COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Review of Domestic Rating

17 October 2007

Mr Magor:

Well, it has been empty for a long time.

I think I can see political antennae blowing in the wind. It might be a problem that would build over a period of time. That will have to be considered. In any case, this is not the time for making judgement on it. It is one of the options.

Mr Magor:

It is a good option.

As to the low-income rate relief scheme, we should again declare an interest. In a darkened room in the Hilton Hotel in Belfast, we came up with this idea after lengthy consultation with third sector groups in Northern Ireland.

The scheme is a bolt-on to the housing benefit rent rebate scheme, in that it sits on top of that scheme and gives the legislature the ability to enhance various elements of the measurement of need in relation to the structure of the community: older people, lone parents, families with children and so on. The choice was made to enhance an element of the scheme for the current year. The advantage of the way the scheme is structured is that it is directed towards the measurement of need, and therefore it is targeted towards people who are in need.

The issue there — I suspect you are about to raise it — is the question of take-up. There needs to be a concerted effort to make sure that, for both mainstream and special relief benefits, take-up is maximised. There is plenty of scope in Northern Ireland for partnerships with the third sector, the CAB and other voluntary bodies, to push forward the take-up. The legislature is free to revise the low-income scheme in whatever way it thinks appropriate. If it feels that the scheme does not meet the needs of a particular group in the community, it can revise the scheme.

The main issue for us is that when the scheme is revised, one should be careful not to do things for the Government — the Department for Work and Pensions. The obvious way in which take-up can be maximised in Northern Ireland is by the lifting of the capital rule. Lifting that rule, however, should be the duty of central government and that should be funded from the centre. The reason we say that — and I was waiting for an appropriate point to raise this — is that it is grossly unfair that the capital rule has remained in place for more than twenty years now. It is still stuck at £16,000. The rate of income that is derived from capital, through the housing benefit scheme, assumes a 20% return on capital. If you can invest capital and get a 20% return anywhere in the world, let me know. Not that I have any capital.

Income-related benefits turn on capital rules. Those capital rules are so unfair. Everything else has been up-rated, but the capital has not been up-rated. That impacts particularly on Northern Ireland, where levels of savings — particularly of just over £16,000 — is high, according to all the surveys and data sets that we looked at. That is an area in which the scheme could be revised: the capital rule or the derived income rule could be lifted. However, an enormous door could be opened with respect to the amount of relief paid. Ultimately, if that relief is paid by all the other taxpayers, it will have the effect of lifting the tax.

The low income rate relief scheme is flexible. If it is felt that it does not target the right community groups, it can be moved in whichever way is deemed appropriate.

Mr P Doherty (IRRV):

The scheme is called a low-income rate relief scheme. The work that Sir Michael Lyons undertook shows that the name of schemes can be an issue. To call a scheme a low-income rate relief scheme perhaps sends out the wrong message —a better title might be the Northern Ireland rebate scheme. A psychological element comes into play. It is important to get across the message that a rebate is available, and that it is not a matter of holding out a begging bowl. The approach could be as simple as that.

The Chairperson:

I can see that that is an important factor.

Mr P Doherty (IRRV):

I almost apologise when I say that, simply because it sounds naïve and trite. However, Sir Michael Lyons undertook some work on that issue, as did our institute, and that issue emerged clearly.

We developed the low-income rate relief scheme, and we spent a lot of time over here talking to the third sector, interested parties, political parties, and so on. Some very clear messages emerged from those talks. One message was that there should not be an indiscriminate relief scheme that peppers money across the board without any criteria to determine how people should receive money. That is why we came up with the concept of the low-income rate relief scheme. The current benefit scheme is very good and has the ability to target individual client groups, but, of course, the Department for Work and Pensions is restricted by the amount of money available, and so on. However, your scheme has much more flexibility in that it is based on that, so, as David said, it can target whichever groups are in most need of help — for example, elderly people, various age-groups, single-parent families, couples.

An important aspect of this scheme is that it sits on top of the benefits scheme, which means that the millions of pounds that come into Northern Ireland through the current statutory scheme are not affected by it. I want to highlight one of the big issues, which we will touch on shortly when we discuss single-person discount and pensioner discount. If you allow indiscriminate discounts on the amount of rates that is due, the calculation for the amount of benefit is then based on the reduced figure. Say, for example, a 25% discount is allowed on a £200 bill, as is the case in GB. With a discount scheme, the benefit subsidy would be based on £150, whereas now, the benefit subsidy would be based on £200. Therefore, Northern Ireland would automatically lose a £50 subsidy from the centre. When we were developing the low-benefit rate relief scheme, we had to consider how we could retain that income to Northern Ireland. We wanted to develop a scheme that could sit on top of the current scheme but still give relief to taxpayers. That is one of the strengths of our scheme.

"Modifying" is the word.

