The final four posts on local government and independence start with a look at money.
Firstly, a word of warning.
Due to the current perilous state of the UK’s public finances – and the incompetence of the last several UK governments – it would be difficult for anybody, let alone me ( without a university economics department or privately-funded think tank at hand) to make any projections on Welsh local government finances for the foreseeable future other than to say “things are looking a bit shit”.
I know full well when to cede to others’ knowledge of public sector economics.
So this post is more about policy options than spreadsheets and graphs. So it all comes with a healthy pinch of salt.
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Business/non-domestic rates are seemingly equally as unpopular amongst businesspeople as council tax is amongst the public at large.
Non-domestic rates are calculated by the ratable value of a commercial/business property being multiplied by a number (multiplier) set by the Welsh Government. The rateable value is assessed every 5 years at present.
Some of the smallest business properties are exempt from business rates entirely. While local authorities keep what they raise in council tax, the total income from business rates (around £1.8billion a year) is collected by the Welsh Government and then redistributed to individual local authorities and the police forces using a formula.
Just as there have been calls for council tax reform – or replacement – similar arguments have been made for business rates. So, what are the options?
Maintain business rates as is – The system remains as it currently is. The advantages – knowing what you’re dealing with and a rough estimate of income – are the same as maintaining council tax.
Reform business rates – The Welsh Government are currently consulting on options to reform business rates. Some of the options include cutting the assessment period from 5 years to 3 years, improving the rates relief system so more businesses can get a cut to their bills and changing how the multiplier is calculated.
Replace with a commercial land value tax – I went through this in the earlier section on council tax. In the same Welsh Government-commissioned report6, it suggested that a uniform commercial land value tax of 3.9% would raise the same amount as business rates in 2018-19.
Replace with a local sales tax – Technically, we already have a sales tax in the form of VAT. That could be changed so that:
- VAT is partially-set locally/regionally (in the same way income tax is partially set in Wales).
- there are local rates of corporation tax.
- a separate local sales tax (and/or online sales tax) on top of/in addition to VAT.
A local sales tax or equivalent would likely have far more distortive effects than a local income tax because it could encourage some local authorities to set artificially low rates to attract extra investment. While that’s a useful tool, if different councils tried to outdo each other they could put themselves at risk of running into financial problems as a result.
A sales tax would be, in principle, fairer than business rates (because it would be based on actual business activity/income rather than property values). However, there are extra administrative problems, difficulties applying reliefs and exemptions (i.e. charity shops) and it would disproportionately affect businesses that do a high volume of trade in lower-cost items (which is what the bulk of the Welsh high street is).
There’s also no inkling as to what rate a local sales tax would need to be to match income from business rates. Business rates are passed on to customers indirectly, but a more visible “sales tax” on a receipt may affect consumer spending.
6. ap Gwilym, Jones and Rogers (2019). “A technical assessment of the potential for a local land value tax in Wales.” Available at: https://gov.wales/sites/default/files/statistics-and-research/2020-03/technical-assessment-of-the-potential-for-a-local-land-value-tax-in-wales.pdf
