We need to start talking about fiscal devolution…

May 18, 2018   By Jessica Studdert, Deputy Director

This week Seattle’s City Council voted unanimously to levy a new tax on large businesses to help address the city’s homelessness problems. Through negotiation and consensus-building, a democratically-elected local assembly agreed a new financial levy to address a pressing social need. While this might appear to be the result of a mature deliberative process, such a measure would be considered pretty shocking in this country.

Although we too enjoy an advanced Western system of representative democracy (and indeed, also experience a significant homelessness crisis), it would be impossible for such fiscal autonomy to happen here. Not only do our own local governments not have any such revenue raising power, but the entire weight of national policy regarding local government finance is calibrated towards micro-managing, curtailing and undermining such autonomy of action. As a result, the very concept of a locally-elected body this side of the Atlantic being able to demonstrate such initiative, such responsiveness to local needs, is inconceivable.

Seattle’s new levy on large businesses is a “head tax”, with companies grossing over $20 million a year now set to pay $275 per employee. The $47m per year that this is expected to raise is earmarked for building affordable housing and funding emergency housing shelters. Of course, big local businesses – including Amazon and Starbucks – have protested, but Washington State is actually unique in the US in having no state-levied income tax. As a result, it has the most regressive tax system in the country, with lower income residents paying a much larger share than wealthier residents. So this measure attempts to redress that imbalance – in the context of a wider public political climate in which the principle of democratically sanctioned, locally-raised revenue is entirely legitimate.

Compare that to how our local services are resourced. As central grant funding is set to all but taper off by the end of the decade, councils are left with two main sources of revenue, each of which is rapidly decreasing in legitimacy. Council tax is based on 1991 property values: as the housing market has rocketed and deep regional distortions have opened up, it is becoming increasingly regressive – detached from people’s ability to pay and current house value. Business rates are also a property tax – levied on rateable floor space of premises. Not only are they hugely unpopular with small businesses, but the tax is entirely detached from actual business value in the local economy – literally relating to how much space a company takes up.

The result is a system of local government finance that is increasingly unfit for purpose. The ability of local governments to raise revenue to address their needs are severely curtailed by central government. The only two significant sources of revenue available to fund local services, being based on property values, are increasing out of kilter with the reality of income and value in the economy, and so face declining legitimacy.

Meanwhile forms of taxation that relate to genuine value created in the economy are kept at a national level: transactions (VAT), earnings (income tax), jobs (national insurance). Keeping local government dependent on property tax means that in the future it will have strong incentives pursue building-expansion based growth, which may be low value in terms of wages, rather than to necessarily pursue value creation in local economies. In the context of our national productivity crisis, and indeed the higher productivity of countries with much more devolved systems of revenue raising such as the US, keeping the role of local fiscal incentives off the national policy agenda will be increasingly hard to sustain.

There is emerging disquiet over the deficiencies of our current local resourcing arrangements. The Labour Party has indicated it might consider scrapping the “broken” council tax, although suggestions that the party would favour a land value tax mean leave a new system still prone to geographical distortions and not linked to productive value in the economy. Conservative-led Westminster Council recently introduced a voluntary extra levy for the wealthiest homeowners – the shortcomings of this notwithstanding, it has put the issue of contribution on the agenda and indicates potential scope for building political consensus around the need for deeper reform. The progressive think tank the Resolution Foundation has made a detailed case for reforming council tax, on the basis of intergenerational unfairness in asset ownership, which has been echoed by the liberal Financial Times.

Establishing the declining legitimacy of current local taxation is in many ways the easy part. Proposing an alternative is certainly harder – and one few national politicians are prepared to stake their reputations on. But the upcoming Spending Review is an opportunity to consider the financing of local government in the round. We can take lessons from other advanced Western nations, such as the US, where local revenue raising capability is the norm. This involves a wide menu of different available revenue-raising measures, to be deployed based on local circumstance and opportunity, underpinned by democratic legitimacy.

We are a long way from anything like the local initiative and responsiveness demonstrated in Seattle – but the case for more fundamental fiscal devolution is building.

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