PRESS RELEASE Issued by: Councillor Stuart Kelly Leader, Liberal Democrat Group Date of Issue: 12 January 2003 Contact phone number:0151 653 9077

SCRAP COUNCIL TAX
'Wirral bills topping £1000'
'Council Tax system 'fundamentally flawed'

Wirral Liberal Democrat Leader Councillor Stuart Kelly today set out his Party's alternative to replace the unfair Council Tax. The move followed the national launch of the Liberal Democrats' document 'Scrap Council Tax' and its 'Axe the Tax' campaign.
Councillor Kelly said,
"With average Wirral increases since 1997 of over 70% and with average bills topping £1,000 Council Tax has now become the most unpopular, unfair tax in Britain today. The Audit Commission has called the Council Tax system 'fundamentally flawed'. A pensioner can pay as much as a cabinet minister."
The Liberal Democrats propose a new Local Income Tax, set at an average of 3.75p, to replace Council Tax. Based on people's real ability to pay, the move would mean tax cuts for millions of pensioners and ordinary families and savings on bureaucracy of at least £300 million.
"Local Income Tax is a fair, efficient, tried and tested method of local taxation. It is already used in many other countries around the world and works very well. Most importantly it is directly related to the ability to pay. Our plans for LIT will be a huge advance for most people - 70 % will pay less or be unaffected.
" Councillor Kelly added,
"Britain's poorest 10% pay four times more of their income in council tax than the richest 10%. For pensioners, the poorest 20% pay nearly six times more of their income than the richest 20% non-pensioners.
"In a country where the average household income is around £21,700, a local income tax based on the ability to pay, is the only fair means of raising revenue.
"By using the existing income tax system, we can save at least £300 million on bureaucracy alone. And local income tax doesn't need a costly benefit system - it has fairness built in."
The Local Income Tax plans include:
A tax free personal allowance of at least £5,000 on implementation
No rise in the overall tax burden
Using the Inland Revenue to assess and collect local income tax
Estimated savings of over £300 million a year on bureaucracy

Notes to Editors
1. A copy of the Liberal Democrats' plans to introduce a new Local Income Tax to replace Council tax is below
2. The Liberal Democrats have also launched a new website www.axethetax.prai.co.uk setting out their policy on Local Income Tax and inviting people to comment.

SCRAP COUNCIL TAX

Liberal Democrat plans to replace Council Tax with a Local Income Tax

"It's about fairness"

January 2004

Contents

i. Summary -It's about fairness

ii. Why Council Tax has to go

iii. Why Local Income Tax to replace Council Tax

iv. How a Local Income Tax Works

v. Council Tax Bills versus Local Income Tax Bills

vi. Local Income Tax and the Balance of Funding Review

vii. British Politics and the Council Tax Battle

Annex 1 - Frequently Asked Questions

Annex 2 - Getting to a 3.75p rate as averageLIT

Summary - It's about fairness

Council tax is now the most unpopular tax in Britain today - because it's the most unfair tax. Worse still, council tax, as part of a system of local government finance, was described by the Audit Commission last December as "fundamentally flawed".

So a major question for all Britain's political parties is, how do you propose to reform council tax, and the system of local government finance?

For Liberal Democrats, the only credible answer is to scrap council tax completely, and replace it with a tax related to ability to pay - a local income tax. This paper sets out our current thinking on implementing this policy, and as such forms part of the Liberal Democrat submission to the Government's Balance of Funding Review, being conducted by the ODPM. In Scotland, the Partnership Agreement with Labour commits the Executive to establishing an Independent Review of Local Government Finance, and Scottish Lib Dems will put the case for LIT to that review. Key parts of our package are:

• To scrap council tax, replacing it with Local Income Tax at 3.75% - cutting the tax burden overall for most pensioners and households, with no rise in the overall tax burden
• To use the national income tax system to administer local income tax, saving much of the cost of collecting Council Tax and operating Council Tax Benefit, estimated for the UK at over £650 mn (a net saving after Inland Revenue extra costs of at least £300 million)
• To have a tax-free personal allowance for local income tax of at least £5,000 (for over 65s, at least a £7,000 allowance) when implementing
• To cap an individual's income that can be taxed by a local income tax at £100,000 per annum.
• To allocate £1.7 billion from proceeds of our proposed new national 50p income tax on incomes above £100,000 to Local Government Grant support in order to keep Local Income Tax to just 3.75%, ensuring local taxes on most pensioners and the lowest paid are cut compared to Council Tax.