Some good work has already been carried out in partnership with the Pension Service in Northern Ireland, and that work should be developed. Individual local authorities should be given support to do that, and work should be carried out a local level. There should be targeted campaigns, and data profiles should be created using existing data sets. Information should be gathered on where older people live, and they should probably be visited.

I could go on forever because I am a great believer in take up, and there is such a contrast between the rented sector and the owner-occupied sector. In the rented sector, there is maximum saturation and a good job is being done, but the message has not got through to the owner-occupied sector. In lots of cases, that may be the resistance of the owner-occupier. The data is available; it is possible to identify where the older people live by postcode. It can be arranged for nice people to knock on the doors of older people, or they can be approached by letter or text message — there are 101 different ways of contacting them. However, the data set must be analysed, it must be established where the older people live and where the low-income pockets are. A targeted campaign would yield dramatic results.

Mr P Doherty (IRRV):

It would be more feasible to enable local authorities to set their own variable tax rate when the administrative changes have been made and the decision has been taken on the eventual number of councils. In theory, local authorities know the local economies better than the centre does. Therefore, it is a question of enabling councils to set tax rates according to their economic needs.

Mr Magor:

In the early days of the research for the reform process in Northern Ireland, the University of Ulster carried out some work on graduated tax rates, which produced some interesting models. Those are worthy of further investigation.

Just to pick up on Pat Doherty’s original comment about the single person discount, if you grant a discount to someone who is in receipt of benefit, you immediately reduce your take from the Government, in terms of rate rebate, because it reduces the amount of property tax that is used for the calculation of benefit. Therefore, money is being taken from Northern Ireland to finance the single person discount, either at local level or through the local taxpayer. I worked in local government when the single person discount was first introduced in 1993. You would expect a city such as Oxford to have a fair number of people who live on their own, but not 38% of the population; however, that was the reality. Some 38% of my taxpayers claimed a single person discount. We tried to police and administer those claims, but it became impossible. For years I was suspicious of those statistics, but we reviewed the claims frequently.

Recently, more scientific data matching was carried out in GB, and it transpired that 25% of the single person discounts in GB are fraudulent, which is horrifying. People simply apply for the benefit, take the 25% discount, and the local authority pays it year on year without carrying out any checks. The Audit Commission recently carried out a data-matching exercise, comparing several data sources under the national fraud initiative. In one London borough, the Audit Commission found that £1·4 million per annum is being lost to single-person-discount fraud.

The other problem is that the single person discount is regressive, because it is a discount for living alone, and it has no regard at all to someone’s ability to pay. There are many threads to granting the discount, and I find them all negative. That is why the relief scheme is so important. Relief can be targeted to people living alone, through premiums, such as the measurement of need for housing benefit and the rent rebate system. Those premiums can be enhanced and more help can be provided to people who live alone. The beauty of the rate relief scheme was its flexibility. Simply granting an arbitrary single person discount, without the proper policing mechanisms, could turn out to be costly and prove to be a massive administrative burden.

Some single pensioner discounts and other automated discounts have become popular, and four or five local authorities in GB have introduced them. People expect many local authorities in GB to introduce those, but they will not because of the impact on the take from central Government in relation to rebates — money will actually be lost. The treasurer of any organisation or public body has a fiduciary duty to ensure that the organisation maximises its income and does not lose subsidy. As soon any targeted discount schemes are introduced, subsidy from Government is lost, and that seems foolish. However, recent evidence of policing such schemes puts another nail in the coffin of single person discounts. It remains to be seen how the reaction from GB authorities will be managed through the revenue support grant process in GB, because it could be argued that so much money is being lost due to fraudulent claims that local authorities have acted in an inappropriate manner in trying to police them, and that could cause major difficulties. I recommend that you should not go down that path. If you are keen on the idea, a lot of research must be carried out. Clear procedures must be put in place to find out whether someone is living alone. You have to think carefully how you will police that, and you also have to think carefully about the penalties that you will impose if people abuse the scheme, because the evidence of abuse is very high indeed.

Mr P Doherty (IRRV):

You have to think whether it is a good use of public money, when it could be used in a more targeted way to achieve the same end, but with people who genuinely cannot afford to pay.

I echo everything that David has said. My former authority is in Harrogate, which, as most people will know, is a fairly wealthy area, but it still has about 28% of people claiming a single person discount. However, it is not just the Audit Commission — under the national fraud initiative (NFI) — that has been undertaking that sort of work to try to assess the level of incorrect claims. A couple of major companies in the UK who are big data holders have developed products that they use with local authorities in GB to run the information through their systems. Their data shows that 25% of claims for single person discount are incorrect. We would not recommend it.

The Chairperson:

We have a very clear message there. It is useful to hear the experience and see the spectrum of issues that have to be factored into any move in that direction.

