A Land Tax would close local government deficits; But Only If Holyrood Lets Go Of Control

The Herald reports today that Local Authorities face growing collective budget deficits, with the funding shortfall of nearly £997 million over the next two years with £647 million of that landing on budgets next year.

Much of the increase in this budget deficit appears to be due to the increase in National Insurance contributions coming due to the UK Government’s recent tax rises but other factors including pay deals, inflation and increased demand play a role too. Local Authorities claim that the promise of support from Holyrood isn’t enough to cover the actual increases in costs and this could result in further loss of public services.

None of this would be necessary though if Local Authorities were able to use their devolved tax powers in a manner more like regional and local governments are able to in other countries in Europe.

Scotland’s Local Authorities - in addition to being far too large - are too tightly controlled by Holyrood. Too much of their funding comes from a Block Grant and they have far too few powers to raise revenue, resulting in too much weight being placed on the one tax over which they have both substantial control and which generates substantial revenue.

Except, they don’t even have that much control. The Scottish Government has previous record of bribing and bullying Councils into using the Council Tax to suit Holyrood’s agenda (often to force them to freeze increases in the tax) in a way that the Scottish Government would deem utterly unacceptable if the UK Government attempted to do the same over, say, devolved income tax. If Scotland was a normal European democracy, such meddling in local government affairs by Holyrood may even be deemed an illegal breach of subsidiarity by a Constitutional Court.

Holyrood also controls the purse strings when it comes to new taxes. While the rules of devolution make it difficult or impossible for the Scottish Parliament to create a new tax that they control (they couldn’t, for instance, create a new national carbon tax), they do have almost unlimited power to create taxes to fund local government. This means that they can create taxes controlled by Local Authorities. We’ve already seen them do this with things like the new Tourist Levy.

Common Weal has advocated that this power should be used first to scrap Council Tax and replace it with a fairer Property Tax based on a percentage of the current value of a house (rather than what the house might have cost in 1991). Doing this and setting the tax at what would have been a “revenue neutral” rate in 2019 would instantly mean a tax cut for houses worth less than about £400,000 - this is around 80% of households. We think that given the increase in house prices since then, the 2019 revenue neutral rate would be worth more than £650 million a year in extra revenue now, so either the tax rate could be set a little lower or we can take the extra revenue given that so many households would still be paying less.

Even if we assume that the Property Tax doesn’t raise additional income compared to Council Tax, there’s something else we can do - we can extend the Property Tax to cover land. Doing this would bring in around £450 million a year in additional revenue (again, likely more than this given that land prices have risen since the paper was written).

This is all it would take to wipe out Local Authority deficits across Scotland - a change to Council Tax that EVERYONE says needs to happen plus a tax on those very few who own most of Scotland’s land.

Holyrood needs to stop treating Local Councils with a level of disdain that they would not accept from Westminster. Reform local taxation, given Councils much more fiscal autonomy, make local taxes fairer, and allow communities to maintain their public services. All it will take is for Holyrood to let go of a little bit of control.