Presentation on theme: "SEEC/SECL South East Property Tax Devolution January 2015."— Presentation transcript:
SEEC/SECL South East Property Tax Devolution January 2015
Report overview 1.Objectives of the Work 2.Fiscal Balance 3.Property Taxes – Overview 4.Property Taxes – Analysis 5.Conclusions 2
1. Objectives of the Work 3 Identify headline property tax figures for the South East, consistent with the report by the London Finance Commission’s (LFC’s) 2013 report, “Raising the Capital”. Specifically, quantify the values of (i) council tax, (ii) business rates, (iii) stamp duty land tax, (iv) annual tax on enveloped dwellings, and (v) capital gains tax on property disposal. Estimate total property tax for each local authority in the South East, based upon assumptions about potential apportionment bases. Compare against local authority funding from central government.
1. Objectives of the Work 4 Definitions: (i) Council Tax – levied on households, based on property value and occupancy (ii) Business Rates – levied on non-domestic property, based on rateable value (iii) Stamp Duty Land Tax – on ‘land’ transactions, including property (based on purchase price), leases, rent (iv) Annual Tax on Enveloped Dwellings – payable by companies, partnerships, investment vehicles that own high value residential property, based on property value (v) Capital Gains Tax on Property Disposal – on the ‘gain’ from the sale/disposal of property (but note that the LFC only considered property owned by companies).
2. Fiscal Balance 5 To provide context, we begin with an overview of the balance between total tax revenue and total public expenditure in the South East. Oxford Economics estimates that, in 2011/12, the South East had resident-based revenues of £88.5bn, compared to a share of total public expenditure of £84.0bn. This translates to fiscal balance of +£4.5bn, second only to London. Since 1999, the South East’s net fiscal contribution has averaged +£10.2bn per year. This ‘return on investment’ contracted sharply in the wake of the global financial crisis, and has since partially recovered.
Fiscal Balance 6 Figure 1 – South East Fiscal Balance
Fiscal Balance 7 Figure 1 – South East Fiscal Balance
Fiscal Balance The fiscal balance captures all major sources of tax revenue and public expenditure in the UK. Public expenditure includes services that are typically outside the remit of local government, such as health care, welfare payments and defence. Oxford Economics’ measure of tax revenues include all major revenue streams, including: Income tax National Insurance Contributions (NICs) Value Added Tax (VAT) Corporation tax Council tax Business rates 8
Fiscal Balance An earlier study by Oxford Economics (London’s Finances and Revenues) included a breakdown of the South East’s tax revenues in 2010/11. 9 Figure 2 – South East Tax Revenues, 2010/11 * Capital Gains Tax also includes financial assets, and so is not a pure property tax
Fiscal Balance Overall, it showed that property taxes accounted for only 11% of the region’s total tax take. 10 Figure 2 – South East Tax Revenues, 2010/11 11% * Capital Gains Tax will also include financial assets, and so is not a pure property tax
3. Property Taxes - Overview 11 The following sections focus on property taxes in the South East, in the context of the London Finance Commission’s (LFC’s) report, “Raising the Capital”. The report calls for the devolution of all property taxes. It is argued that this would increase the capital’s autonomy to invest in infrastructure, promote economic growth, and increase accountability to local residents and businesses. Specifically, the commission calls for the devolution of: 1.Council tax 2.Business rates 3.Stamp duty land tax (SDLT) 4.Annual tax on enveloped dwellings (ATED) 5.Capital gains property disposal tax (for companies only)
Property Taxes – Overview LFC concluded that property taxes are well suited to devolution because: They have immobile tax bases They are buoyant, increasing over time in line with general economic growth; and They are relatively easy to administer and enforce. 12
Property Taxes – Overview LFC did not believe that devolution of the other major taxes was appropriate at this time: Income tax could disincentivise employment, create inefficiencies (due to a mobile workforce) and would be difficult to implement. NICs are already ‘ring-fenced’ for nationally administered services, such as pensions. VAT could not be devolved, due to EU requirements that member states apply common rates within their jurisdictions. It could instead be assigned (i.e. collected by central government and allocated to local authorities), but this would be difficult to implement. Corporation tax posed a number of challenges, such as volatility, distortions (e.g. authorities driving away businesses, or engaging in a competitive ‘race to the bottom’), and difficulty identifying the origin of the tax revenues. 13
4. Property Taxes – Analysis 14 Analysis was carried out to estimate property tax yields in the South East and use assumptions to apportion these to local authority level. This section is divided into the following parts: Methodology Results Analysis
Property Taxes – Analysis When estimating tax revenues at the local authority level, it is necessary to consider local government structure. Within the South East, there are four structure types, as illustrated below. 15 MethodologyResultsAnalysis Shire District County Council (no fire) Fire & Rescue Unitary Council (no fire) County Council (with fire) Unitary Council (with fire) Fire & Rescue Shire District Figure 3 – Local Authority Structure Type 1Type 2Type 3Type 4
Property Taxes – Analysis Tax revenue data is often only available for shire districts and unitaries. In this case, we need to estimate how much of the revenue would be passed on to the other tiers. 16 MethodologyResultsAnalysis Shire District County Council (no fire) Fire & Rescue Unitary Council (no fire) County Council (with fire) Unitary Council (with fire) Fire & Rescue Shire District Figure 3 – Local Authority Structure Type 1Type 2Type 3Type 4 ? ? ? ?
