Tax devolution – a help or hindrance to the UK’s cities, regions and nations?

The devolution of tax-setting powers across the UK is a transformative issue meriting wider debate than at present.

That was the overwhelming view of a panel of experts who gathered at 10-11 Carlton House Terrace for the latest CIOT/IFS debate on the future of the UK’s tax system, chaired by Helen Miller from the IFS.

(Pictured left to right are; Dr Neil Lee, Helen Miller, Joanne Walker, Julia Goldsworthy and David Phillips)

A piecemeal approach to tax devolution over the last two decades has seen a myriad of tax powers devolved to the UK’s constituent nations. However, England remains an outlier, with a tax system decided from the centre with little respect for regional priorities.

David Phillips, Associate Director at the IFS covering devolution and local government, set out the rationales for tax devolution, which have the ability to empower communities, incentivise economic growth and be more responsive to local investment priorities.

He then considered the risks and challenges of devolution. He questioned whether significant capacity existed at a sub-national level to support the devolution and implementation of tax setting powers. He noted that while devolution is an enabler of choice, it could also incentivise tax competition, with authorities seeking to lower their tax rates to attract investment, to the detriment of the tax base and public spending.

When considering the suitability of different types of taxes for devolution, in theory, Phillips noted that property taxes were the most attractive option. But the inequities of property prices across the UK (and thus a hugely differing tax yield) posed a problem, with receipts heavily concentrated in the south east of England.

Personal income taxes had the benefit of being easily identifiable, but diverging rates within jurisdictions had the potential to encourage avoidance, especially among higher earners.

Dr Neil Lee of the London School of Economics said that despite a global trend towards devolution since the 1970s, there was little clear guidance in theory of the costs and benefits of fiscal decentralisation. While the majority of research was inconclusive, there were some examples when tax devolution had been found to deliver benefits.

For tax devolution to be effective in practice, Dr Lee warned that local authorities and sub-national regions needed to have strong leadership in place to deliver real benefits along with public support. The UK’s quality of local governance had declined in recent years, leaving local government in many areas not up to the task.

Joanne Walker of the CIOT considered the impact of tax devolution in Scotland, noting that fiscal devolution had existed in some form or another since the Scottish Parliament reconvened in 1999.

The majority of discussion and debate north of the border had focused on powers devolved in the Scotland Acts of 2012 and 2016 (Scottish Income Tax, Land and Buildings Transaction Tax, Scottish Landfill Tax and (the yet to be implemented) Air Departure Tax).

Together with the Institute of Chartered Accountants of Scotland (ICAS), the CIOT had established the Scottish Taxes Policy Forum to review Scotland’s tax powers in the 21 years since Scottish voters backed the creation of a Parliament with tax raising powers.

Its report – published at the start of the month – had concluded that there needed to be a more logical and consistent framework for the devolution of tax powers across the UK, with a greater emphasis on improving public awareness and understanding.

The CIOT had commissioned an opinion poll that had found that 84 per cent of Scots believed they needed better information about how taxes were decided in Scotland.

The same survey had also found a widespread lack of understanding over which tax powers were the responsibility of Westminster and Holyrood, despite the growing importance of devolved taxes to the Scottish budget.

Walker noted that the forum had considered a range of issues relating to the operation and performance of the devolved taxes, their interactions with the wider UK system and the attitude of the Scottish public towards tax devolution.

Julia Goldsworthy, director of strategy for the West Midlands Combined Authority, said that combined authorities, established on a regional scale, were set up nicely to empower fiscal devolution.

However, in the West Midlands, the current focus was less on the devolution of existing tax powers and more on the generation of new revenue streams.

Tax devolution, she argued, needed to be viewed as a process and not an event. Consideration needed to be given to the impact of tax devolution on other revenue streams and the ability to attract both public and private investment.

Goldsworthy also suggested that a longer-term approach to revenue planning was necessary to remove day-to-day political expediency from the process.

During a Q&A session, the panel were asked whether tax devolution was a distraction from the day-to-day business of running local government. They were also asked if the constraints on Scottish income tax devolution had increased the scope for tax planning and avoidance and whether a wider debate across the UK on the devolution of extra powers other than revenue-raising was needed to empower local democracy.

Links to the audio of the event, together with presentation slides, can be accessed below.

Introduction from Helen Miller, Associate Director (Tax) - Institute for Fiscal Studies

David Phillips, Associate Director (Devolution and Local Government) - Institute for Fiscal Studies, and Dr Neil Lee, Associate Professor - London School of Economics (plus slides)

Joanne Walker, Technical Officer for Scottish Taxes - Chartered Institute of Taxation, Julia Goldsworthy, Director of Strategy - West Midlands Combined Authority and Q&A session (plus slides)

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