Why Council Tax Has to Go

Unfair

From the Devon council taxpayers' revolts to the Chancellor's panic council cash injection in the Pre-Budget Report, the evidence is clear: council tax is the most unpopular tax in Britain today.

Council tax's unpopularity springs from its basic design fault: its unfairness. Most significantly, the banding system puts a ceiling on what the richest pay, and a floor under what the poorest pay. This problem is exacerbated by the inefficient council tax benefit system and the fact that your home's council tax band is totally unrelated to your income. People on low incomes can pay more than many top earners. Nationally, the poorest 10% pay over 4 times more of their income in council tax than the richest 10%. The poorest 20% of pensioners pay nearly 6 times more than the richest 20% of non-pensioners, as a proportion of their income.

While the Conservatives must take the blame for introducing such an unfair tax, Labour have made it worse, partly by inaction and partly by their over-centralised control of the council grant system. Average Council Tax bills have already gone by £455 under Labour, a rise of 70% - with more to come. The Tories' unfair council tax has got worse under Labour.

Fundamentally flawed

Council tax is not only unfair. It undermines local accountability. In its December study, "Council Tax Increases 2003/04 - Why were they so high?", the Audit Commission said:

"But the study also found that there are fundamental problems with the way council tax operates. Small changes in spending - up or down - can have a big impact on council tax rises. There is a lack of accountability through the grant system - with councils making decisions on how money is spent but central government providing 75 per cent of the funding." The Audit Commission called on the Government "to address fundamental flaws in the local tax system"

Liberal Democrats, like the Audit Commission, believe the Government's current Balance of Funding Review provides the opportunity to tackle these fundamental flaws in the system of local government finance - and at the same time, tackle the unfairness of council tax.

Why a Local Income Tax to replace council tax?

Liberal Democrats believe local income tax is the best alternative to council tax for 5 reasons:

• Fairness - local income tax has fairness "built in", as it is related to ability to pay
• Efficiency - it's cheaper to administer, needing no special bureaucracy or benefit system
• Decentralisation - it allows national income tax to be cut, with tax power pushed down
• Greater accountability - by raising tax closer to people, it strengthens local democracy
• Tried and tested - international experience is successful, from the USA to Sweden

Fairness

Britain has an extremely unfair tax system overall.

Taking all taxes, the richest 20% of the population pay 34% of their income in tax compared to 42% for the poorest 20%. Of all major taxes, council tax is the most unfair.

On the other hand, income tax is the fairest tax. With personal allowances taking the poorest out of income tax, the system is progressive, with the top 10% of income taxpayers, paying 52% of all income tax. Replacing Britain's most unfair tax, with our most fair tax, makes tax overall more progressive.

Efficiency

Council tax requires two special bureaucracies - to collect the tax and to operate council tax benefit. In 2003/04, in England alone, the total administration costs were £569 million. Local income tax "piggybacks" on an existing bureaucracy - PAYE - and as local income tax has fairness built in, it needs no benefit system. This will save at least £300 million every year.

Decentralisation

The other political parties have started to talk about "new localism" and "decentralisation" even though they both have a bad record on giving power to local people. Yet if this is to mean anything, it must involve taking tax power away from Whitehall and down to local councils. Local income tax allows this. National income tax could be gradually cut, enabling local income tax to rise, penny for penny. No other tax allows this transparent and genuine decentralisation.

Accountability

Accountability would be enhanced under a local income tax for 3 main reasons. First, as the system rolls out, more of a council's budget would come from local people, and less from central grant: councillors won't be able to blame Whitehall. Second, the collection system makes sure taxpayers know their local rate, and how it compares (see later). Third, there are more income taxpayers than council taxpayers, so more people will be aware of the cost of their council.

Tried and tested

Local income tax already works - in countries with different political cultures and geographies. From conservative-minded USA and Switzerland to the more progressive Scandinavian countries, local income tax is a tried and tested form of local taxation. Countries with a local income tax include America, Sweden, Switzerland, Norway, Japan, Finland and Denmark

How a Local Income Tax (LIT) works

Local income tax would work very much like national income tax.