Property Taxes – Analysis To do this, we need to estimate the shares attributable to the lower, upper and fire tiers. One approach is to base these share on past service expenditure. In this case, we have used actual Revenue Outturn 2013/14.* 17 MethodologyResultsAnalysis Shire District County Council (no fire) Fire & Rescue Unitary Council (no fire) County Council (with fire) Unitary Council (with fire) Fire & Rescue Shire District Figure 3 – Local Authority Structure Type 1Type 2Type 3Type 4 Lower Upper Fire * Based on the average for South East England. Only a sub-set of authorities can be used in these calculations.
Property Taxes – Analysis The resulting shares, based on past expenditure, are illustrated below. As can be seen, the majority of expenditure is attributable to the upper tier (87.5%). 18 MethodologyResultsAnalysis Shire District County Council (no fire) Fire & Rescue Unitary Council (no fire) County Council (with fire) Unitary Council (with fire) Fire & Rescue Shire District Figure 3 – Local Authority Structure Type 1Type 2Type 3Type 4 Lower Upper Fire 2.8% 87.5% 9.7%
Property Taxes – Analysis Council tax revenue is already known for all tiers of local government. For business rates and SDLT, revenue was allocated between tiers on the basis of past expenditure, as described in the previous slides. For ATED, figures were only available at the regional level, so population was first used to estimate the shares for each district/unitary council. 19 MethodologyResultsAnalysis Property Tax Regional amount District or Unitary amounts Fire & County amounts Council TaxActual Business RatesActual Past expenditure Share Stamp Duty Land TaxActual Annual Tax on Enveloped DwellingsActualPopulation share Table 1 – Methods used to allocate notional tax revenue
Property Taxes – Analysis Capital gains tax was ultimately excluded from our analysis. The LFC report only includes capital gains tax relating to UK residential properties, worth over £2m, which are owned by companies. LFC report that this revenue was worth £25m to the UK in 2013/14, of which an estimated £20m would be raised in London. Any remaining revenues raised by the South East would therefore be insignificant compared to the other property taxes discussed here. An earlier LFC working paper* stated that the devolution of capital gains tax more widely would be “prohibitively complex” 20 MethodologyResultsAnalysis * London Finance Commission Working Paper ‘Options for Tax Assignment and Devolution’, September 2012
Property Taxes – Analysis Overall, property taxes were worth £9bn to the SEEC area alone in 2013/14 21 MethodologyResultsAnalysis Figure 4 – South East Property Tax Revenues, 2013/14
Property Taxes – Analysis Overall, property taxes were worth £9.8bn to the South East in 2013/14.These figures include Swindon, Wiltshire & Central Bedfordshire. 22 MethodologyResultsAnalysis Figure 4a – South East Property Tax Revenues, 2013/14 £9.8bn
Property Taxes – Analysis For unitaries and counties, once apportioned, total property tax revenues ranged from £1,340m (Surrey) to £108m (Isle of Wight) 23 MethodologyResultsAnalysis Figure 5a – Property Tax Revenues (Unitaries & Counties)
Property Taxes – Analysis For shire districts, property tax revenues ranged from £27m (Elmbridge) to £7m (Gosport) 24 MethodologyResultsAnalysis Figure 5b – Property Tax Revenues (Shire Districts)
Property Taxes – Analysis We assessed the balance between (i) property tax revenues and (ii) local authorities’ current funding from central government. The objective was to determine whether the devolved property taxes (excluding council tax) would be sufficient to replace the major grants. This includes all grants making up ‘Revenue Spending Power’ in 2015/16, with the exception of two major ring-fenced grants (Public Health Grant and Better Care Fund). This also excludes funding for education, police, and other grants that were not included in Revenue Spending Power. Property tax revenues in 2013/14 were projected forward to 2015/16. Business rates were increased by 1.9% each year (reflecting the multiplier cap), and SDLT was increased in line with OBR forecasts (which increase sharply, due to rising property values and transaction volumes). 25 MethodologyResultsAnalysis
Property Taxes – Analysis By 2015/16, the SEEC area alone was forecast to have revenues of £5.8bn, vs. grants of £2.7bn. This gives a ‘funding surplus’ of +£3.1bn. After ring-fenced grants, the SEEC area surplus would be £2.3bn 26 MethodologyResultsAnalysis Figure 5 – Balance of Funding
Property Taxes – Analysis By 2015/16, the South East was forecast to have revenues of £6.3bn, vs. grants of £2.9bn. This gives a ‘funding surplus’ of +£3.3bn. These figures include Swindon, Wiltshire & Central Bedfordshire. 27 MethodologyResultsAnalysis Figure 5a – Balance of Funding Surplus +£3.3bn
