Experts' cautious support for local income tax

Local income tax would be a "realistic option" as an alternative to council tax, a respected public finance body told the government today.

The independent Chartered Institute of Public Finance and Accountancy's advice came amid mounting anger at above-inflation rises in council tax, which the same body earlier this week predicted would average around 6% this year.

In a paper submitted today to the government steering group considering the financing of local councils, Cipfa argued that local income tax (LIT) could be used to replace or supplement council tax.

But its chief executive, Steve Freer, warned that any local income tax system would be "technically complex and challenging" to implement.

The report was welcomed by the Liberal Democrats as vindication for their long-running campaign to replace council tax with a local income tax.

Cipfa's report to the balance of funding review group, the body charged with looking at local government financial reform which is chaired by the local government minister, Nick Raynsford, warned that any change was bound to be controversial, creating losers as well as winners.

Biggest losers would be single employed people and two-earner households in London and the south east, while pensioners, single-parent families and single-earner households with dependants in other regions would gain most.

An income tax hike of between 3.2p and 6.5p would be required to replace council tax altogether, at today's levels, the report found.

But it said that a more effective option might be to use LIT as a supplement to council tax, substituting some of the grants which come from central government. This would allow any LIT rise to be matched by reductions in the national income tax bill, so that taxpayers would not feel worse off.

Although it would require "considerable" initial spending - particularly on a more reliable database of taxpayers' addresses - LIT was likely to be cheaper to collect than council tax because it could be administered centrally by the Inland Revenue, said the report. It would allow more tax to be raised locally and would link local taxation more closely to ability to pay.

But the report warned that LIT could create additional work for employers operating the PAYE system and would mean a less predictable income stream for councils.

Mr Freer said: "There is no doubt that local income tax is a realistic option as a strong sustainable source of funding for local services.

"But we should not see it as an easy option. It is technically complex and challenging with much of the devil in the detail.

"A system that sees individual local authorities setting the tax with the Inland Revenue responsible for collecting it looks to be the most promising model. Simplicity of approach would be paramount - taxing personal incomes fairly can be a very intricate process."

He added: "There are 5.7 million more income tax payers than there are council tax payers and there are also 1.5 million employers who would need to be involved to assist in collecting a LIT. Their views have yet to be considered.

"We also need to think about geography - I cannot imagine a local income tax succeeding unless coincidentally introduced throughout the United Kingdom.

"Timing will be critical. Rushed change would be a disaster for all concerned. LIT is clearly at the complex end of the range of options under consideration. It would therefore require extremely detailed planning and preparation."

The Lib Dem local government spokesman, Edward Davey, said: "The prime minister must now explain why he opposes local income tax when independent experts say it is a fair and workable alternative.

"The study backs Liberal Democrat figures, backs Liberal Democrat analysis, and backs our belief that local income tax is a practical way out of the council tax mess."

A Cipfa survey released on Tuesday predicted that band D increases in England, Scotland and Wales would average ?62 in 2004-05, taking the annual payment to ?1,142.

The balance of funding review is considering various options for the reform of local taxation to put council funding on a more stable footing. It is due to report to the deputy prime minister, John Prescott, this summer.