Councils would set their rate for local income tax and this would be added to the national rates of income tax. The Inland Revenue would administer and collect LIT, with national income tax, through the PAYE system, passing the money to councils depending on their rate.

Yet inevitably there will be some differences and some innovations needed to introduce a local income tax. This section explains those differences. Combined with Annex 1 - Frequently Asked Questions - we believe we are providing the most detailed description of a new tax policy ever set down by an Opposition Party - and we will publish even more before the election.

What income would be taxed?

Not all income. Local income taxpayers would have the same personal allowances they have for national income tax.

This means the first part of anyone's income is free from any income tax.

With the 2003/04 personal allowances an employee could have earned £4,615 before paying any local income tax, or a pensioner have income up to £6,610 before paying any LIT. We aim to implement LIT with a tax-free personal allowance of at least £5,000, and for pensioners a tax-free allowance of at least £7,000.

All other income would be subject to local income tax, except for incomes above £100,000. All income above £100,000 will be free of local income tax.

This £100,000 "cap" is proposed for two reasons. First, we are proposing a new top rate of national income tax of 50p on all income above £100,000. We wish to guarantee to higher earners that 50p will be the maximum rate they will face. Second, we are concerned that without such a "cap", higher earners would have a large incentive to move to the council with the lowest income tax rate. While distortions exist in the council tax system, we do not want to make them worse.

How would LIT be administered?

All the assessments of an individual's taxable income and all the collection would be handled by the Inland Revenue, just as with national income tax. Indeed, we aim to make the administration of local income tax as similar to national income tax, as is practical. By using the existing national income tax system, including PAYE, Liberal Democrats believe we can save over £300 million on bureaucracy, reaping the benefits of economies of scale.

However, some changes are needed, as individuals will pay different LIT rates, depending on where they live. To ensure the right amount of tax is charged, there are 2 options. Both use the PAYE system. One option involves linking different LIT rates to tax codes. The other involves abolishing the existing codes in favour of an end-of-year reconciliation process. In the White Paper prior to legislation, Liberal Democrats would set out the 2 options and consult with taxpayers, employers and other stakeholders on their preference. The two options are briefly described in the FAQ sheet in Annex 1, and we will shortly be publishing more detail for pre-manifesto consultation.

Council Tax Bills vs Local Income Tax Bills

This section provides illustrative examples of what LIT would mean in terms of actual bills faced by different individuals and families, compared to council tax bills in 2003/04. The figures for LIT are based on the Liberal Democrat system of income tax which would have produced a national average rate for local income tax of 3.75p in 2003/04. Calculations for this figure are set out in Annex 2

To understand the wider impact on people, it is worth looking at "middle income" individuals and families. In the IFS briefing, "Is Middle Britain Middle Income?", the median average gross income is £11,800, and the mean average is £16,900. For households, the median average is £21,700 and the mean average is £30,300. Most households are poorer than many people imagine.

We expect around 70% of households will be better off or unaffected by scrapping council tax.Britain's tax system will be much fairer - it's about fairness.

Notes

a) Personal tax allowances for 2003/04 have been used, e.g., the single person's allowance of £4,615.

b) Personal tax allowances for the elderly are higher and more complex. A pensioner, for example, between 65 and 74 has an allowance of £6,610, and a pensioner over 75 an allowance of £6,720. These are withdrawn at incomes above £18,300. Moreover, some pensioner couple's still get married couple's allowance.

Local Income Tax and the Balance of Funding Review

The Government have at last recognised the council tax system is not working, and has even commissioned research on a local income tax.

Renewed Whitehall interest in local income tax

The Office of the Deputy Prime Minister set up last April the Balance of Funding Review to consider whether local government could raise more of their budget locally. Now councils only raise around 25% of their finances, relying on central grants for 75% of their income. This creates what is known as the "gearing effect", by which council tax will rise by 4%, if councils decide to spend just 1% more than allowed for in the grant. If Government is to tackle annual above inflation council tax rises, it must deal with the gearing effect, either by giving councils more financial powers or centralising yet more areas of local responsibility.If Government chooses to centralise, all its pretence at public service reform will come into question.

Thus this Whitehall review is believed to be considering a range of options for new revenue sources for councils, with its meeting last October listing 12 new tax options, including a localised Vehicle Excise Duty, a local sales tax, a tourist tax as well as a local income tax.

