareness.
I think that this is the first time that there has been a serious discussion about the three different systems of taxation. Personally, I knew nothing about land value tax beforehand, but the minister and I could now take you to the pub and bore you rigid on land value tax and the other options. There is an on-going discussion and dialogue to be had there.
We are looking for a system that will work and that will probably be in place for quite some time. However, we are not restricted to having only one system; there could be a variety or a basket of systems. It is important that the dialogue continues.
After the previous evidence session, I am sorely tempted to go to the pub, but it is probably better to be here.
Mainly for the benefit of the public who might be listening to this discussion, can the minister give us a flavour of the pros and cons of the three options that the commission looked at: local income tax, a reformed and proportionate council tax and a steeply progressive property tax?
That is, in essence, 90 pages of the report, but I will try to summarise it.
Economists value property tax and consider it stable, and people are familiar with it. However, it is rather difficult to make it progressive on the basis of income, which many people apply as the test of fairness. That said, some people dispute that that is the appropriate approach to take. Income is a fair and abstract basis, but we must ensure that the fairness carries through into the implementation, and we have to be careful about how we plot that through.
Land value tax is probably the big favourite with the pure economic theorists, but in many ways it is the most abstract and the furthest from people’s understanding. It can also be difficult to explain how it works—for example, when there is a tenement block with 10 people sharing the same land underneath. There is a serious communication issue there.
We said that targeted or general land value taxes are “promising” but that it is far too early for us to be able to assess in sufficient detail the impacts of implementing them, because that approach is so far from the system that we have now and from the data sets and analytical tools that we have. However, we said that it should be more possible to do that in the coming years, as we get a better impression centrally of the valuations of land and, indeed, the ownership and use of it. In a way, we left a bit of a question mark over land value tax, because it would be a much bigger change and so is harder to quantify.
It is fair to say that the public were very keen on the idea of local income tax. As I said, perceptions at the start of the sessions tended to have changed by the end. For example, a local income tax does not actually tax wealth; it taxes income, and somebody can be very wealthy without having income. Also, people can have smart accountants. As Marco Biagi said, land value tax was perhaps further from people’s perception, but there is an awful lot of interest in features of it that should be looked at and considered for the future. Everybody recognised that the current property-based tax is unfair. It can be changed and made less unfair but it cannot be made completely fair.
As Marco Biagi said, all this is contained in a great big report, and it is not possible to summarise it in the short time that we have today.
Did a favourite option emerge in the commission, or it is that no favourite came through?
We were absolutely clear that our role was to inform the discussion and that it is for political parties to put forward their options.
I assume that the modelling data that you obtained and used to inform the report will be available to the parties as they formulate their proposals to the public. Is that correct?
Yes.
I have a wee question to follow up on that. If we are going to stick with a property-based tax, what would be the impact of revaluing property prices so that the tax is fairer? How long would that take and how much would it cost?
We had evidence from the rating and valuation people, who said that they certainly could do that job. I am probably the oldest person in the room, and I remember when revaluations used to take place, before the days of the poll tax. That was very controversial. We have not had a revaluation since 1991, it will be controversial if it has to happen, and we are clear that part of the reason why it will be controversial is that it has not been done since 1991. Valuations need to be done regularly to keep up to date.
The evidence is fairly clear that revaluation or valuation is one of the big challenges for any property tax, in terms of public acceptance, transition and simply making it work in the political sphere. We were aware of that challenge. We heard extensive evidence about the difficulties and why there has not been a revaluation since the institution of the council tax. It would be politically challenging to deliver for anybody who wished to do it. The issue has to be considered in the context of the reforms. Anybody who makes detailed proposals will undoubtedly be asked about revaluation if a property tax is part of those proposals. Based on what is in the report, they would be wise to be cautious.
That pretty much sums it up.
11:45
One of the problems with revaluation and land value tax is the fact that not all land is registered, and knowing who owns the land is important if you are going to have a land value tax.
Did the commission look at the underregistration of land? In response to work that was done by another committee of which I am a member, the Registers of Scotland said that it would be difficult to address that issue in a short period of time and it set out a longer period of time for it. I am glad that Fergus Ewing, the Minister for Business, Energy and Tourism, asked for the process to be speeded up.
How quickly can any new system—either revaluation or a land value—be put in place? If we want the political parties to come forward with alternative plans at the election in May, we will want an idea of how realistic the alternatives are. I remember that, nine years ago, a political party put forward an alternative that was not taken forward. It would be good if the public were aware of how quickly any proposed change could be put in place, particularly in the context of claims from local authorities that they are cash strapped in times of austerity.
