How to pay for local services?

For many years now, governments of all political colours have seen fit to centralise more and more powers to themselves. The result of this has impacted directly on the councils that once were the major providers of services that have improved the lives for generations of our citizens. Today, they are a shadow of their former selves, whose lack of influence is clearly reflected in poor turnouts in local elections.

There have been promises to reverse the centralisation of powers and to devolve many of the powers back from where they have been taken over many years. So far, progress has been painfully slow.

Whatever services that remain the responsibility of local government must still be paid for. Traditionally the bulk of the funding came from central government grant, based on a formula devised and administered in Whitehall. The rest (around 30%) came from revenue and a smaller contribution from the recipients of those services via the Council Tax.

The strains are now really beginning to show. The 2010-2015 Coalition Government used its austerity programme to cut its central grant progressively and used the so called ‘Council Tax Freeze Grant’ to bribe councils not to raise Council Tax, at least not above 2%. The result was that a council like Lincolnshire that accepted the grant was forced massively to reduce its staff and many of the services it provided, libraries being just one example, in an attempt to protect Frontline Services such as Adult Social Care. Interestingly, had the County not accepted the grant but had raised Council Tax by 1.99% for the duration of the grant, it would now be around £30 million better off.

The government has decided gradually to reduce the central grant to zero by the beginning of the next decade, while offering the sop of allowing councils to retain more of the uniform business rate. Already the cracks are getting wider. Northamptonshire County Council has just put in a ‘Section 114 Notice’ banning all new expenditure, while the UK’s richest County, Surrey, has been hit by a £100 million cash crisis. It’s reckoned that nine out of ten authorities could go over budget this year. Here, Lincolnshire County Council has just proposed an increase in its take of the Council Tax of just under 5%. That works out to about £1 per week extra for a Band C property as a 1% rise in the County Council’s share of the tax bill is around £2.5 million.

Now I know that some people will blame those greedy people some of us elect to run our local services, as Northampton’s seven Tory MPs have done. Certainly, councillors come in all shapes, sizes and abilities; but those few who actually run the show have usually got there by merit. The allowances they are paid, which some claim to be either excessive or indeed unnecessary, are actually extremely modest. I certainly wouldn’t expect anybody to put the time in that many councillors do without any remuneration.

Local Government Finance is desperately in need of major reform. The Council Tax, which is still in England based on early 1990s property values, is clearly no longer fit for purpose. A revaluation would undoubtedly produce howls of protest, especially where it would penalise those people who, whilst living in large properties, may have a restricted income. Adding a few bands on the top would make little difference. The only Tax worth considering is one that takes proper account of an individual’s ability to pay and that has got to be some form of Local Income Tax. However, even this would not be the complete answer in places like Lincolnshire where incomes are traditionally lower than in other parts of the country. In addition some form of central government grant will still be required as may a small ‘Property Tax’ based on land values.

That’s not to say that financial savings can’t be made. As far as Lincolnshire is concerned, we really do not need a County AND seven District Councils. Areas like Wiltshire, Cornwall and Northumberland, to give just three recent examples, have posted significant savings by replacing their County and District Councils with a Unitary Authority. However, even Unitary Authorities are struggling now to balance the books.

As Oscar Wilde famously remarked, the cynic is the person, who knows the cost of everything and the value of nothing. There are those out there who fit that bill. However, whether we like it or not, if those of you who can afford it are not prepared to pay more, then the services on which many of us currently rely could belong to history.

* John Marriott is a former Liberal Democrat councillor from Lincolnshire.

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  • Timely and well written article, John.

    You might find the House of Commons report of interest

    ALTER, which I chair, does not favour the introduction of local income taxes. Under the existing tax regime virtually all taxes inhibit production. This is not just because taxes deter people from earning more by work or enterprise. It is also because income tax, national insurance, VAT and the rest punish the margins of production, the marginal areas of the country, the marginal firms just breaking even, and also the marginal output of all firms, including the largest and most productive ones.
    Taxation should fall on non-marginal sources of output. Economic analysis since David Ricardo has taught that non-marginal value is primarily economic rent. By definition this rent is the excess of value produced over the value produced on the margin. Land is the principal source of this rent.
    Land value is far and away the greatest untapped source available as public revenue.
    The value is created by the presence of natural resources, by the work of the whole
    community and by the provision of public services.
    LVT is not just a useful additional tax. It is essential that it becomes a means of reducing other taxes that hit production by taxing the margin. A stimulus to produce would benefit the whole economy, in particular entrepreneurs and workers,

    Expenditure need only be cut where genuine inefficiencies are found. It would also fall
    when new jobs were created and unemployment reduced. A virtuous circle of higher output and greater revenue from rising land rents would replace the vicious circle of lower output from higher existing taxes and heavy expenditure cuts. LVT creates a
    balanced economy of producers freed from taxes and nonproducing rentiers yielding public revenue.