Nor is it only Whitehall showing renewed interest. The normally apolitical Audit Commission's conclusion to their study, "Council Tax Increases 2003/04 - Why were they so high?", said:

105 So other options need to be looked at including supplementing council tax with other sources of income - for example, charging for services, return of the business rate to local control, and local income tax - or changing funding responsibilities of local government. Alternatives such as these are being considered as part of the balance of funding review.

There now appears to be more active consideration of a local income tax in Whitehall than the days following the Royal Commission on Local Government Finance in 1976 ("the Layfield Commission"), which recommended a local income tax.

With the revolts over council tax continuing, we are not surprised. Labour fears a poll tax mark II.

Fears about the Balance of Funding Review

We welcome the Review, its inclusive nature and the open-mindedness it has displayed to date. However, we are concerned that the Prime Minister appears already to have ruled out local income tax. We are concerned that one option under active consideration by Number 10 is to centralise education spending, rather than decentralise tax power.

The Review is a huge opportunity, to tackle the unfair council tax and solve the longstanding weakness with the local government finance system across Britain. Ministers' attitude to a local income tax will be the litmus test of whether they have grasped the opportunity.

British Politics and the Council Tax Battle:

What are the Labour and Conservative policies?

Council tax is now on the national political agenda.

Whether it can do the same political damage to the Blair Government as the poll tax did to the Thatcher Government, only time will tell. Yet it has become a focal point for many people concerned that Britain has become more unfair, and that the politicians are not listening.

The Liberal Democrats offer a clear, distinctive alternative with our proposal to scrap council tax, and replace it with a local tax, related to ability to pay, a local income tax. Our proposal would tackle the real unfairness felt by many. Yet it would do much more. A local income tax provides the foundations for our radical public service reform agenda, giving the financial framework for meaningful political decentralisation.

Which way will the Labour Government go?

The tensions within the Cabinet are real. On the one side there are the decentralisers, pushing the ODPM's Balance of Funding Review, considering ideas like local income tax. On the other, there are the control freaks. Scared by the council tax revolts and the schools funding crisis, the centralisers believe the only option is to attack local democracy even harder than Mrs Thatcher, perhaps by centralising all education funding.

And what of the Conservatives, the inventors of the council tax?

So far, the Conservatives have got away with having no policy. As Shadow Chancellor last April, Michael Howard was asked by the Daily Telegraph what the Conservatives would do about council tax and he replied "I don't know." Yet the Shadow Foreign Secretary, Michael Ancram, isn't worried, saying the council tax was "as fair a tax as you will find".

Oliver Letwin, the new Shadow Chancellor, seemed to have worked out a policy when he told The Independent that the Tories "may propose that the share of council budgets raised locally is increased from 25% to more than 50% and the council tax is likely to remain under their plans". Whether this means council tax bills will double under the Conservatives was not made clear by the Conservative Spokesman.

Neither the Labour nor the Conservative positions are sustainable. With the council tax set to continue to rise faster than inflation, it is an issue that will not go away.

Annex 1

Frequently Asked Questions about LIT

Q1. How would local income tax work?
Much like national income tax. People will pay local income tax through the Inland Revenue, which will administer and collect LIT, with national income tax, passing the money to councils depending on their rate.

Q2. How do you deal with the different abilities of rich and poor areas to raise income tax?
We keep an "equalisation" grant. Part of the grant councils get from central government reflects a local authority's tax base - its resource base. So poorer areas receive more support than richer ones, now. We would have a similar system to protect deprived areas.

Q3. How much would I pay under local income tax?
Like council tax, this depends on your council. In 2003/04 the average national LIT rate, to replace council tax, will be 3.75p. However, you only pay LIT on your taxable income. Thus, an individual in 2003/04 gets an income tax-free allowance of £4,615: no LIT would be paid on that. Someone earning £14,615 only pays LIT on £10,000 - £375 at the average rate of 3.75p.

Q4. I don't have to pay income tax at present. Will I now have to pay local income tax?
No. If you don't earn any income above your tax allowance you won't pay LIT either - it uses the same tax system. Over 50% of pensioners don't pay income tax now. They would pay no LIT.

Q5. I'm a higher rate taxpayer. Do I now have to pay LIT at a higher rate too?
No. Councils can set only one rate, so you will pay the same LIT rate on all your taxable income.

