Moving through the Gears or just Grinding the Gears: Devolution and Fiscal Autonomy for Local Government. | Professor Colin Copus, Localis Visiting Fellow
Colin Copus is Emeritus Professor of Local Politics, De Montfort University, Visiting Professor Ghent University, Localis Visiting Fellow
Introduction
Local government must remember the depressing truism of its relationships with the centre when it comes to devolution: oppositions promise, governments fail to deliver. A cynical view – maybe – but one developed from decades of experience. It is even more depressing for local government when considering that despite the word ‘government’ in its title it does not have the power to raise taxation, or other sources of finance, or to spend that money in a way any institution bearing the name ‘government’ would be expected to be able to do. As each new initiative, policy proposal or set of promises for devolution and reforming finance comes along it soon becomes mired in the minutia and detail of the existing system and how to make it a bit better. New radical proposals simply cannot be accommodated because they don’t fit the existing system. So, we never move through the gears of local government financial autonomy as simply grind them till they become jammed.
If devolution to local government in England is to mean anything, and it rarely does, we need to explore changes that will fundamentally recast the central-local dynamic and stress the ‘government’ in local government. With England already having the largest units of local government across Europe and with the current government and Labour opposition being supporters of yet more increases in council size, we have already lost the ‘local’ in local government; but can we save the ‘government’ by increasing local financial autonomy?
If local government is to be the ‘government’ of its locality, then we need to look overseas for some lessons. It is useful for us to reflect on the reluctance our centre has to explore the levels of taxation and financial freedom that exists overseas. Rather depressingly a senior MP when referring to the possibility of a tourist tax for local government bemoaned the lack of an operational model from which to build. The fact that some 120 countries across the globe have some form of tourist tax must have slipped off the radar!
So, it is alternative blindness, being prone to tinkering rather than radical reformulation and centralist thinking that blights local government financial autonomy. The big problem for those in control at Westminster is that true devolution for local government means giving power to councils that may very well be controlled by another party. For Whitehall, it means not being able to pull the purse strings of local government and oversee and control what it does. These centralist attitudes need to change. Anyone can talk devolution – but are you really ready to deliver devolution and the financial autonomy on which it necessarily stands?
The paper offers a review of some taxation powers resting with local government overseas and what that tells us about moving up through the gears of local finance. It gives examples of what an enhanced local taxation regime and greater fiscal autonomy might look like across local government in England and gives a flavour of how things could change to enhance local autonomy.
In reading this paper some may nod sagely in quiet but frustrated agreement, others will tut silently muttering ‘it’ll never get off the ground’, and others will run screaming into the hills at the very thought that local government should become ‘government’ in any classic sense of the word. But all of what follows is not a flight of fantasy; it exists somewhere in the world of local government, just not all in the same place.
Gearing or at Least Getting out of First!
Our complex, complicated and centrally controlled system of local government finance fits nicely to the old expression that “Only three people understand this: one’s mad, one’s dead and one’s forgotten”. The overwhelming temptation for any government stating commitment to local government devolution is to focus on the existing system, tinker, reform, reorganise and even ‘reimagine’! But the existing system remains after all of that has taken place.
There is, in the two main national governing parties, no real appetite for radical, fundamental and thorough-going recasting of the local government fiscal system. Why? Well, by doing that, the centre gives away control of what happens locally, and no government really wants to hand power, and taxation power in particular, to political opponents in councils across the country. As local government is so heavily dominated by national parties, which at the time of writing hold about 88 percent of councils’ seats across England (this might change on 4th May 2023, but the national parties will still dominate), the national governing party risks their opponents having powerful fiscal tools available to them. Best then just to promise devolution while in opposition and fudge when in power. But the very act of promising devolution recognises the unpleasant truth that England operates in one of the most centralised governing systems.
It is widely accepted in local government that devolution without fiscal autonomy is unworkable and unachievable. A rather muted but nonetheless useful source of support for fiscal autonomy comes in the shape of the European Charter of Local Self-Government (1985) which states in article 9.3: ‘Part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within limits of statute, they have the power to determine the rate’. Despite the Blair Government signing the charter in 1997 (some 12 years after everyone else) we are far from fully complying with the article.
Moving through the gears means ending central control and dictate of local government fiscal powers. It also means greatly extending the basket of taxation powers available to local government from which to choose, not only to generate financial resources but also as policy tools.
It is commonplace across local government globally for a sizable proportion of local tax revenue to come from one or two major taxes, sometimes up to 80 percent (OECD, 2016). That income, however, is supplemented by a range of other taxes which individually may provide only a proportion of council income, but which collectively provide valuable resources and financial autonomy. There is nothing that says that such high percentages must come from one or two taxes however, but property and income, for example, are easy to spot and tax.