I do not think that we came to a conclusion about actual timescales but it would take longer to do that valuation if we were using a system of land value tax because there is no base to start from. If you were starting with a property-based tax, there would be a base to start from, although I have to say that it would be a poor base. Part of the evidence was that, in 1991, streets were valued rather than individual properties, and it was done in an extremely haphazard way that often involved only a drive-through by the valuation officers.
It is difficult to put a timescale on the work that needs to be done, but I suspect that it would be quicker to value a domestic property than to conduct a land valuation—note that I said quicker, not quick.
Land valuation would definitely take longer because of transparency around the ownership and delineation of land. As you might imagine, with Andy Wightman being the nominee of the Scottish Greens on the commission, land value tax was explored in great depth, and the issue that you mention was raised. However, given that it was a non-tax issue, we did not want to come to a view on how long it would take to achieve land registration, but we certainly recognised that it would be necessary to allow a land value tax to be put in place, and that it was still some years off.
Earlier this morning, people who are involved in the local government benchmarking framework told us about the variation in the costs of services across Scotland. When you did your public listening events, did the issue of public accountability seem to be a big issue for communities? How much control did people seem to want to have over what they pay for services?
At those public participation events, I was surprised at how often people wanted to broaden the discussion to expenditure and to talk about the pluses and minuses of what their local authorities did. Certainly, the idea of the connection between how much you pay and what you get is quite strong in a lot of places. You often hear people saying, “I deserve this because I pay my council tax.” That comes from the belief that council tax is the sole method of funding councils, when, in fact, it is responsible for only around 12 per cent. That is the figure that we use and, although different accounting methods will give different numbers, all the numbers are in that sort of territory. It is important that people understand the broad range of ways in which local government is funded, because it will help them to understand the wider situation for local government.
People have not yet taken on board what we have done in this regard over the past decade. Any reform should make a lot clearer to the public how much money they are putting into the local authority. Right now, that is perhaps not as clear as it could be.
A much wider discussion needs to be held about local accountability and local democracy. Previously, I chaired the Scottish commission on strengthening local democracy. Through the evidence that it took, the commission recognised the link between the ability to raise finance and how that finance is spent locally. That has diminished over the years in Scotland and the wider UK. The UK and Scotland are way out of step with what happens elsewhere in the developed world.
In that context, what is your view of local authorities using other tax instruments? There is a lot of talk about tourist tax—the bed tax. That seems to be controversial in some places, but acceptable in others. Do you think that it could sit alongside local accountability? Can the two operate in parallel?
We have recognised that a basket of taxation would be useful. You talked about a tax. You did not say bedroom tax, did you? [Laughter.]
No, we are not doing that again. I said tourist tax—the bed tax.
There are some places where a tourist tax would be absolutely right, but there are other places where something different might be appropriate. For local government, it would definitely be advantageous to have flexibility in raising funds and to have a basket of taxation.
The commission report highlighted some of the options for those taxes. As they were not taxes of the scale of £2 billion, they were not explored in great depth, but work has been done on some of them. In principle, if they are workable, there should not be an impediment. There is a difference of opinion between the Scottish Government and the main local authority about advancing tourist tax, which is the tax that has reached the most advanced stage of discussions in the public sphere. The difference of opinion relates to the benefits as opposed to the costs.
When a workable system is found and agreed on, in principle there is no reason not to go ahead with it. When such proposals are made and appear to be workable, we will have those discussions. That could be part of a wider reform from any party that wants to put that forward.
The report was unanimously agreed, although I think that there was a dissenting voice at one point. For the record, is that right?
Yes.
What was that disagreement about?
It was about paragraph 13.14.
Do you want to expand on that for the record please, minister?
No, actually, I do not. I value the consensus that the commission achieved, and I also recognise the work that went in to coming up with the wording for the conclusions and recommendations, which carried virtually unanimous support. The report has 90-plus pages, and one member dissented with one paragraph. I would rather look at our overwhelming agreement than look at any disagreement.
Fair play to you, minister.
He is quite right.
He is quite right. So, you are in general agreement on that point as well.
I thank the gentlemen—and lady, even though she did not take part—for their evidence.
When we wrote the recommendation in our autonomy and flexibility report, some of us wondered how long it would be before somebody took up our call for a commission. It has happened extremely quickly, and I am glad that you have put in the effort that you have.
11:54 Meeting continued in private until 12:11.Previous
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