Q6. I own a holiday home in Devon and my home in London. Will I pay LIT twice?
No. However, to ensure owners of second homes pay a fair contribution to local services, we would levy our equivalent of business rates, local site value rates, on the second home.

Q7. How would the Inland Revenue combine a LIT system with national income tax?

There are 2 ways to combine LIT administration with national income tax:

i. One option is for an average rate of LIT to be calculated from the different LIT rates of councils. This would be added to the national rates and deducted through the year. An end-of-year process would ensure a taxpayer pays the correct amount of national and LIT. If your local authority has set a rate of LIT lower than the national average, then you will get a rebate at the end of the year. If your authority has set a rate higher than the average, then you pay a little extra.

ii. Alternatively, the existing PAYE codes could be adjusted to reflect the LIT rate to be paid by each employee. Before widespread computerisation, it was thought to be too cumbersome for employers, but tax credits suggest this could now work.

We would consult to see which option taxpayers, employers and financial institutions preferred. Both save hundreds of millions in administration - as LIT "piggybacks" on PAYE.

Q8. Would the Council get to know my personal financial affairs?
No. Only the Inland Revenue would need to know your income. The LIT system allows greater privacy as people do not have to apply for the means tested Council Tax benefit.

Q9. What about the self-employed?
Little change. The self-employed would have to say where their primary residence was, on their existing forms.

Q10. What about students?
Students only pay LIT if they already pay income tax, e.g., on holiday income.

Q11. Would LIT be difficult to enforce?
Wouldn't people evade it? No, national income tax is not avoided by the vast majority. That's one reason why national income tax revenues are "buoyant", growing faster than receipts from other taxes. Some councils still fail to collect a great deal of their council tax.

Q12. I live in one council area and work in another: which council would charge me LIT?
LIT would be charged for the local authority area in which you live.

Q13. Would LIT hide the cost of local government?
No. The reverse. With one option (seeQ8), the year-end adjustments involve refunds when a council's LIT is below the average, and extra bills when they are above. These refunds and extra bills show taxpayers how their council compares to others, and would arrive just before the May local elections. Thus, visibility of costs would increase. If consultation showed people preferred our other option - for PAYE coding changes -we would ensure the Inland Revenue sent a year-end account to each taxpayer to show the cost, along with our national "Taxpayers' Contract" showing how national government spends national taxation. Pay slips could show LIT too.

Q14. How quickly could LIT be introduced?
Within two years maximum. As it uses an existing system, the only major delays would be consultation on details and getting legislation through Parliament.

Annex 2

- Getting to a 3.75p rate

Calculating the national average for LIT, to replace council tax in 2003/04

1. The first calculation is to estimate the total yield from council tax in England, Wales and Scotland, plus the yield from domestic rates in Northern Ireland. Estimates provided by CIPFA suggest a figure of around £19 billion, net of council tax benefit.

2. The second calculation is to subtract £1.7 billion from the £19 billion above, as £1.7 billion has been assigned for this purpose from the £4.7 bn proceeds from the Liberal Democrat policy of a 50p on incomes above £100,000. Since we propose to cap LIT at £100,000, we want to ensure that some national proceeds of a new income tax rate above £100,000 are used to reduce the average LIT rate for the less well off.

3. The third calculation is to estimate the total yield from 1p on income tax, applied to all taxable income, up to the £100,000 limit for LIT. Treasury figures suggest the yield would be £4.613 billion in 2003/04.

4. The fourth calculation is to divide £17.3 bn by £4.613 bn, to get the average national rate of LIT for 2003/04 of 3.75p

The following points are worth noting about these calculations.

The figures give an average LIT rate for the UK. We will be calculating LIT rates with colleagues in Scotland, Wales and England for every local authority across Great Britain, and have already commissioned independent experts for this w ork.

· Every year both council taxes rise, as do the estimates for yields from 1p on taxable income. It is impossible to know either the net yield from council tax or the income tax base for 2004/05, and therefore the average LIT for 2004/05, but we will revisit these calculations when the figures become available.

· These figures do NOT include any estimates of savings from reduced spending on bureaucracy, or any yield from our policy of applying non-domestic business rates to second and empty homes, at equivalent rates as now apply with council tax.