Property Taxes – Analysis Even including ring-fenced grants, the region would still have a surplus of +£2.4bn. Business rates alone would almost cover almost all the grants. These figures include Swindon, Wiltshire & Central Bedfordshire. 28 MethodologyResultsAnalysis Figure 6 – Balance of Funding Surplus +£2.4bn
Property Taxes – Analysis Excluding ring-fenced grants, nearly all unitaries and counties would have a funding surplus in 2015/16 (with the exception of Isle of Wight) 29 MethodologyResultsAnalysis Figure 7a – Funding Surplus (Unitaries & Counties)
Property Taxes – Analysis For shire districts, 60% would have a funding surplus and 40% would have a deficit 30 MethodologyResultsAnalysis Figure 7b – Funding Surplus (Shire Districts)
Property Taxes – Analysis The preceding slides raise two additional issues: Ensuring a fiscally neutral outcome; and Equalisation of funding between the South East councils. 31 MethodologyResultsAnalysis
Property Taxes – Analysis Fiscal neutrality LFC recommended that newly devolved taxes should be offset through corresponding reductions in grant, to ensure a fiscally neutral outcome. As shown on the previous slides, property tax revenue (excluding council tax) exceeds the South East’s major sources of revenue funding. To ensure fiscal neutrality, options include: Assume responsibility for funding a wider set of services, e.g. police and schools Return a share of property tax revenue to central government Devolve a limited set of property taxes, e.g. business rates, which would be sufficient to replace most existing, non ring-fenced central government grants 32 MethodologyResultsAnalysis
Property Taxes – Analysis Equalisation Based on the assumed revenue splits between the upper, lower and fire tiers (of 87%/10%/3%), a large number of shire districts would still not be revenue self-sufficient if property taxes were devolved to the local level. This would require equalisation among the South East authorities. This could take the form of ‘top ups’ and ‘tariffs’, similar to the current business rates retention scheme. At the outset, equalisation could be based on prevailing levels of funding. However, the region would then need to consider if or how equalisation would be adjusted to reflect future changes in need; for example, due to population growth, ageing populations or changes in deprivation. 33 MethodologyResultsAnalysis
Property Taxes – Analysis Council Tax Finally, it should be noted that our measurement of “surplus” excluded council tax. This is because council tax is already fully devolved, and is both collected and retained by the South East. Our definition of “surplus” measures the difference between (i) property tax revenues that are currently collected on behalf of the Exchequer, and (ii) the amounts that are currently redistributed back to local authorities in the form of central government grants. For completeness, however, we also provide projections of council tax revenues in 2015/16. As a prudent estimate, we used 2014/15 council tax requirements, which assumes a 100% uptake of the council tax freeze that is to be offered in 2015/16.* 34 MethodologyResultsAnalysis * Historically, the take up of council tax freeze grant has ranged from 65% to 100% of local authorities (nationally) in any given year.
Property Taxes – Analysis Summary of Revenue Streams The table below summarises the projected value of all major property taxes in the South East from 2013/14 to 2015/16, including council tax. 35 MethodologyResultsAnalysis Property Tax2013/142014/152015/16 Council Tax£4.338 bn£4.449 bn Business Rates£3.650 bn£3.719 bn£3.790 bn Stamp Duty Land Tax£1.845 bn£2.257 bn£2.473 bn Annual Tax on Enveloped Dwellings£0.010 bn Total Property Tax Revenue£9.843 bn£ bn£ bn Table 2 – Summary of Actual and Projected Property Tax Values, South East
5. Conclusions Oxford Economics estimated that the South East generated a fiscal surplus of £4.5bn to the UK (as at 2011/12). Earlier work by Oxford Economics (in 2010/11) identified that property taxes accounted for 11% of total tax revenues in the South East. LG Futures estimates that devolving the property taxes under consideration would generate revenue of £9.8bn in the South East of England in 2013/14. By 2015/16, property tax revenues (excluding council tax) would be £3.3bn greater than the major non ring-fenced grants currently received by local authorities from central government. Limiting devolution to business rates, rather than all property taxes, could help ensure fiscal neutrality. Given our key assumptions, most counties and unitary authorities would become revenue self-sufficient. However, ‘equalisation’ would still be needed for a large number of shire districts. 36