  • John Marriott 12th Feb '18 - 9:28pm

    JoeB, You say that your committee ‘does not favour the introduction of Local Income taxes’. The piece you recommended that I read may well support your point of view, although I think I am right in saying that the 1976 Layfield Report considered LIT to be more than viable.
    Call me old fashioned if you like; but I just do not buy the argument that ‘virtually all taxes inhibit production’. I think that the ability to pay for services should be the primary consideration. The cynic might say that, if it can be shown that higher taxes benefit those most in need, whether that’s for health, education or any other worthwhile cause, most people would be quite happy to pay more, especially if someone else were paying.
    Whatever system emerges, youwillstillhave a problem where incomes and land values are relatively low, as here in Lincolnshire, for example. The trouble is that, while some of us argue the merits of one system or another, local government is withering away. Something needs to be done AND QUICKLY!

  • Katharine Pindar 12th Feb '18 - 9:36pm

    I am really pleased to see your article has appeared, John, and echo Joe B’s praise. However I find Joe’s detailed comment puzzling, as it becomes one of those economic explanations that lay-people like me find difficult to follow, without the clarity you have now provided on my own thread, Joe (current, What should we do about Labour?). Land Value Taxation, though as important as you say, surely cannot be the only policy we should endorse, and I had understood that it should be applied to commercial land but not to private properties. So as John advocates, why not a Local Income Tax, and a general principle that households should be charged on the basis of their capacity to pay rather than on the value of the house they are living in.


  • Lorenzo Cherin 12th Feb '18 - 10:35pm

    Joe is liked and respected but really this is LDV not LVT, enough already !

    We are a party that is not doctrinaire, no one thing dominates in Liberalism. To argue against income tax being a good thing when incomes at the middle top and high top, are extreme in their difference to the middle to bottom, is to be a one trick [pony doing tricks , not a political party presenting a programme. Alter are too obsessed with either or rather than this as well as that. We need more revenue, not a moral or ideological, however correct, high ground.

    The argument for no local income tax is against our previous stance and current one on this and a penny for extra for health as with previous policy on education.

    We need a mix, if LVT is a part of it , great, we need more income for better services.

  • John,

    the select committee report from 2003 gives a short history of the rates system that survived for close on 400 years. The last major review of Local Authority Finance, the Lyons report in 2004, did recommend consideration of a local income tax and this was Libdem policy for a time, but appears to have been dropped from the 2010 manifesto and subsequently.

    A Scottish cross-party conducted a review in 2015 The subsequent Scottish Libdem conference in 2016 voted to drop the Local Income Tax policy It was expected that either a land or property-based tax would replace the local income tax proposals.

    The cross-party committee in its conclusions noted:
    “We believe that a system of land value tax is promising, but that, while the work done for the Commission has been of unprecedented scale, gaining a full understanding of its impact would require further analysis. Any system of administering property based taxation should provide sufficient flexibility in time that site values could form a tax base for a system of land value taxation. Further work should be done over the next parliamentary term to assess both general and targeted land value taxes, and their introduction should be given consideration as part of a broadened system of local taxation.”
    This work has now been commissioned by the Scottish Land Commission that was set-up.
    So there we have it. The Layfield report led to the development of poll tax and its replacement council tax. Few of Lyons 2004 recommendations have been implemented and reverting to recently abandoned policies is unlikely to move us forward. We could do worse than take close note of how this important issue is being addressed in Scotland to find a way forward.