Mr Magor:

Mr Magor:

You have to be very careful what you say about local income tax nowadays, because of the impending decision in Scotland. The arguments on local income tax have been well rehearsed — are you going to have true local income tax, or a levy raised at the centre and distributed to local government? If you have a true local income tax there are then the problems of administration, and a lot of research has been done on how that would be implemented, and the speed at which HMRC could implement it.

The president of the IRRV said that when it was announced that it would take six or seven years in Scotland, he thought that he had misread it and that it would take 67 years. That is most likely right, because the quality of the information held by HMRC is the massive unknown. It holds lots of information about people on PAYE, but what about the rest? The PAYE information is based on place of work, as opposed to place of residence, and therein starts HMRC’s problem. If you have true local income tax you will completely have to restructure the tax system. Logically, it would be collected at national level rather than at local level, and HMRC would have to keep all that data up to date. The last time that individual person data — movement of people — was used in GB was the poll tax. That did not work. The administrative challenges for a true local income tax are enormous.

Having said that, one has to be a realist and say that it would be linked to the ability to pay. The real problem with local income tax is that it does rather target those on PAYE, who can almost be regarded as the victims of local income tax, because they will be targeted straight away, whereas the self-employed would perhaps be in a more advantageous situation.

The real issue is the old argument about the rating system — the widow living next door to the house full of burly bricklayers and they are paying the same rate bill. While local income tax works the other way round, think about the household with three young people working on the minimum wage who suddenly have a local taxation bill to be paid through their income. What do they do? Perhaps one of them has a job in somewhere like McDonald’s and suddenly is paying up to £5 a week in local income tax. That person is going to go to McDonald’s and ask for more wages to pay for that, otherwise the minimum wage would have to rise. Studies have been done by lots of people on local income tax being a disincentive to work, and what the inflationary effect would be on wages. All those issues stand aside from the administrative ones. Governments need to think very carefully.

The debate is going to be had in Scotland, but, of course, it does not have pure local income tax. What we are talking about is 3p at the centre, and the money is going to be distributed.

The assumption must be that it could be complicated by the proposals for the administrative changes in local government when, presumably, some of the services that are currently run at regional level will be devolved to local authorities. The overall impact of that requires careful consideration.

Dr Farry:

There would have to be a balance between the regional and district rates.

Mr P Doherty (IRRV):

Frankly, by the time that services have been transferred, it may not even be worth thinking about it.

Dr Farry:

It sounds as though we should keep control of most things.

The Chairperson:

Mr P Doherty (IRRV):

An extra 1% on a bill — £1 a night — is not going to affect anyone’s decision to come to Belfast or any part of Northern Ireland. It is about carrying out research and making a judgement as to whether it is a good or a bad thing, or what its impact will be on visitors. The idea should not have the door closed on it.

Mr Magor:

Pat is correct. The economic effect has to be measured, as well as the impact on Northern Ireland’s tourist industry as a whole.

Having come to Northern Ireland for several years and watched the growth in tourism, when I left the city last night, my eyes were opened. Although I may not have spent enough time in Northern Ireland, I have been around, and I have seen how the tourism infrastructure is developing in areas outside of the city. It would be sad to affect that in any way. The tourism industry in Northern Ireland has not yet matured; there is a long way to go and the potential is enormous; however, I am not a tourism expert.

The Chairperson:

That is on the agenda, you have addressed it and people will consider the pros and cons. Possibly, a cost-effective approach might be to ring-fence the revenues in order to further develop the product.

Mr Magor:

Turning now to road charges, we prefer to call these "traffic-management" charges, which sounds a little less aggressive.

The Chairperson:

He spins like a spin doctor.

Mr Magor:

It broadens the discussion. Given the available technology, the term, traffic-management charges, applies to road calming and lots of other measures. It is not necessary to use measures that are as crude as speed cameras. There are many different methods. For example, lessons were learned about the effectiveness of spot cameras on motorways, which resulted in the introduction of variable-speed cameras.

If one is considering raising revenue, one thinks of congestion charging in London. Irrespective of what has been said about the effectiveness of the administrative process, congestion charging works well — very well. It has raised an awful lot of revenue; however, it is questionable as to whether it has achieved its desired effect. Traffic-management technology enables you to make the choice. Implementation is simple and is no longer a technological challenge. Once implemented, collection processes are also effective.

The real decision to be made is about how much the Government wants to impact on the motorist, which raises the issue of ring-fencing revenues. Should that money go back to benefit motorists in the form of improved roads and public transport?

Traffic management charges encompass many measures, including parking charges. They are viable sources of income, and modern technology means that the cost of collection is relatively low and enforcement performance is high. However, implementation decisions are political and will affect motorists.

Mr P Doherty (IRRV):

The economic impact on city centres is also relevant, particularly in an area such as Northern Ireland in which 60% of the population work in Belfast. That figure may be wrong; however, the economic impact of such decisions must be considered.

