Tax is becoming a major political issue. Whilst the debate in the late 1990s revolved around keeping taxes low for high earners in order for New Labour to win, the debate has now become polarised between advocates of ‘minimum tax’ at all costs such as the right-wing Tax-Payers’ Alliance (TPA), and those who focus on high salaries in the private sector (a.k.a. bankers’ bonuses) and legal tax evasion. Whilst the latest UK budget is the subject of much debate as to ‘who is paying’, it would have been incomprehensible in 1997 for the Chancellor to state that their aim was to increase the amount of tax from the rich – even if most of us realise that this is rhetoric alone.

But the debate around national taxation, whilst justifiable, has eclipsed the financial crisis in local government. Local government still provides key public services ranging from housing, waste collection and disposal, to social services. Since 1979 central government – Conservative, Labour and Coalition – have been described as ‘waging a war on local government’. In the 1980s it was by breaking up big councils, introducing rate capping, and undermining council housing; in the 1990s and 2000s by encouraging or forcing councils to privative services, and more recently by embracing a neoliberal model of decentralisation whilst slashing funding by up to 28%.

A new tax and financial settlement for local government needs to reverse these thirty years of centralisation and allow Councils to provide public services determined through democratic processes. To sketch out the present system:

1)            Councils receive grants from central government. The three main types are specific ring-fenced grants for undertaking central government priorities, area-based grants to fund local priorities, and formula grants based on an assessment of need.

2)            They also levy the council tax which is a tax on each property in the area based on the value of the property and paid by the residents (so tenants and owner occupiers). Central government has always been keen to reduce the council tax, firstly through a policy of rate capping (i.e. setting an upper limit on rises) and more recently combining this policy with providing financial incentives to not raise council tax. The Local Government Information Unit (LGIU) noted that whilst in 2012 most councils chose to take the grant (worth about a 2.5% rise in council tax), the ending of the Council tax Freeze grant in 2013 meant that most councils would be looking to raise it the maximum allowed (3.5%).

3)            Another less obvious source of income is the ‘business rates’ (National non-domestic rates) which are levied on owners of non-domestic property such as shops, factories, offices and so on. The rates for these are set nationally, although local councils have the ability to grant business rate relief.

4)            Finally there are a whole set of miscellaneous charges (like car parks), interest on investments, and rent from commercial properties owned by councils.

There are a number of problems with the current set of arrangements.

The first is the current council tax system, a largely watered down version of the ‘Poll tax’. The Poll Tax itself was a per capita flat tax to be set and levied by local councils on all adults. The tax was defeated by a massive campaign of civil disobedience involving councils refusing to set a rate and tens of thousands of individuals refusing to pay. After this embarrassing rout, central government settled on Council Tax as a means of combining the property element of the rates system with the principle of individual charging and payment of the poll tax.

There is a postcode lottery effect in that Councils in prosperous urban areas where there are a lot of expensive non-domestic buildings can use this income to keep their council tax down. Whereas councils in areas where property values are lower and there are fewer offices, factories and shops have to rely on Council tax to support services. This leads to the rather bizarre situation whereby Westminster LBC charges the most valuable properties (Band H) £1375 in Council tax, whereas Newark Council charges £1311 for a terraced house (Band B). This situation is likely to get worse under reforms to council tax benefit, which mean that councils will be able to set the criteria for giving unemployed people money to cover their council tax. Combined with the fact that central government will cut the amount of money going into council tax benefit by 10%, this means that councils will either have to make other cuts to compensate, or restrict council tax benefit.

Business rates are also currently subject to reform under the Localism Act, with the prospect of councils keeping all their rates. Whilst this seems initially attractive, this move suffers from a similar problem to local income tax in that councils where a lot of business or industry is located will gain and poorer authorities will lose. So, councils such as Westminster stand to gain huge amounts of revenue whilst councils in deprived and rural area are likely to lose a large amount of their income. There is also the risk where cash strapped councils desperate to bring in rates income engage in a race to the bottom and put ‘business-friendly’ policy ahead of democratic mandates.

In general the disparities and inequalities between areas are meant to be partially adjusted by grants from central government. However, these are the most vulnerable to cuts. As with rate-capping, the centralisation of power means that grants are easily used to manipulate or control local government decision-making and pass down cuts.