  • Lorenzo,

    there is a advert on the right with a link to an audiocast from Unherd titled “can a wealth tax save capitalism” that might be more to your taste.
    Contributers from right and left include Jacob Rees-Mogg, Nick Macpherson, Richard Leonard, Victoria Bateman, James Kirkup, Paul Johnson, Bernard Jenkin, Howard Glennerster and Tom Copley. The documentary presents a manifesto for wealth tax reform, and argues that the alternative to a fairer tax system is an anti-capitalist backlash.

  • John Marriott 13th Feb '18 - 9:13am

    Far be it for me to criticise someone as knowledgable as you appear to be; but you, nor I, for that matter, are infallible. Firstly the 1976 Layfield Report, in recommending much more freedom for Local Government, also advocated Local Income Tax as the vehicle to bring this about.

    The 2007/2008 Lyons Report (not 2004 as you state) also offered a way forward but, like the 2004 Tomlinson Report, whose recommendations could have formed the blueprint for worthwhile reform of Vocational Education – and, boy, do we as a nation need that now – both were kicked by the Labour Government into the long grass. Both, in my opinion, are worthy of resurrection. As far as what the Scots Lib Dems want to do, that’s up to them.

    Katharine made some good points in her response.i would be interested to see Joe Public’s reaction to such a complicated and, I must say, embryonic proposal as a Land Value Tax. The motto should be ‘Keep it simple’. In any case, in areas like mine neither LIT or LVT are enough for reasons I explained in my article.

  • Joe is consistent in his advocacy of LVT – but perhaps he could tell us why Lloyd George eventually abandoned LVT, how much was actually raised by LVT and what problems were associated with its implementation ? Roy Douglas wrote a very detailed article for the Liberal Democrat History Journal a while ago which is available to be downloaded.

  • John,

    as a former councillor you will be well aware of the time spent by local authorities in managing local government finances, prioritising spending and scrutinising outcomes.
    There are multiple unsatisfied spending priorities at both National and local level to be balanced from the NHS to schools, Adult social care, pensions and welfare benefits, housing, defence and policing, economic infrastructure, University grants and so on. To address them all simultaneously would require raising tens if not hundreds if billions in new taxes.

    You state in your article that “Local Government Finance is desperately in need of major reform. The Council Tax, which is still in England based on early 1990s property values, is clearly no longer fit for purpose.”

    I agree. Land Value tax is aimed at addressing inequality and focuses on the collection of economic rents rather than taking more and more of wage incomes from the working population. A shift towards this form of taxation, on the face of it, has winner and losers like all tax changes, although ultimately we all win by making taxation more progressive. Commercial Landowners and Landlords renting residential properties would be brought into the business rate scheme and all but the smaller landlords (with rents below £15k) would pay approximately double the current level of council tax. Tenants would no longer pay council tax, only a service charge for direct council services such as rubbish collection.
    Current council tax would be reduced for virtually all basic-rate taxpayers and increase slightly for higher rate taxpayers in band D properties and significantly for higher rate taxpayers in high band properties.
    Asset Rich, Income Poor taxpayers would have the option of deferral (as is generally the case with most property tax systems internationally) or a system of exemptions akin to the current council tax reduction scheme.

  • David Raw,

    I have a stack of Liberal Democrat History Journals waiting to be read and have not got to the article by Roy Douglas yet.
    Geoffrey Lee wrote an article for the ALTER publication “The case for a new people’s budget” published in the run-up to the 2010 election.
    In the foreword Vince Cable writes “LVT is not just another property tax…LVT has far-reaching effects on breaking down monopoly land-holdings, on encouraging new enterprises and raising the level of earnings, on recovering the cost of major and minor public works, on supporting small scale farming and the cultivation of marginal land, on stabilising house prices and, perhaps most importantly reducing the disparity between the rich and the poor.
    Lee’s article notes that 250 Liberal MPs pressed for the introduction of LVT in 1908 (a similar petition signed by 400 MPs) had been put to Campbell-Bannerman in 1906. However, Landed Interests, the Lords and Balfour’s conservative party combined to frustrate and delay the valuation of land needed. The outbreak of the 1st world war intervened and the Liberal Party were never again in a position to implement this Landmark policy.

