Scrap Council Tax

Article in Policy Review

The pensioners' revolt over council tax has rattled Downing Street.

That's why the Chancellor saved the last few sentences of his 2004 Budget for announcing a £100 payment for pensioners over 70, to help with council tax bills - for next year only.

It's why the last few sentences of Gordon Brown's December Pre-Budget Report were saved to announce extra cash for councils - to help lower council tax bills for 2004/05.

And it's why the Deputy Prime Minister has been threatening to cap anyone and everyone in local government who sets high rises in council tax bills - and why the ODPM is undertaking a major review of local government finance in the so-called "Balance of Funding Review".

So council tax and local government finance reform are near the top of the policy agenda, after an absence of 12 or so years. Apart from the details of the reform, the only question is, when will the Government act? Before or after next year's likely General Election.

To date, the Liberal Democrats are the only party in British politics with a policy on this.

We want to replace council tax with a local income tax, with consequent reforms to the grant system. We want to denationalise the business rate, reforming its structure so it is based on land values - developed or undeveloped - not just property. And we want gradually to devolve more income tax raising power, from Whitehall to local authorities, by over time, cutting national income tax, reducing grants and allowing local income tax to take up the slack.

This isn't a new policy. In every election manifesto since 1983, we have proposed replacing the old domestic rates or the poll tax or the council tax, with a local income tax, in similar packages of wider reform.

However, there's now a feeling round local government and even Whitehall that Ministers may be about to borrow generously from this policy menu.

So why the policy, and why is it gaining friends and influencing people?

Local income tax has two key benefits. First, it is much fairer than the alternatives. Second, it is the only tax base that would allow councils to raise significantly more of their own resources locally.

So, if you're concerned about a more progressive tax system. Or believe in decentralisation - or "localism" as we all now call it - a local income tax is the obvious way forward.

Till recently, most discussions on local income tax leant heavily on rather old policy analysis.

The seminal work is the 1976 Royal Commission on Local Government Finance, commonly known as the "Layfield" Committee, after its chairman. It recommended a form of local income tax, though had concerns on the administration costs in a pre-PC, pre-Microsoft era. While this was updated by various contributions during the poll tax debates, most notably by a 1992 study by the former Deputy Chairman of the Inland Revenue, AJG Isaac, no detailed analysis had taken account of recent changes in income tax administration, including IT and the development of widespread self-assessment.

Until the report by the Chartered Institute of Public Finance and Accountancy (CIPFA), commissioned by Ministers, and published in March 2004.

This covers the usual ground, including the many international examples of local income tax working well in countries as diverse as Sweden, Switzerland, the USA, Denmark and Japan. Yet it also begins to look hard at the practical steps needed to introduce a local income tax in the UK

And CIPFA are in no doubt that a local income tax (LIT) is a practical, workable option. They report that "the advances in technology have taken place and IT systems could be developed to provide the support infrastructure needed to operate a LIT".

The main practical question for introducing a local income tax, according to CIPFA, is the creation of a database of taxpayers' names and addresses. "Although the Inland Revenue currently holds addresses for taxpayers, a more rigorous system would be required to maintain information to the standard needed to provide specific locations of residence for a LIT" the reports says.

While cynics might argue that the recent record of the Inland Revenue does not inspire confidence in their capability to deliver, most observers feel that a project to introduce local income tax is more likely to succeed. Unlike Labour's tax credits, local income tax is a policy option long thought about by the Revenue: it has already got a computer system designed with a database and fields to operate the address management CIPFA point to. Moreover, this is a system-wide project, not a project relating to a group of taxpayers that have to be specially identified.

So if local income tax is now practical for the mandarins, is it now practical politics? Liberal Democrats will be making the case. I hope others join us.