Mr McQuillan:

On that point, how would such a measure work in Northern Ireland? Could it work?

The Chairperson:

We would start somewhere and then roll it out.

Mr P Doherty (IRRV):

It could work. London is not the only example. Durham is a small city in the north of England that introduced congestion charges. The decision to adopt traffic-management measures comes back to what you want to achieve and what would its economic impact would be.

If, for example, a congestion charge were to be introduced in Belfast — which, going by this morning’s evidence, could certainly do with such a scheme — half of the workforce might suddenly stop coming into the city centre and move their places of employment — if that were possible. Although that is an exaggeration, such a scheme would have a major economic impact on city. As we said earlier, in addition to deciding what you want to achieve, it would be important to undertake an overall economic impact assessment. However, to answer your question, it could work. Given the one-way systems in Belfast, it would be quite easy to position the charging cameras at various entrance and exit points in the city.

Mr Magor:

Administration is no longer an issue. The real issues are economic and the impact on motorists and how they should be treated.

Mr P Doherty (IRRV):

It would be a major political decision.

Mr Magor:

There are numerous successful methods to administer such a scheme.

The Chairperson:

You mentioned the need for education and the raising of consciousness regarding green issues, but revenue streams can be protected for that purpose.

Mr Magor:

The Government underestimate the enthusiasm of the majority of the public to participate in recycling and the improvement of the environment.

They underestimate how strongly people feel about that, but the research must be done.

Ms Purvis:

How would those people who do not pay rates be incentivised?

Mr Magor:

People use local-authority services, so if it were done at a local level it would be no different to any other rewards card. There are loads of ways in which it could be done; incentives could be offered in partnership with commercial organisations. People could use their green credits in partnership with, for example, Tesco. There are loads of different ways of providing incentives but not enough work is being done in partnership with the private sector. Mr Doherty mentioned plastic bags. Local authorities could work more effectively with the private sector to deal with packaging and other green issues. Those issues are often considered to be insurmountable. I do not think that they are, although not enough innovation has been applied to them.

The Chairperson:

Mr Doherty, did you indicate that you could prepare a paper for the Committee?

Mr P Doherty (IRRV):

Yes, we can do that.

Mr Magor:

The general principle of land value and direct land taxation is to tax the land, whether it is improved land or otherwise. Generally, land value taxation is applied to unimproved land on the concept of highest and best use. The tax is determined based on what the highest and best use of a plot of land is. The person who owns the land pays the tax. That sounds simple but the theory is that the taxable burden is passed through the hierarchies of ownership and occupations on that land.

If one was to start with a clean sheet of paper, one would start with land tax and consider an improved land tax — which is effectively a property tax — after a number of years. The land-tax theory would work for owner occupiers — where single plots of land are built on — and for land in a building. Countries in the new Europe, for example Lithuania, have a successful land-tax system which works well.

However, in a mature city such as Belfast, the introduction of a land tax would be difficult. There would only be around 15 tax payers because the ultimate and absolute owners of the land are a small amount of people. That is a problem in a commercial sense because the level of land tax would have to be so high to match the current yield of the rating system for non-domestic properties. The tax payer would have to defray that tax through the various levels of ownership.

The practical side of how that would work is interesting. I am giving a paper on it to Oxford City Council, where I used to work, because the controlling group there are interested in land tax. Oxford is a classic example of a place where, if a pure land tax were introduced in the city centre, there would be six tax payers paying an enormous tax bill, and they would all be colleges of the university. The current rates bill for the properties in Oxford city centre, which include Marks and Spencer, office blocks and a shopping precinct, is enormous. The owners of the land would be faced with a massive tax burden that they would have to quickly defray. I have not seen any examples of how that would work.

I have looked at the Pennsylvania study and it is quite misleading. Land tax has not been collected in that way in Pennsylvania. When problems came along they were not taxed; only the easy problems were taxed. If land tax is to be introduced, the impact on the non-domestic sector must be considered. It must be considered whether land tax can give the same yield of non-domestic rates for the same plots.

If land tax were accepted as a principle, it could be introduced into the domestic sector tomorrow because the plots of land are identified and the value of the land is easily achieved. However, the big yield is non-domestic. How would that be replaced with a land tax? I will ask that question in my paper to Oxford City Council, and it will be interesting to see how that is answered.

The Chairperson:

At an early stage, the Minister of Finance and Personnel identified that as being worthy of consideration. That is perhaps as strongly as that could be put. However, there have been some interesting papers and discussions on that subject. Perhaps your own paper will add to the discussion.

Mr Weir:

There is an added complication with introducing a land tax in Northern Ireland. Land law across the whole of Ireland is radically different to that in England. Registration of land is less frequent and the law is much more complex — massively more complex from an administrative point of view. It would present even greater problems than the various difficulties that you have described in other parts of the United Kingdom. It would be next to impossible.

