Income tax would be the most promising candidate for partial devolution to local authorities, with the potential to raise an extra £19bn a year, according to a study by the Institute for Fiscal Studies (IFS).
In a report looking at tax devolution, the IFS said that devolving a flat rate of income tax could allow local discretion on funding levels and financial incentives to expand the local tax base, while limiting the degree of revenue volatility and inequality.
However, it said that there would be additional administration and compliance costs, as well as some tricky technical issues to overcome.
The report said: “Revenues from a flat rate income tax would generally be less volatile than overall income tax revenues because they would depend less on the amount paid by those with the very highest incomes – which tends to be particularly pro-cyclical, and subject to change as people migrate.”
However, it said that variation in revenues is significant enough to mean large-scale redistribution of local income tax revenues between council areas would be required to avoid large differences in funding for services.
Joanne Pitt, local government policy manager at the Chartered Institute of Public Finance and Accountancy, said: “We welcome this new research from the IFS which sets out the clear need for radical, long term change to restore sustainability of local services.
“However, we recognise that local income taxes have been explored in the past and requires political support.”
Paul Dossett, head of local government at accountancy firm Grant Thornton UK LLP, said: “Council funding is stretched to the brink and, whilst the outcome of the government’s Fair Funding and Business Rates Retention reviews are not yet concluded, many in the sector believe that these will not provide a long lasting solution to the financial sustainability of local government.
“Every local authority shares a common aim – to secure the best possible outcomes for local communities and a healthy and productive local economy. They need to be given the power to achieve this and providing some form of fiscal devolution, such as a local income tax or tourism tax – while not the perfect solution – would go some way in helping councils better support their local priorities.”