  • William Fowler 13th Feb '18 - 12:18pm

    Council tax accounts for approx twenty percent of council income, it would therefore be an interesting experiment in local democracy if the council tax payers were given the vote on a further 20 percent cut in services in exchange for getting rid of council tax… along with, perhaps, a more realistic cap on salaries and pensions. Moving more and more services away from haplessly inefficient councils, such as social care coming under NHS, and centrally funded, is also a good move. Central govn has moved notoriously inefficient and often corrupt councils kicking and screaming into the modern world, but reducing councils to a very minimal provider of services is good thing for everyone, the less politicians and hangers-on the better.

  • John Marriott 13th Feb '18 - 12:29pm

    I would not dream to doubt the sincerity of advocates of LVT like JoeB. However, IF the decision was to go for LIT (brave indeed as both Tory and Labour Parties appear to view direct taxation as something of a poison chalice) its implementation could be relatively simple. Back in 1976 the ‘Inland Revenue’,as, I believe HMRC was called back then, was not ‘computerised’, or at least not to the extent it is now. To implement LVT, when all the details were worked out, could prove to be something of a nightmare.

    Lord Ashdown coined the famous phrase; ‘no taxation without explanation’, a relatively easy task with income tax, especially if a portion of it were hypothecated; but not so, I would argue with Land value.

    Finally, if the LVT cake has been baking in the oven since the beginning of the 20th century, could someone please tell why it’s not ready to eat yet?

  • Laurence Cox 13th Feb '18 - 12:33pm

    While I appreciate that Joe has previously attempted to ameliorate the downside of LVT with his ‘homesteading allowance’ there is still the danger that LVT will become another tax on London, which even in 2015 was subsidising the rest of the UK to the tune of £34 billion. Some of this is Corporation Tax on businesses with London head offices, but much of it comes from the higher salaries in London. Proposers of these idealistic schemes need to remember that there are 73 constituencies in London, over 11% of the total for the whole country, and that means that you have to convince a majority of London voters that any changes are in their best interests. It is no use proposing a new tax that would work well in rural areas, if it produces severe problems in London, where a small flat can be priced at the same level as a mansion in the North of England.

    We should stick with Council Tax, but add some extra bands for higher-priced properties and remove its regressive character by making the tax proportional to the mid-point of each band apart from the lowest and highest, where the numbers of properties are small enough that it would be practical to calculate a weighted average.

  • Lorenzo Cherin 13th Feb '18 - 12:45pm

    Joe thanks, my point is one you take up inadvertently rather than directly, we need more income, not alternatives to current income, for services to thrive.
    Therefore as I say often, consider LVT as an extra tax not as a replacement.

    John writes a very constructive article and replies to you correctly recognising your expertise , as does David herein too.

    We need to visit my point and as here nobody is, humility as well as knowledge, we are not dealing with something we have many good examples of and as John and David and colleagues show, it is far from easy to explain or even implement, and we have a crisis in confidence based on a cut in services.

  • John Marriott 13th Feb '18 - 12:58pm

    Mr Fowler, you seem to have a very jaundiced view of local government. Have you personally had a bad experience? Well, Sir, I hardly think that central government is a model we should slavishly follow. As someone, who has, over the past thirty years, served at all three levels at some time (in my case, County, District and Parish as well as meeting councillors from other areas) I can assure him that the majority of men and women who are successfully elected are there for the best of reasons, although some have more nous than others. It’s called DEMOCRACY, Mr Fowler. Have you ever tried it?

    Having read some of your contributions recently, forgive me if I am wrong, you would seem to be coming from right of centre, to use the old designation. However, in advocating even more state control I wonder whether there’s barely a fag paper between your views and those of people like John McDonnell. Not that this bothers me. It’s a free country, as my old man used to say. Or at least it was last time I looked!

    Oh, by the way, in its current form, the Council Tax accounts, I believe, for nearer thirty percent of expenditure rather than twenty percent.

  • Steve Trevethan 13th Feb '18 - 6:21pm

    Perhaps a basic problem is that there is insufficient tax gathered nationally.
    Perhaps the efficiency of tax gathering would be increased if there were consistent financial and administrative transparency.
    Management of anything can be neither efficient nor equitable if you do not accurately know what you are dealing with.
    “Research found there are about 97,000 properties in England and Wales were held by overseas firms as of 01/18. It adds to concerns that companies registered in British -controlled tax havens have been used to avoid tax.”
    “In contrast to residential properties owned by individuals, the Land Registry does not always release “price paid” figures for properties owned by companies.”