Mr Beggs:

I want to ask about the non-domestic sector. I am interested in dealing with the sizeable land-banks that have been created. These are cases where land has planning and general approval for building for domestic purposes, but where the landowner has just sat on the property.

Are there any complications in introducing some sort of tax that would encourage the landowner to introduce that land into the housing sector?

Mr Magor:

Over the years, there have been various taxes related to that problem. There have been many attempts to try to tax vacant sites. Taxing them would not present a problem. If there is vacant land that is not built on, to tax it to its highest and best use would encourage the use of it.

There are different views on that; but if the tax is set high enough, a point will be reached where it is cheaper for the landowner to develop the land than to continue paying the tax burden. That is a viable new source of revenue for Northern Ireland — and GB for that matter — if the Government felt strongly enough to take the bull by the horns.

The Chairperson:

That would also discourage land banking.

Mr Magor:

It would discourage land banking and encourage good bringing land into good use.

Mr P Doherty (IRRV):

However, it would have to be a very specific, rather than a general, land tax.

Mr Magor:

How it would work would make for an interesting piece of research in Northern Ireland, particularly in Belfast. One looks around and sees massive potential for development in the city. It is certainly a viable option.

The Chairperson:

Let us move on to the subject of derelict land.

Mr Magor:

Derelict land falls into the same category. There are always problems with contaminated land and the definition of derelict land. If land can be put to use, and if it has no problems with contamination or other inherent difficulties, a derelict land tax could work in exactly the same way to encourage landowners to bring that land into use. The concept of highest and best use could be applied here also. It would have an interesting effect.

Mr P Doherty (IRRV):

Sir Michael Lyons, in his report, saw that as something worthy of further research.

That is concludes our evidence.

Occasionally, it would be useful to be a little provocative in some of the analyses. Members have probably gathered by now that the subject matter is not easy. I used to say that anyone who worked in rates for too long eventually went mad. There is probably some living proof of that around.

Rates inevitably get mixed up with issues such as equality agendas, and so on. It also raises notions of fairness. Just to be provocative, I suggest that quite a few economic crimes have been carried out in the name of fairness. Sometimes, it is useful to take Scrooge’s approach and be suspicious of certain proposals that merely amount to an excuse to pick people’s pockets.

I have gone through the various options that have been identified by the review of domestic rating and the consultation report, many of which the Committee has already discussed. I am not sure how the Committee wishes me to proceed. Members have the paper in front of them. If they want me to go through it, I am happy to do so. Instead, they may wish to choose issues from the paper for discussion.

The Chairperson:

I shall invite members to ask questions. In order to economise your time and effort, Mr Hewitt, perhaps you could highlight the particular issues that you would like the Committee to consider.

Mr Hewitt:

There are issues about how broad the range of taxes should be upon the people who live in the jurisdiction. That comes down to caps and floors, and so on. Theoretically, under the current system, every household could pay a different amount for essentially the same services. Therefore, the range of taxation could be extremely large. For example, 20:1 could be the range of figures. Essentially, local Government and the regional Assembly are there to provide services. Taxes are there to pay for those services. We must not forget that we pay for services. It is not a good idea to disconnect totally the services that are consumed from the amount that is paid for them, because people then feel that they are being punitively taxed for the consumption of what are, ultimately, relatively few services. Therefore, the Committee must contemplate how big the range of taxation should be.

The water-tax proposals, for example, are a precise illustration of that because those proposals are essentially based on the rating system. In fact, for all intents and purposes, they are the rating system. When I spoke to another Committee, I said that if the word "petrol" were used instead of "water", one person, when asked at the pumps about the value of his or her house, would be charged £10 per litre for petrol, while another would be charged just £1 per litre. That is the sort of situation that could arise. Ultimately, all of that must be paid for. However, the importance of ranges must be kept in mind.

There is no argument about whether there should be rating of vacant domestic property. Valuable assets should not be derelict or unused.

There are various amendments to the rating scheme. I have introduced a matter that is seldom brought into the light, which is the parity principle. The idea is that as long as the Assembly does not depart vastly, though lavish expenditure or taxation, from the tax burdens that are borne by the rest of the UK, it will benefit, because the deal is that any deficits in the Budget will be made up by the UK taxpayer. If the Assembly is lavish in discounts and abatements, or in the services that it provides, it will start to stretch that principle.

Perhaps that principle is not as important to the Treasury under devolution as it was under direct rule. Under direct rule, people were reminded about it from time to time, and it is worth bearing that in mind.

I heard the argument about the early payment discount. In the private sector, if a company allows people to spread the cost of paying for something over time, it charges a fee for the privilege. Car insurance is a good example; people can pay for it in 10 or 12 instalments, but they usually pay more than they would if they paid the full sum up front. However, from what I can see, we give a generous discount to people who pay up front.

