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Why the Tartan Tax flopped

The LibDems are nothing if not persistent in their push to replace “the unfair” Council Tax by local income tax (LIT). Despite the collapse of the Scottish proposals in February, LIT is still a LibDem policy and was not dropped at the party’s Spring Conference. They would do well to examine the Scottish experience, which was summarised in an article in The Scotsman.

THE local income tax, as set out by the SNP, was designed to be simple but ran into many complications. The plan involved introducing a flat-rate increase in Scottish income tax of 3p in the pound. The rate was designed to bring a £270 million cut in taxation and also make it simpler and less expensive to raise. The SNP argued that varied rates across 32 different councils would have increased bureaucracy.

It said it would have been raised as a supplement using the existing PAYE method through HM Revenue and Customs, although HMRC has said that it would not collect LIT. Some critics argued that the flat rate took away the ability of councils to set their own rates and as a result broke European law on local government. The rate seemed to have been decided on the basis that the Scottish Parliament has powers to vary income tax in Scotland by up to 3p. However, the SNP wanted to go beyond the “tartan tax” powers of Holyrood and add 3p to the higher 40p tax rate as well. The Treasury suggested this was illegal. A further complication was that the SNP wanted the money (£400 million) paid to people receiving council tax benefit to be added to the Scottish block grant. However, because the money only goes to individuals and not to councils or devolved governments, the Westminster government insisted that this money would no longer come to Scotland if the council tax was abolished. Some calculations suggested that the gap in public funds from the loss of council tax benefit, higher rate tax increases and a basic shortfall could be as much as £1.5 billion.

In an unusual show of unity, business leaders, trade unionists and opposition politicians who had campaigned against a local income tax were relieved at the SNP’s U-turn. Business analysts had warned the move would be an extra tax on earners – just at a time when the country was struggling economically – and that this would deter businesses from setting up in Scotland and could persuade existing companies to relocate to England. The Federation of Small Businesses called the decision a “relief” for business. The Scottish Council for Development and Industry said ministers had made “the right decision” and CBI Scotland said the move would be “warmly welcomed” by business. The trade union Unison said the tax would have had “a disastrous effect on jobs and services”, while Glasgow City Council said it would have had “dire consequences” for the delivery of services had the Scottish Government brought it in.

We are not supporters of the Council Tax on account of its regressive nature and the fact that it does not collect sufficient land value on vacant or undeveloped sites, but it seems to be pensioners who are worst affected and there are other ways of dealing with the difficulty of people who are living on fixed or falling incomes. The LibDems have an LVT campaigning group, ALTER, within the party and its leaders ought to be taking notice of them.

Read the full article in The Scotsman.