Income generated from renting out commercial property, parking charges, and investment incomes are all subject to the market. Many councils took a substantial hit when the recession started due to the immediate fall in interest rates. The Welsh Local Government Association calculated that in 2009/10, Welsh Councils would lose an £35million alone due to reduced income from investments. Similarly, councils are not the only providers of commercial property or car parking, and are increasingly under market pressure to keep charges at rates which are competitive with the private sector. An example of this is the rise of private sector car parks which tend to keep council owned car parking charges low, similarly a lot of councils rent out shops and office space on a commercial basis in direct competition with commercial lettings agents. There are even calls from those on the right for local government to stop providing services that can be provided by the private sector (another version of privatisation, based on the old ‘crowding out’ argument).

There are, however, other models and ideas for financing local government including local income tax, land value tax, rates, and more regressive poll taxes.

The 2007-2011 minority Scottish Nationalist Party (SNP) government in Scotland attempted to replace council tax with local income tax but parties were unable to come to an agreement on how to implement such a scheme. The embarrassing collapse and continued bitter debate should have consigned local income tax to the wilderness for a decade or more, but it continues to hold an attraction to the SNP.  The basic idea would be for a certain percentage (between 3-4.5%) of raised income taxes to be given directly to local councils. However, under the devolution settlement, the level of tax would have been set by the Scottish Government rather than by local councils, leading to the justified accusation of further centralisation. Local income taxes are used in some US cities such as New York and Philadelphia which amount to around a 3% income tax. This solves the issue of tax levels (and thus revenues) being set centrally. The problem with this model is that as cities fall into recession or decline, such as Detroit, tax revenues plummet and local government faces a financial crisis.

More radical is the ‘Land Value Tax’ advocated by a broad spectrum of organisations on the political left and right in the UK and used in Hong Kong (where land use is critical). This would levy tax against the value of land. In Scotland, the Green Party has laid out more detailed plans to tax land according to use and value with empty urban vacant land being taxed at 10% of its value. This ability to adjust for use means that certain types of land use (e.g. forestry) could be encouraged and land more efficiently used. A report by Compass argues that Land Value Tax can be extremely effective in funding infrastructure as infrastructure raises property value. For example the extension of the Jubillee line to Stratford raised property values in the area by an estimated £10billion. Rather than rely on discredited Private Finance Initiative (PFI), land value tax could fund projects such as Crossrail.

Domestic rates, which were the main source of funding before Council Tax, are charges levied on owners of property adjusted for the value of property or in other cases size of dwelling.  In the UK (and still in Northern Ireland) these were levied on property owners who often passed on the tax directly to their tenants, making it an easier tax to collect. However, periodic revaluation was required (every five years under a law of 1925) but were delayed or put back by governments anxious to avoid big shifts in tax. Revaluations only took place in 1928/1929, 1934, 1956, 1963, and 1973 before rates were abolished in 1990. Similar problems have beset the council tax, which is also meant to reflect property value but which has not been revalued since 1991. 

Just to sketch out an idea as to what a system combining the best of the above might look like:

Central transfers/grants being used to fund core or statutory services, such as child protection, based on need as assessed through a formula – perhaps the Indices of Multiple Deprivation. As an area became more deprived and lost tax revenues from other sources, it would be able to invest in public services through increased grants. This funding could be determined every 3-5 years, so that Councils can undertake longer term planning in the same way that current grants are often determined on a 3 year cycle.

So, on top of ‘core services’ would be discretionary services – basically what people ask for when they participate in the democratic process and elect representatives. So, these could be funded by a mix of land value tax and domestic and non-domestic rates, plus any commercial earnings from renting out office space and so on. This would allow councils to have a number of tax instruments to get the best outcome without having to overly rely on one source of income alone.

The new element I would propose would be participatory budgeting.  The historic model has been of elected (or before then appointed) representatives raising taxes and spending them with the guidance and planning of professional civil servants and public sector workers. The new model, emerging from Brazil in the last twenty years or so, is towards a radical participatory way of deciding the budget against which taxes are levied. To briefly outline, citizens in each locality and interest group start with deciding their specific demands/needs and elect delegates to a general assembly which work these up into budget proposals. The proposals are then put back to citizens to vote on and from there to the local government to implement. In Porto Allegre this led to a major expansion in water and sewer connections, and health and education spending.

It’s time to think again about how local government is funded. A new system should encourage citizen involvement and place power back in their hands through participatory budgeting and a taxation system that allows them to decide to raise taxes and spend them. It seems simple enough, but is needs central government to accept the legitimacy of local decision making.