  • Laurence,

    I think it is important to remember that London contains some of the most deprived areas in the country and with its very high proportion of renters and smaller 1 B/R or 2 B/R properties in Bands A to C, a majority of its residents are likely to see significant benefits from a switch to LVT.

    The figures below are approximate estimates for Brentford (an area of West London.
    1B/R 2B/R 3B/R 4B/R
    LVT @ 20% Basic rate taxpayer 536 1013 1157 1732
    LVT @ 40% Higher rate taxpayer 1071 2025 2314 3463

    Council tax 1091 1247 1403 1715
    B C D E

    Landlords Business rates:
    LVT @ 46.6% 1248 2359 2695 4034

    A basic rate taxpayer owning a band A 1 B/R would see their council tax halved.
    On a band D property a basic rate taxpayer would pay #1157 and a higher rate tax payer #2314 as against the current council tax of #1403. A landlord renting a band D property would pay #2695 in business rates, subject to small business rate relief below for annual rents below 12,500 per year.

    Renters and the majority of owner-occupiers in Lincolnshire are likely to experience similiar benefits after adjustiing for proportionate land values and Local Housing Allowances in their area.

  • Katharine Pindar 13th Feb '18 - 7:25pm

    John, your spirited reply to our centre-right friend is music to my ears, as I believe we must be protecting and extending local government services. The question is, as your title indicates, How to pay for them; and I am not much clearer on this so far. It seems that LVT, if accepted, must be brought in gradually, and I recall Joe B. writing last summer that we should extend council-tax bands to be going on with, and have site value rating for business rates. In the grand scheme, Joe, I am concerned for tenants, whose rents may possibly be steeply increased to compensate the landlords having to pay far more.

    I should like to see as a priority a council tax system which is fairer to people not in work and those on benefits, perhaps with restoration of a centrally funded tax benefit
    scheme, but I also wonder about the Mirrlees Review proposal for a Housing Service Tax, a flat percentage of the rental value of each property, rented or owner-occupied. And while I am wondering, considering the point made about different needs and costs in London, is there any way in which foreign absentee owners of large London properties can be highly taxed, and/or obliged to open up their housing properties for rent at non-exorbitant rental costs?

  • John Marriott 13th Feb '18 - 8:58pm

    I’m glad that my article has produced some interesting and generally informative comments. However, what really worries me, as someone who would like to see stronger more responsible local government, is that, unless something happens soon, there will be precious little local government left. This might please certain individuals but could prove to be disastrous for many of our more vulnerable citizens. Time is running out.

  • Part of the attraction of Local Income Tax is that it goes up automatically in take terms as wages go up whereas council tax doesn’t.

    Part of the problem with council tax and the funding of council services is the difficulty councils have in putting it up – even by inflation let alone GDP growth.

    Part of the problem with council tax is also that it falls heavily on low(er) income earners.

    Interestingly for the first time we are seeing a “local” income tax and that’s in Scotland.

    Changing to LIT or LVT does mean that you won’t keep central government grants and equalisation and indeed a mix of taxation and revenue – such as business rates.

  • Good article in the Economist today – Wanted: radical proposals to fill Britain’s giant fiscal hole

    “Britain’s wealth looks undertaxed. Since the 1970s, as house prices and equities have soared, total household wealth has risen from three times income to eight times. Taxes on that wealth relative to GDP have remained steady, however.
    Council tax, one of the biggest wealth taxes, is based on property valuations from 1991. Rich people often pay less than poor. Buckingham Palace attracts a council-tax bill of £1,400 a year, around the same as some flats in Bradford.
    Basing council tax on up-to-date values would be a start. Other forms of wealth could also be tapped. Cancelling a proposed loosening of the inheritance-tax regime is one idea, though it would not raise much revenue.
    A land-value tax is another option. An annual levy of 0.5% might fill almost a third of the fiscal hole. Such a tax would be hard to avoid, since land cannot be hidden or easily substituted. The evidence also suggests that it is landowners, rather than renters, who bear the burden of such a tax.
    Today, no prime minister would dare to implement these radical ideas, least of all the timid, distracted incumbent. But the fiscal logic is brutal. If Britons want good public services, they will need to pay more. Real tax reform is coming sooner or later.”

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