Taxing times for Wales

The National Assembly for Wales’ powers to determine tax on the sale of land and buildings and on waste disposed to landfill are hardly setting the commentariat alight.  Yet the devolution of tax-raising powers is a key milestone on the devolution journey.

Why? Three reasons.

One, this is the first time that the National Assembly for Wales has had any tax raising powers.

Having previously existed on the governmental equivalent of pocket money, being responsible for generating some of your own income is a milestone. The amounts of money likely to be generated by the successors to stamp duty and landfill tax are tiny, but nevertheless they mark a real shift in how the Welsh Government conducts its business. If it gets the amount of tax it is likely to collect wrong, or if it fails to collect it effectively, then there is a gaping hole in its finances and untold damage to its reputation. And as most people do not like to pay taxes, the Assembly also risks being seriously unpopular if it is seen to tax excessively or unfairly.

The Welsh Government has never faced this sort of challenge before, and it is a challenge that is going to get bigger as, I predict, more and more taxes are devolved.

Two, taxation is a powerful level over the behaviour of individuals and organisations.

Tax is about much more than raising money. The level of tax and its various exemptions can and do change behaviour. Most obviously, a badly drafted tax regime creates opportunities for evasion and avoidance. More positively, an effective tax regime encourages ‘good’ behaviour and discourages ‘bad’ behaviour. Stamp duty is a case it point – before the Chancellor changed the way in which tax was charged on residential transactions, there were massive spikes in the number of transactions just below the threshold to the next tax band and an equally massive trough just after it, as people priced their properties to minimise tax paid. Evidence also shows that the temporary stamp duty holidays introduced to try to stimulate the housing market did have an effect on encouraging purchases and sales of homes.

This too is a challenge for the Welsh Government. It needs to balance raising money against possible negative consequences. For instance, it might be tempting to increase further the tax levied on the sale of the most expensive properties – Wales’s own mansion tax if you like.  But it could also have the side effect of leaving large, historic houses unsold, or discouraging inward investors from relocating, say.

Whether there is sufficient information to enable the Welsh Government to make these predictions is a moot point.  In the case of land transactions, for example, data on the value of residential property sales for Wales are not published, which means that it is not possible for those outside government to model the effects of taxes at different thresholds.

Three, there are knock-on effects to the rest of the UK government

Some UK government departments are notorious for not recognising Welsh devolution – yet those departments will now have to engage with the Welsh Government as it introduces its new tax on land transactions and landfill. The Ministry of Justice will need to co-operate over enforcement, the Land Registry will need to co-operate over transactions, HMRC might well be involved in tax collection, to name just a few.

The start of a new era with a land transaction tax and a tax on waste disposed to landfill might seem a bit dry – they’re not quite as sexy as a pop tax or a fat tax – but they are critically important.

So if you haven’t read them already, take a look at the new series of Treasury papers – you might also like the Bevan Foundation’s responses to the consultation on Land Transaction Tax and Waste Disposed to Landfill.

Victoria Winckler is Director of the Bevan Foundation.