A Local Taxation Tale of Two Cities Laura Fallon lfallon@arlingclose.com

If you want more localism you have to pay for it

Much has been said in local government and central government circles about the fact that the UK is one of the most centralised countries in the world with a large number of decisions being made in Westminster (and sometimes Holyrood, Cardiff Bay and Stormont) and not many in town halls across the country. This is almost always said in the context of this being a bad thing, with successive governments trying with varying but perhaps limited degrees of success to make things more local.

A useful exercise is to compare the UK with a different country with a notoriously more local stance on government: the USA. This as we all know is comprised of 50 states which are further subdivided into county and city administrative areas. Where you live in the USA can have quite an impact on your life and crucially on what taxes you pay. To illustrate this point I have taken two example people earning average salaries and living in average priced homes within a household comprised of two people: one lives in London (and specifically the London Borough of Sutton) and the other in New York City. Both of these cities have a lot in common: they are large, ethnically diverse major cities with big financial districts. Both have high property prices and (on average) high earning residents. Both are in developed countries with established tax tax-collecting bureaucracies and welfare states.

This person in London would earn £33,800 a year and pay £7,200 (21% of their income) in income tax and national insurance which are national taxes. They would pay £1,900 in council tax (5% of their income) which is the only truly localised tax in the UK. Then there is the 20% of a lot of things they buy being taxed through VAT which is a national tax. Every single other tax this individual pays either directly or indirectly (think fuel duty, stamp duty, inheritance tax and corporation tax) is a nationalised tax. Although business rates are collected locally, they are for the most part put into a pot and then redistributed so aren’t really a local tax. Recent attempts to make business rates a bit more local have so far stalled. Even council tax is in practice capped nationally by centralised governments with a rise of more than 2% requiring a referendum in England: the recent 2% precept on council tax to fund social care was a national and not local decision. So in practice even our local taxes have limits on their localism.

Let’s contrast this to Mr. Average living in New York City and earning $50,800 a year. He is paying approximately $10,700 in federal (ie. national) income taxes. At 21% of income this is actually exactly the same proportionately as Mr Average in London. However the difference lies in the plethora of other taxes which are paid locally compared to the UK. In the USA it’s common to pay taxes such as income tax and corporation tax on a national, state and city level. Some taxes go even more local than that and depend on what school district you live in. Sometimes you have to pay taxes to an area even if you don’t live there but only work there. Mr Average New York will be paying $2,800 (6% of his income) in income tax to New York State and $1,800 (4% of income) to New York City. As anyone who has ever been on holiday to the states will know their equivalent of VAT ‘sales tax’ is 100% local. New York City has a sales tax of 4.5% and New York State one of 4% so New Yorkers are paying 8.5% in taxes on a lot of what they buy, all of it a local tax. The equivalent of Council tax ‘property taxes’ would be approximately $3,400 for Mr Average USA (7% of income) which is all local and dependant on school district. As already mentioned other indirect taxes such as corporation tax will be a mix local and national.

Whilst a federal ‘United Counties of Britain’ type system may not be exactly what we are aiming for what I believe this illustrates is that if you want to make things more local how things are paid for is fundamentally as important as who is spending the money. Reforming business rates and making them more local is probably the most obvious place to start. The devolved regions of Scotland, Wales and Northern Ireland may also be able to achieve greater autonomy in this area with Scotland already having some genuine variations to England in taxes such as income tax. The perceived success of regional Mayoral systems such as the Mayor of London and the Mayor of Greater Manchester could be further strengthened with more powers to set their own taxes. People might start caring more about who their local council is if they can see the name coming out of their pay cheque!

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