1 April 2019

Local tax powers would let Britons take back control


With everything going on in Westminster at the moment, it’s easy to forget that Brexit was meant to be about taking back control. Some people dismiss that idea as mere campaign rhetoric, of course. Others see it as little more than jingoism. But in truth, the words “take back control” encapsulated an important principle: that political power ought to be exercised as close to the people it affects as possible. Better a national government than a supranational one; better Westminster – for all its flaws – than Brussels.

Yet why stop at a national level? The same logic applies to the panoply of councils, mayors, and devolved authorities that make up the sub-national government of Britain.

Distributing power to lower levels of government makes it easier to trial different policies in response to local needs. Successful policies can be copied elsewhere; failed ones can be written off without doing widespread damage. Decentralisation also creates an “exit option”, the possibility of escaping poor or onerous government by moving to a neighbouring jurisdiction – but without the hassle of actually having to emigrate.

In other words, decentralising authority gives government some of the characteristics of a competitive market, and supplements the democratic power that people occasionally get to exercise at the ballot box. Governments are inherently monopolistic, and therefore liable to take their “customers” for granted. But still, it’s better to have lots of little monopolies operating side-by-side than a single, all-encompassing one. That’s what decentralisation provides.

There’s no shortage of real-world examples of decentralised government working rather well. To take just one, consider Switzerland: its 26 cantons exercise most of the country’s political power, taking primary responsibility for health, education, welfare, law enforcement, and so on. From Zurich (population 1.5 million) to Zug (population 125,000), the Swiss enjoy low taxes and high-quality services.

So what about decentralisation in Britain? The coalition and Cameron governments made the right noises, and took some concrete steps in that direction. But their agenda has stalled, partly because of the practical difficulties involved in putting together new “city deals”, and partly because other issues (can you guess?) have become all-consuming. As a result, localism has largely dropped off the agenda.

Yet the current Brexit impasse won’t last forever. At some point in the not so distant future, we’ll have a new prime minister and – in all likelihood – a new programme for domestic policy. And if we want to make good on the logic of taking back control, further decentralisation of political power should clearly be part of the mix.

That would mean addressing the great failing of previous efforts: the absence of any real fiscal autonomy at the local level.

As things stand, councils in England only raise about a third of the money they spend, and have very little control over how the grants they receive from central government are parcelled out.

It’s hard to think of this as decentralised power in any meaningful way. A government that doesn’t raise its own funds from its own taxpayers lacks accountability and faces skewed incentives – it becomes a mere spending body, always lobbying for the biggest possible handout. And a government without real policy discretion is hardly worthy of the name.

The ideal is that each level of government should raise the money it is responsible for spending, and should have a significant degree of control over how it is spent. You need some sort of equalisation funding from central government, of course, to make sure that poorer areas aren’t deprived of important services. But that could be done by formula, with money block-granted to local government on an annual basis, and any interference by Whitehall kept to a minimum.

How, though, could these newly empowered local governments raise money? A new report by the Institute for Fiscal Studies has helpfully assessed the options. The authors wisely reject devolved stamp duty land tax, which ought simply to be abolished at the earliest opportunity. They also rule out devolving VAT or corporation tax, since working out exactly where value is created quickly turns into a bureaucratic nightmare.

A more promising possibility is a local retail sales tax, kept to a few percent to avoid unwelcome economic distortions. Another sensible option is giving local policymakers more control over council tax and business rates – or perhaps letting them introduce and manage simple flat-rate levies on residential and business property values instead.

The best option, though, is a local income tax. I’d favour knocking a few percentage points off every national rate, and then allowing councils to charge their own flat-rate tax on any income over the personal allowance. Such a system would give local government significant revenue-raising power, but without complicating the tax system or hugely increasing administrative costs.

Where I depart from the IFS’s otherwise excellent analysis of devolved taxation, however, is on the issue of tax competition. The report’s authors are concerned about sparking a beggar-thy-neighbour race to the bottom, and therefore suggest that the rate of any such local flat tax be set nationally.

I don’t think we ought to be so prescriptive: some local governments might want to set a higher income tax and minimise property levies; others might prefer to raise as much as they can from sales taxes, while keeping direct taxation as low as possible. Let’s allow them each to find the right balance.

With proper decentralisation, people will be able to vote at the ballot box for their preferred tax policies; but they will also be able to vote with their feet. To my mind, tax competition is a feature of decentralisation, not a bug. It gives individuals more choice, and keeps government in check.

Clearly, we’re a long way from having that sort of decentralised system in the UK. And I’d be lying if I claimed this programme of reform is likely to be an easy sell. We’ve all seen the front-page headlines about postcode lotteries, and heard the derision voters are apt to aim at their local representatives. It sometimes feels like decentralisation just isn’t in Britain’s political DNA.

But perhaps we could learn a lesson here from our cousins across the Atlantic. America’s federal politics have been paralysed by partisan grandstanding and bitter culture wars for years. Washington policymakers have never been more tribal, more entrenched in their positions, or less able to compromise in the national interest. Sadly – but perhaps unsurprisingly – Westminster seems to be heading the same way.

And yet across the US, you can find state and local officials pursuing practical policy reforms designed to boost economies, streamline governments, and solve the problems that matter to ordinary voters. Now more than ever, we could do with a bit of that in Britain – with the centre failing to live up to expectations, decentralisation offers a way forward.

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Tom Clougherty is Head of Tax at the Centre for Policy Studies