A graduated tax system was mentioned. Members can see how that will operate. You can defend an upward graduation to some extent because it is progressive. A downward graduation will inevitably be a bit regressive. At the end of the day, that is a policy decision.

I was interested to hear what was said about the single person discount. When you start giving almost automatic discount to particular groups, the situation becomes very difficult, because lots of people who are not really entitled to that discount will claim it. In general, I am hostile to automatic discounts of any sort — they contain too much deadweight.

An enhanced discount for framers was mentioned. To be provocative, perhaps one way forward on local taxation is, rather than to keep thinking about narrowing the tax base, to think about broadening it, but lowering the rates. You would bring more people into the net, and, therefore, you can charge less, instead of taking people out of the net and having to charge more those who are left more.

There are issues about whether agricultural land should continue to be entirely exempt from rates. Why should we give a special privilege to that asset as opposed to others? Those issues are worth thinking about, and members should not close their minds to them. They pose difficulties, and there are arguments against them, but the general principle of spreading the tax base widely is a good one. It brings people in and engages them with the services that they consume. It starts to get away from the special pleading, or what economists call "rent-seeking behaviour", among individuals, where they attempt to change the system in such a way as to confer a particular benefit on themselves. The energy is going into changing the system, rather than going into generating the wealth to pay the taxes that would otherwise fall on them. It is worth bearing that in mind.

Banding was mentioned, and that is a way of keeping down the range of the tax payment, to some extent. It must be regularly updated, as the previous witnesses said.

Local income tax has always been on the cards, but it has practical difficulties, as the Committee heard. You would need primary legislation in order to introduce it. You cannot order HM Revenue and Customs (HMRC) to do anything at the moment. Frankly, given the state of HMRC, I am not sure that it would be capable of doing it at present. There is an issue of paying according to residence, as opposed to workplace. The legislation would need to be taken through Westminster.

The Scottish Nationalist Party (SNP) is attempting to introduce a variation of local income tax — 3p in the pound — by 2010. As the previous witness said, instead of rushing into introducing that sort of tax, you can watch the interesting experiment that is taking place on your doorstep and see how it proceeds.

Westminster launched a shot across the bows by saying that, if the Scots do away with the council tax, they will lose the council tax rebate, which is paid by Westminster. They would lose £450 million of council-tax rebate, and they would have to make up that amount. There is an argument for saying that there are still poor people in the local income tax system, and Alex Salmond seemed to think that efficiency savings would make up the £450 million.

The Committee must think about all the consequences that would flow from introducing local income tax, including the economic consequences. As I have said, taxes on income inevitably are taxes on employment or taxes on effort. That is not something that you need to rush into. I would have the same view on income-tax varying powers.

There are issues of legality surrounding a local sales tax. Looking back, the Northern Ireland Administration in the 1920s or 1930s did have the power to vary sales taxes in Northern Ireland as compared to sales taxes in Great Britain, but it was never utilised. I would need to look at that again, but it was mentioned by Professor Lawrence in his book. A lot of those things are lost in time.

The poll tax is really a medieval concept. It worked in medieval times because it was difficult for people to move around then — most people lived their lives within about five miles of where they were born. However, in a modern society when a burden is put on individuals, they will move and be difficult to track down. The poll tax was a reasonable principle for medieval times but probably not for our times.

I have heard both sides of the argument for a tourist tax, and there are merits in looking at that. I do not know whether the tourist market here is matured to the point where it would be able to take that strain. It might be a very modest strain. There would also be issues surrounding the tourist attractions: where are they and would they benefit from the tax? Would it be done at a regional level where the money would be distributed out on population as is done with the non-domestic rate? Again, it is worth thinking about, but I do not think that it would raise an enormous amount of money.

We sometimes get a bit mixed up about the purpose of road charging: is it to raise revenue or is it to deal with traffic management? The basic idea is that road space is, at various times of the day, of different value to different people. At rush hour the road space is very valuable indeed, and in the middle of the night it is not very valuable. There would be tolls and charges at different times of the day. I was in Spain recently, and the toll road changed from its summer toll rate to its winder toll rate on the recognition that there are not going to be too many tourists in the winter. However, the road was empty on either rate, because the traffic was using another road — but that is a policing difficulty.

Land value taxation is much beloved by economists because it is, theoretically, very efficient. It does not disturb other choices. The practicalities are that you never start with a blank sheet of paper; when introducing the tax you always start with some distribution of property rights, and that will shift the burden from property owners to landowners. There have been occasions when the UK was tempted to introduce some sort of land value tax. The first occasion was in the first part of the last century and led, in part, to the crisis with the House of Lords and the passing of the Parliament Act 1911. There was another attempt just before the Second World War, when it actually reached the statute books but was never implemented. There are power struggles between different groups in society when you start changing the burdens of taxation within society. However, in principle, it is a very efficient way of taxing as it does not disturb the choices that people make.

