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Background Briefing SNP Proposal for Scottish Local Income Tax

Financial Implications:
Net Income Implications:

The table below quantifies the estimated average effects upon net income, by income decile group (individuals are categorised into ten groups on the basis of income levels – 1 is the Poorest, 10 is the Richest).

Effect across the Scottish income distribution of replacing council tax with a 3% local income tax, 2006-07

Source: Institute for Fiscal Studies, March 2007  

Effect for different family types of replacing council tax with a 3% local income tax in Scotland, 2006-07

Source: Institute for Fiscal Studies, March 2007

Some Criticisms of Proposed LIT

The proposed LIT has been criticised on the basis that savings income is excluded, and the implications of this for “fairness”. For example, a wealthy, retired investor who earns dividend income would not be required to contribute under this system. However, savings income is excluded due to the enormous administrative costs which would be associated with charging investment income 5.

It is argued that local authorities’ reduced ability to raise revenue would constitute a significant reduction in the importance of local government within Scotland. Levels of local spending would be almost entirely determined by the level of grant received from the Scottish Executive, since local authorities would lose the ability to increase local taxes to fund expenditure. There are concerns that this could result in the accountability and efficiency of local government being undermined 6.

The proposed LIT could represent a considerable additional administrative burden on local employers.

As mentioned above, it is argued that families consisting of multiple incomes would be comparatively worse-off under a LIT.

It is argued that the introduction of a LIT would result in the economy suffering the flight of high earners. High earners are typically highly mobile; they often have more control over their terms and locations of work. They are also adept at arranging their tax affairs to maximum advantage.

Large UK companies with a presence on both sides of the border may recruit senior staff to offices outside Scotland if this tax is imposed. This argument implies that the tax could damage the economy doubly – by driving wealth creators away and diverting business to other parts of the UK.

The current system of council tax provides some incentive to live in relatively smaller (low-value) properties. This alleviates some degree of pressure on the local housing market. This effect would be removed by the proposed LIT 7.

  1. “Abolition of council tax – public domain statements by the Scottish Executive”, FMQs 7 June 2007
  2. This assumes that individuals’ behaviour did not change in response to the reform.
  3. This estimate assumes that the savings from not having to pay council tax benefit (which would accrue) centrally, would be returned to the Scottish local authorities – if this was not the case, the tax cut would be £830 million.
  4. “Analysis of the SNP proposal for a capped local income tax”, Institute for Fiscal Studies, March 07
  5. “Abolition of council tax – public domain statements by the Scottish Executive”, FMQs 31 May 2007
  6. “Local Income Tax Would be Holyrood’s Biggest Mistake’, Policy Institute Website, 20/09/07
  7. “Why a local income tax would prove disastrous for Scotland”, Policy Institute Website, 25/09/2007