Local taxes have been devolved to Scotland since 1999 but very little has been done to improve the funding of local government. Council Tax, introduced in 1993, is still based on valuations made in 1991 and only 12% of the money spent by local governments is collected locally.
The Commission on Local Tax Reform in 2015 stated that “The current system of Council Tax must end. It is not fair, progressive or locally empowering” and concluded that “This is an opportunity for reform that must not be missed”
The Social Justice and Fairness Report in 2021 also condemned Council Tax for being regressive and strongly recommended that Council Tax, Business Rates and Land and Building Transaction Tax should be replaced by a Land Value Tax.
Despite these calls for the need for radical reform of local taxation Scottish governments have been reluctant to accept the recommendations, and in recent years seem to want to obtain independence before thinking about making any significant changes.
To achieve fairness, progression, stability and efficiency any tax or charge imposed to fund local government, its most important feature should be that it does not hinder employment or trade and so reduce the total fund from which the tax or charge must be paid. For fairness, the amount levied must be related to the ability to pay and for justice, earned incomes should not be taxed whilst any unearned incomes are left untaxed. The tax or charge should be cheaply and easily collected, so that the costs of administration are as low as possible and there should be no opportunity for avoidance or evasion.
Local Income Tax is often suggested as a replacement for Council Tax but it fails to meet any of the criteria for a suitable tax. It is very complicated and difficult to understand and it is so deleterious to employment and trade that at least one pound is lost from the national economy for every pound taken in Income Tax. It is also expensive to administer and is avoidable and evadable, especially by the rich. That most people are familiar with Income Tax is its only merit.
The only suitable means of obtaining revenue for the funding the necessary functions of government is Land Value Tax (LVT) otherwise known as Annual Ground Rent (AGR), as recommended by Adam Smith. If it replaced Council Tax it would be much simpler and cheaper for valuations to be done because individual houses would not need to be valued. Estimations of land rental value by post code would suffice. The development of most of the derelict and disused land would be stimulated by its inclusion in LVT/AGR. It currently contributes nothing to government revenue and increases the price of land for building houses by restricting its supply, and imposing LVT/AGR increases the potential to raise more much- needed revenue for local government.
Duncan Pickard is a member of the Scottish Land Revenue Group
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