PAYING FOR LOCAL GOVERNMENT,WATER AND SEWERAGE SERVICES FAIRLY:
THE CASE FOR A SCOTTISH SERVICE TAX AND SCOTTISH WATER CHARGE

April 2002

Professor Mike Danson and Geoff Whittam
Economics & Enterprise
University of Paisley
Paisley PA1 2BE

1. INTRODUCTION

Since the original research paper to the Scottish Socialist Party proposing the introduction of a progressive Scottish Service Tax to raise funds for local government expenditure in a more equitable way, there have been a number of comments, feedback and developments which suggest that this is an opportune time to update the earlier report. Meanwhile, the fiscal constraints imposed by Westminster and by the more rigorous application of the Barnett formula (Heald and Geaughan 1999) are continuing to restrict the ability of the Scottish Parliament to address the problems in health, education, housing, poverty and jobs. Given the constraints of the devolution settlement, the proposals outlined in this paper for a Scottish Service Tax seek to introduce a progressive, redistributive tax system as a way of tackling poverty and under-investment in the public sector with the abolition of the council tax.

Further, currently the Scottish Water Bill is establishing a countrywide single water authority through the merger of the three existing regional bodies. This is being promoted partly because of the need to modernise the water and sewerage system through massive investment in this most basic of public utilities. This investment programme is also designed to meet the competitive challenges differentially faced in supplying domestic and non-domestic users, to raise efficiency and to equalise the rate of water charge across Scotland. Collectively these developments suggest that this is an opportune time also, therefore, to consider introducing a fairer way to finance the domestic shares of this investment and the use of water and sewerage services.

This report is structured as follows: in the following section the case is recalled for improved levels of public service expenditure in Scotland to promote social inclusion and justice. Section 3 analyses the tax and benefit system in the UK to demonstrate how the poor pay for their poverty and the tax system in aggregate is regressive. Section 4 considers the current political context of local government finance, discussing the need for a review of how councils are funded in Scotland. Section 5 explores the advantages realised for public expenditure interventions across the developed world, with a brief examination of the international literature and experience of regional and federal tax systems in Section 6. The form, structure and impediments to the introduction of local income tax are discussed in Section 7, before the powers of the Scottish Parliament and its capacity to introduce a progressive Scottish Service Tax are assessed in Section 8. The contribution of non-domestic consumers of local services is addressed in Section 9, with proposals initially to return control over business rates to local authorities with a land value tax system introduced later. The detailed proposals for a Scottish Service Tax are discussed in Section 10. The efficiency and equity advantages of replacing the current methods of charging Scottish households for water and sewerage with a progressive Scottish Water Charge are examined in Section 11, with parallel changes for non-domestic users discussed in Section 12. The report is concluded in Section 13.

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2. THE NEEDS: PUBLIC SERVICES AND INCLUSION

Without doubt, the quality of life in Scotland has suffered from underinvestment for many years. Across transport, health, education, housing and social services it has become increasingly clear that public services need major attention if Britain and Scotland are not to fall even further behind our continental partners. While services have been cut, throughout the public sector there is evidence of worsening skills shortages as the short-term labour market effects of wage restraint are exacerbated by deterioration in working conditions. Long-term problems are now being generated by underinvestment in staff, infrastructure and equipment, made worse by the use of the private finance initiative (PFI) and public-private partnerships (PPP), which progressively will reduce the funds available for re-investment in the future. Additionally, poverty and deprivation in towns, cities and rural communities throughout Scotland have been catalogued as severe and endemic (Scottish Executive 1999; CPAG 2002).

The introduction of the euro, the UK Chancellor’s pursuit of the five Maastricht criteria, and the implications of increasing globalisation on European, national and regional economies are exacerbating the effects of the Barnett squeeze. Against this background, pent-up demand to address the underinvestment in Scotland and the expectation that the Scottish Parliament can make a real difference have made the need for innovative policy formation an imperative for Holyrood if a more inclusive, cohesive and efficient Scotland is to be gained.

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3. WHO PAYS?

Paralleling this underinvestment, over the last quarter century it has been the poorest in the community who have lost out from changes in the tax and benefit systems. The move away from progressive direct taxation to regressive indirect taxation has led to the situation where the people on the lowest income pay a greater percentage of their income in tax than those on the highest levels of income; the poor contributing to the financing of public expenditure to a greater extent than hitherto and than elsewhere in the EU. The increase in inequality is illustrated in the following table, particularly:

In taking evidence from its former special advisor, the Local Government Committee were informed that ‘what matters is that the whole system of taxation is progressive’ (Col 246 5, 11 December 2001), and so there is no particular need for the property tax to be changed in favour of a Scottish Service Tax. However, Professor Midwinter has missed the conclusions of the Government’s own statistical service: as demonstrated by Table 3.1 in our previous report (reproduced above) where we cited figures from Economic Trends 1998, published in 2001, which showed that the proportion of income taken in all taxes from the poorest fifth was 41% in 1999/2000 but only 35% for the richest fifth. The system is not progressive as a whole; indeed the opposite is the case and this is in stark contrast with the position in 1983 when the proportions were 27% and 41% respectively. In this his third criticism of the proposals to replace the regressive Council Tax (the other two are analysed below), Professor Midwinter inadvertently presents a strong argument in favour of abolition and so of support for the SST or equivalent which addresses this overall inequity within the UK and Scottish tax system.

Since 1994/95, relative poverty has worsened with the proportion of households living below low income thresholds - defined in terms of average incomes - tending to rise as the economy has grown (Households Below Average Income 1994/5 to 1998/9, DSS, 2000). Indeed, the DSS confirm that 'the proportion of the population below half average contemporary income (AHC) was 24 per cent in 1991/92, 1996/97, 1997/98 and in 1998/99'.

As Table 3 demonstrates, the position has not yet shown signs of improving. This suggests that changes made up to 1998/99 had not reversed the increasing inequalities of the previous two decades. Considering this another way, between 1994/95 and 1997/98, the gross incomes of the poorest 10% of taxpayers increased by 14.2%, while the incomes of the top 5% grew by 15.7%, and the top 1% saw their incomes improve by a massive 37%.

Table 3: Shares of total income received by individuals below and above various percentiles of the income distribution, Great Britain