That is a very quick run through my submission, and I am happy to answer any questions.

The Chairperson:

Very well done, Victor.

Ms J McCann:

I did not hear the green tax mentioned.

Mr Hewitt:

I have missed out a few.

Ms J McCann:

What is your opinion on green taxes?

Mr Hewitt:

Green taxes are a bit like the road taxes in some ways. You would be trying, first and foremost, to modify people’s behaviour with green taxes. They are not just revenue-raising mechanisms. In principle, they could be neutral in the amount of revenue raised. You would be trying to stop people from misusing resources over time. That could be done either through the penalty route, which seems to be the route that the UK is taking, or the incentive route. As explained by the previous witnesses, if you get the incentives right, that is the best route to take.

Ms J McCann:

Does that increase revenue?

Mr Hewitt:

Yes, if you want it to. The objectives of a policy must be set out. Is the primary objective to change people’s behaviour so that they do not use as much material, they manage their waste properly and they do not abuse the amenities, or is the objective to raise revenue? If the intention is a mixture of both, then there is a question over the weight that is applied to each one. Often, the behaviour can be changed with a level of taxation that will not bring in a vast amount of revenue. Therefore, if revenue is the dominant feature, people must be charged more for their behaviour than is strictly necessary.

The Chairperson:

Then we are penalising people rather than offering them an incentive.

Mr McQuillan:

The discount for owner-occupiers, which is a bad title to begin with, is really about second homes. How do you go about addressing that problem, particularly on the north coast?

Mr Hewitt:

As the owner of a second home, I declare an interest.

Is it a good idea to discriminate against those with investments and assets? People invest in a second home, which is an asset. It is often also used for lifestyle purposes. Is a second home an asset that produces adverse affects in the local area and therefore something that requires an additional rate of return in order to compensate? Possibly it is.

As mentioned earlier, there is no real evidence or research base on this issue, so we have to look at the experiences of other countries. However, the circumstances of other areas are different, so I am always cautious about saying that we should definitely do something when there is no great evidence base.

The problem on the north coast is that local people are being priced out of the housing market. The other side of that is that the owners of second homes are not putting as much strain on local services as local residents because they are not there most of the time. That goes back to the very principles of taxation; on the one hand there is a fairness agenda on taxation that says that ability to pay is everything, and on the other there is a benefit principle that holds that there should be a correlation between services consumed and the amount of tax paid for them. Over the centuries, the struggle between those principles has been the source of most of our difficulties in taxation. Generally, the ability-to-pay principle has won, which is why we have progressive taxation. However, where tax is directly linked to local services the benefit principle is legitimate as it is more transparent. When you make national taxation payments, you receive a bundle of goods from central Government — such as defence and overseas representation — for which consumption cannot be quantified. However, with local services such as collection of rubbish — whether it is once a week or once a fortnight — there is a much more intimate relationship, and people look to see what benefit they are receiving from the tax that they are paying. That is when the benefit principle kicks in. It is a very difficult area.

Mr Beggs:

You mentioned the issue of land value taxation, and that if there were a blank canvass there would be more freedom to come up with a workable system. I am concerned that if land value taxation was applied in a blanket fashion, there could be a detrimental effect on local jobs and small businesses. I previously worked in a textile company and another fabrication company, where survival seemed to be the main goal. Such businesses experience difficult times, and if land value taxation were applied in a blanket fashion, some companies would be pushed over the edge. First, do you think that such a policy would adversely affect existing businesses? Secondly, can land value taxation be applied solely to areas zoned for housing that have not been developed by those who are land banking?

Mr Hewitt:

For businesses, it depends to a large degree on the extent to which the tax burden can be transferred. In the first instance, the landowner is legally required to pay the tax, but there is a concept in economics that is known as the incidence of taxation, whereby the people who end up paying the tax are not necessarily those who are legally liable to foot the bill. It is about whether the landowner can pass those charges effectively to the people who utilise the land or who have property on the land. There are difficulties with people who own the land and utilise it for business purposes. As a result, there will be a hit on the capital value of the land. It really depends on whether the local market is competitive, whether you can shift around, whether many landowners are trying to get people onto their land in order to pass the tax on. It is difficult for those landowners to pass the tax on. If there is a monopolistic situation, if there is not much movement, landowners will pass it on. Rents increase if taxes are reduced, and vice versa.

Land value taxation is an effective way of curbing speculative holdings, because the speculators are penalised if they do not bring the land into use quickly. That is good for areas that have become rundown or derelict and where a lot of land is sitting about that is not in productive use. It is partly not in productive use because there is no great incentive. It might be possible to isolate those areas. I am talking with some degree of ignorance here, but our ability to map the ownership of land in Northern Ireland is a little patchy. It can probably be done in the domestic sector, because of the various deeds, and so on, but the non-domestic sector may be more difficult. Usually the ownership of such lands goes back into history, depending on which robber baron arrived first. I am unsure whether Land and Property Services has an up-to-date picture of who owns what land in Northern Ireland.

