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The risks and opportunities of devolved taxes

July 22nd 2019

Three years after the Bevan Foundation published its ground-breaking report on devolved taxes, Victoria Winckler outlines her top three take-aways from a recent conference on devolved taxation.

Disposable plastic cups like this are one option for a new Welsh tax

The Assembly’s acquisition of tax-raising powers in the 2014 Wales Act was a landmark in devolution. By 2020, the Welsh Government will raise about 20% of its revenue from various taxes – mess them up, and there are real consequences for schools, doctors and hospitals.

The Welsh Treasury’s second conference on devolved taxes, held on Friday 19th July, was an important opportunity to discuss the next steps. For me, there were three take-aways from that event.  These are important not just for tax nerds but for everyone interested in making Wales fair, prosperous and sustainable.

1. There is huge uncertainty and risk

If nothing else the conference highlighted that there are major uncertainties and risks.  Andy King from the Office for Budget Responsibility (OBR) pointed out the major economic uncertainties ahead, including a real risk of recession after Brexit. Add to this, big unknowns in the tax system and there’s not far off a perfect storm.

In Scotland, the combination of economic factors and estimating inaccuracies has resulted in a whopping £941 million shortfall in income tax revenue in 2016/17 with the Scottish Government bearing over £100 million of that. Indeed the Scottish Fiscal Commission estimates that over three years the Scottish budget will fall by £1bn, although the OBR’s forecast loss is lower.

How people and businesses behave adds to the uncertainty. We learned that the 2010 increase in the additional rate of tax to 50% only generated £0.6 billion in 2012-13, instead of the £7.5 billion forecast had there been no change in behaviour. Political parties planning a tax hike to raise revenues should take note not to announce their plans in advance.

2. Devolved taxes are worth it

Despite these challenges, devolved taxes are still worth developing. Not only does the Welsh Government already have tax-raising powers, OECD described how devolved taxes were associated with higher growth rates and many could help achieve greater equality.

Introducing new devolved taxes also gives the Welsh Government new tools with which to change people and organisations’ behaviours, hence the work being undertaken on possible taxes for single use plastic cups and vacant land. Both of these possible taxes need a lot more work to ensure they achieve their aims and don’t generate unforeseen and undesirable consequences.  Interestingly, neither of these taxes offer long-term revenue-raising prospects – if they succeed in eliminating disposable plastic cups or preventing land-banking they will generate zero.

OECD gave a clear steer that property taxes have merit in a devolved context – and all the more so given Wales’ long and populated border. A major overhaul of council tax, business rates, land transaction tax and perhaps – as Gerry Holtham has argued – seeking capital gains tax receipts on property sales might be something for the 2021 election party manifestos.

3. Even devolved taxes are not completely devolved

My final take-away from the conference was that that even so-called ‘devolved taxes’ are still firmly hitched to the UK Government.  This was amply illustrated by the possible impact of Boris Johnson’s pledge to raise the threshold for higher rate tax payers to £80,000 at the same time as increasing National Insurance.  It would, at a stroke, reduce Welsh Government revenues from higher-rate tax payers in the £40-79k bracket at the same time as denying it gains from increased NI contributions. Similarly, any assumptions in calculating block grant that are based on Wales’ economic performance relative to the rest of the UK bring risks if London’s economy continues to out-perform everywhere else. Thankfully Wales is very much less exposed than Scotland to this very real possibility.

When we began our ‘tax for good’ project in 2016, we had an uphill struggle to persuade Assembly Members, stakeholders and the public that the Welsh Government had tax-raising powers let alone encourage people to contemplate possible new taxes. Questions were asked in the Senedd, incorrect answers were given, and the Assembly research service emphasised the hurdles.

Three years on, a mature debate is at last underway. It is one which rightly emphasises the risks, but one which also highlights the opportunities.

Victoria Winckler is director of the Bevan Foundation.

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