But let’s consider some others. First, an old favourite: the tourist tax. Few reading this paper would not have checked out of a hotel after some business trip or weekend away and been presented with the hotel bill and, often separately, a municipal tourist tax bill. We pay and leave – no one rages in fury vowing never to return or moves to that city to vote out the scoundrels who imposed a 2 Euro tax on their stay. A tourist tax is the ultimate taxation without representation and rightly so. Tourism is not a cost free, income-generating-only process. Such taxes enable local government to invest in and replace services consumed by tourists without paying for them, such as water, transport, waste management, land management and public health (Hughes 1981, Derek, 2021). While tourist taxes will not be the mainstay tax of any council, they do provide an additional source of vital income.
Those seeking an operating model for the introduction of a tourist tax for local government in England, could well look at:
- Spain
- Switzerland
- The US
(To mention just a few.)
Tourist or city taxes are set independently by local government, normally at a percentage rate per night of stay or as a fixed rate on top of the bill. Such taxes can also be levied via restaurants, tourist attractions or cultural exhibitions and museums.
An attempt to levy a tourist tax for the commonwealth games in Birmingham resulted in the same dismal and patronising view of local government being expressed in parliament and for the idea to fall on deaf ears. One MP pointed out in the debate, that the full rate of VAT was charged here on hotel stays, hospitality, and leisure, unlike in many other countries: so, we didn’t need a tourist tax. Remind me please where VAT goes? Not the council that’s for sure. Let’s be clear: no one, absolutely no one refuses to go to a city or to return to it because they have a tourist tax. No one!
But it’s not just about making sure tourists contribute their fair share. There are a whole host of other taxes that exist for local government across the globe which include the power to levy a tax on: vehicles and roads, inheritances and gifts, patents, personal income, land value, advertising, gambling/amusements, electricity and gas consumption, business/real estate, dog ownership, sewerage and levies on water pollution, use of municipal land, agriculture land and forests, local lotteries, and, notably in US states, personal moveable property such as:
- Boats
- Cars
- Jewellery
- Airplanes
- Computer equipment
- Tools
- Furniture
(see Bafoil, and Lefevre, 2008; Dessoy, et al 2014, Cammenga, 2019)
Belgium municipalities have access to around a 100 different local taxes and discretion over the rates (De Rynck and Wayenberg, 2010).
The screams of centralist horror at what is being proposed here are deafening. But we are talking about a basket of taxes which councils themselves can choose to use, or not. We are talking about a system where the rates and types of taxes employed are at the discretion of individual councils and not something which suits the centre’s need for tidiness and control. The idea that Westminster and Whitehall know what is best for every council across England is risible. Yet we continue to operate in a system which denies councillors elected locally the use of their knowledge, connections, and appreciation of the needs of their area to design systems of taxation to meet those needs.
It is time to give our councillors the fiscal tools they need to get on with the job and a basket of taxation powers to choose from to suit their areas and for the centre to get out of the way. Now that really is devolution: anyone?
References
Bafoil, F. and Lefevre, C. (2008). Sub-national Governments in the European Union: Responsibilities, Organization and Finances. Paris: Dexia.
Cammenga, J (2019) “State and Local Sales Tax Rates, Midyear 2019,” Tax Foundation, https://taxfoundation.org/state-sales-tax-rates-local-sales-tax-rates-midyear-2019/
Derek, M (2021) Why Tourists should pay taxes in Lackowska, Szmigiel-Rawska and Teles (eds) Local Government in Europe: New Perspectives and Democratic Challenges, Bristol University Press, Bristol, Ch15, 270-283
Dessoy, A., Erauw, A. and Lafontaine, F. (2014). Lokale financien gemeenten 2014. Brussel: Belfius.
De Rynck, F. and Wayenberg, E. (2010). Belgium. In E. Page and M. Goldsmith (Eds.), Changing Government Relations in Europe: From Localism to Intergovernmentalism (pp. 14-29). London: Sage.
Hughes, H (1981) A Tourism Tax — The cases for and against, International Journal of Tourism Management, 2:3, 196-206
Organisation for Economic Co-operation and Development (OECD) and Organisation United Cities and Local Government (2016) (UCLG, Subnational governments around the world: Structure and finance: A first contribution to the Global Observatory on Local Finances.
Colin Copus is Emeritus Professor of Local Politics, De Montfort University, Visiting Professor Ghent University, Localis Visiting Fellow