Mr O’Loan:

You did not give a definitive answer on the maximum cap. The revenue foregone is about £2·5 million. Is that figure worth getting excited about? What are the attractions in a higher cap, with possibly a taper on the cap?

Mr Hewitt:

All sorts of combinations can be used. However, it comes down to whether a small number of people will be crushed with a tax, and whether they are in a position to pay that in order to generate a relatively small benefit for the rest — it is a distributional thing. I gave an average of about £1,000 for the 2,500 people who are exempted above the £500,000 threshold. There is a huge range within that, but there were big ranges in the old rating system as well. There would have been some very high net asset values (NAVs) on domestic properties, and a few people paid around £6,000 in rates. It is a distributional thing. It is about whether you want to bring everyone in, or whether there are some groups of people — who are associated with high income on the basis of high property value — who are well able to bear the burden. I do not know that the correlation between high income and high property values is as precise as some might think. For example, a widow may inherit a large house, but the income level will go down. That effectively shifts the burden onto those who are asset rich and income poor.

The Chairperson:

Victor, you have commented on the menu of options that DFP has outlined. Have you any views on other options that perhaps are not on that menu?

Mr Hewitt:

You may be aware that we were asked to do some work on the issue of industrial derating, and subsequently on the small-business relief scheme. I do not want to pre-empt that. We have made some preliminary proposals to the Department. However, the full range of the work will probably not be completed for another week or so.

Part of our terms of reference was to consider alternative revenue sources. We have done so. Some sources that we have considered are in the sort of categories that have been mentioned, and some of them are outside that altogether.

We have opted for revenue raising, rather than modification of behaviour. We have opted for what would be an effective tax. An effective tax has to have a tax base that does not walk away, which is why houses are very popular for taxing. If additional taxes are introduced, people will do their best to evade them by one means or another. Therefore, we had to examine effective taxes that cannot be escaped from too readily. That does not mean that the measures that we are suggesting cannot be evaded, but they are not as easy to escape from as some may think.

We have carried out some interesting revenue projections — I am teasing you a little bit, but I do not want to reveal too much about that at the moment. It is quite possible to raise substantial sums of money through systems that are quite difficult to evade. The burden will be spread pretty widely; it does not fall on particular individuals. It does fall on a group of individuals, but that will be a very broad group of individuals. Therefore, there are other revenue-raising mechanisms.

We have had to bear in mind the restrictions of the legislation, which basically states that a tax of a similar character to a national tax cannot be introduced, nor can a national tax be modified. However, that still leaves opportunities. We did consider window taxes, but that was tried some time ago. There also used to be clock taxes, and that is why clocks were in town squares — people would not keep them in their homes because they were taxed on them. Therefore, a lot of measures have been tried over the years.

The Chairperson:

I thought that the small windows in traditional Ireland had to do with the climate and managing the climate.

Nothing has particularly leapt out from the research on this issue. Obviously, we are not finished yet, and we may want to think a bit further about it. This ground has been ploughed over many times throughout the world. If there were hidden gems out there, they are liable to have been uncovered by now. The reality is that there probably are not. It comes down to the issue of finding an easy way to collect the money, in which case something like property is the obvious choice, because a house cannot be put in a Swiss bank account. Is that the best way of doing it though?

If you go to the other extreme, and try to go for the individual, there are all the difficulties that generally go with individual taxation. If you go for assets you get into the kind of mess that we have with capital gains tax at the moment. Various things have to be done in different asset classes, such as hedge funds, which badly damage the small-business community.

Mr McQuillan:

Has any thought been given to an urban tax and a rural tax, given that rural people have fewer services?

Mr Hewitt:

There are certainly some interesting views from the United States about that. There is always a town and country distinction in America. There are something like 14,000 or 15,000 taxing jurisdictions in America, be it the state, the county, the city or whatever. I found, while travelling around some of the rural areas in America, that there was quite a lot of resentment in the rural community about having to pay for the education of children who live in the towns. People felt that their contributions should better mirror the services that they consume.

That takes me back to the distinction between the benefit principle, and the ability-to-pay principle. Another way to look at it is: does it cost less to provide services to people in rural areas? It probably does not, because there are economies of scale in towns. You can provide refuse collection, for example, much more efficiently in urban areas with a lot of people, and relatively small distances to travel between collections.

I am not really answering your question, but I am bringing onto the table issues that inevitably come up in this argument.

The Chairperson:

Victor, that was much appreciated. It was straight and to the point, and very helpful. Thank you very much.

Mr Hewitt:

If there is anything that ERINI can do for the Committee, please let me know.

The Chairperson:

That is excellent. Thank you.