1. Is a near complete decentralization of
taxes feasible in the UK
Executivesummary
The aim of thiswork isnot to offersweepingsolutionsoralternativestothe DevolutionRevolution,
but to outline the benefitsitwouldbringand pose important economicquestionsabouthow a
systemof ‘disharmonised’taxesmightworkinthe UK,drawinginsightsfrom comparative examples
and data.I will argue that a piecemeal devolutionof taxesin the UKis entirelyfeasible,solongas
the governmenttakesall necessarystepstoensure thoroughmacroeconomicoversightof spending
and taxationdecisionsmade withinthe new combinedauthorities.
Introduction
Callsforlocal governmentin the UK to have more flexibilityandcontrol overitsfundingandtax
streamsare notnew.The LayfieldCommittee (1974-76),LyonsEnquiry(2004-2007), MirleesReview
(2011), LondonFinance Commission(2013) and IndependentCommissiononLocal Government
Finance (2015) have all calledforsome form of tax reformanddevolutiontolocal assemblies.
However,ithasbeenwiththe instrumentalworkof ex-ChancellorGeorge OsborneandDavid
Cameroninrecentyears,itself owingmuchof itsmomentumtothe pushfordevolvedpowersby
SNPleadersNicolaSturgeonandAlex Salmond,thatthe UKhas beensetona pathof
unprecedenteddecentralisationof tax powers.
To contextualise,itisfairtosay we have witnessedan erosionof publictrustincentralisedcontrol
signalledbythe Scottishreferendum onUKmembership andamore general disillusionmentwith
national politicsreflectedinlowelectionturnoutsamongyoungvoters.Inlightof thisandthe
government’sunrewardingcommitmentto anausterity drive whichhasseenthe local government’s
budgetcut by40% since 2010, the devolution of powerssuchastaxation isseenbymanyas a
welcome solutiontodeliveringthe necessaryinvestmentneedednotjustinWales,Scotlandand
NorthernIreland,butwithinEnglishregions.
Coincidentally,the pushtowardsdevolutionof taxescomesasthe UK has decided toleave the EU,
therebyfreeingitfromthe harmful constraintof ‘harmonised’salestaxesthroughoutthe country,
settingthe stage forindependent taxationwhichcanvarynot onlyacross regionsbutacrossgoods
and services. Liberatedfromthe ‘one size fitsall’straight-jacketimposedbycentral government,itis
widelybelieved,asIwill argue,thatthe creationof tax power-wieldingregional assemblies willdrive
inwardinvestmentandincentivise economicgrowthandtargetedspending,bringingupregions
previouslyfallingbehindandnarrowingthe wealthgap.
The Devolutionitinerary
The transferof tax powersto ScotlandandWales isalreadywell underway,with StampDutyand
landfill tax andLandtax fullydevolvedtoHolyroodasof April 2015, whilstthe powersitwill receive
overincome tax as stipulatedinthe ScotlandBill 2015-16 will alsobe devolvedtoWalesasof April
2018. Theirnewincome tax receiptswillreplace the blockgrantstheypreviouslyreceivedfrom
Westminsteraccordingtothe Barnettformula,which redistributes tax income collectedinthe
respective countriesbasedonneedandpopulation.Similarly,NorthernIrelandhasbeengranted

2. permissiontodropitscorporationtax rate from20% to 12.5% in2018, inline withthe Republicof
Ireland, tobe offsetbya reductiontotheirblockgrant.
In England,withnew ‘metromayors’tobe electedinMay2017 to preside over Combined
Authorities thathave agreedadevolutiondeal, the national governmentis planningatransferof tax
powerstoregional parliaments resemblingthe devolutionpackagestoScotlandandWales. In
October2015 George Osborne setoutthe government’splanforlocal Englishgovernmenttoretain
100% of local taxesby2020, includingall £26bn of revenue frombusinessrates,insteadof 50% of
the rates whichtheycontaincurrently.
Local growthdealswith Englishcity-regionsupuntil now,involvingthe gradual decentralisationof
some powersoverhousing,planningandskills,have provedwelcome reformsgivingmuchneeded
additional control andflexibilityoverthe policyleversthatcansupportlocal economicgrowth.
Takingthisone stepfurther,itis hopedthe move todevolve fiscalpowerswill spurevengreater
growthand narrowwealthdisparitiesacrossthe country.However, there ismuchdebate astohow
thiswill workinpractice.
Literature review
Overall the bodyof earlyacademictheory inthe fieldof tax devolution offersmixedconclusions,
thoughthe weightof more recentempirical evidence seemstosuggestthata fiscally decentralised
governmentiskey toefficiencyandprovidescountlesseconomicbenefits.Academicmodels
howevercanonlyprovide limitedinsightsintothe feasibilityof sucha move.
Accordingto Oates’ classical decentralisationtheorem(1972),a decentralisedprovisionof public
goodsis saidto maximise socialwelfare if we assume spill-overeffectsare absent,anda centralised
provisionmaximiseswelfareunderthe assumption average preferencesacross citizensof different
regionsare equal.Bothassumptionshoweverseemunrealistic.Tiebout(1956) howeveroffereda
theoretical frameworkinwhichfiscal decentralisationcanguarantee anefficientprovisionof public
goodssimplybecause local preferencesare bettersatisfiedthaninthe case of centralisation.
In the lasttwentyyearsthe classical approach has evolvedintowhatissometimescalledthe second-
generationtheoryof fiscal federalism,whichmodelsfiscaldecentralisationaccountingfor
asymmetriesof informationacrosspoliticians,andassumesgovernmentsmaximise theirown
objective functionthatdoesnotimplythe maximisationof social welfare. Here more efficient
governmentactivityisachievedviadecentralisationof tax powers,becausethisreducesthe
informationasymmetriesbetweenthe electorate (principals)andpoliticians(agents),increasingthe
accountabilityof politicians,resultinginlessrentdiversionandlobbyinfluence forinstance.
Empirical evidence tosupport this,givenintermsof local governmentexpenditure,isprovidedina
studyby FismanandGatti (2000) of a wide range of developedanddevelopingcountries,thougha
similarstudybyTreisman(2000) findsweakevidence thatcountrieswithmore tiersof government
offera lowerqualityof health.Nevertheless,Adametal.(2008),usingdata envelopmentanalysisof
21 OECD countriesfrom1970 to 2000 to compute country-specificefficiencyindexes,and
controllingforvariablessuchasdemography,regulations,opennessof the economyandpopulation
heterogeneity,foundstrongevidence forimprovedgovernmentefficiencythroughdecentralisation.
A more specificstudy onSwitzerland byBarankayandLockwood(2007) usingdata from1982 to
2000 has alsoaffirmedthe positive effectsof decentralisedpoweronthe educationsystem.
However,asignificantissuewithdevolvedfiscal powers,andone whichwill be discussedinmore
depthlater,isthe dangerthat local governmentsexploitthe ‘fiscal commons’byshiftingsome of the
costs of provisionof local goodsfromthe local to the central governmentbudget.Thisproblem

3. hingesonthe presence of softbudgetconstraints(SBCs),aphenomenonmainlyarisingfromthe fact
that central governmentcannotcrediblyruleoutthe possibilityof abailoutincase of local default.
In the presence of SBC,local governmentshave the incentive toexpandtheirprogrammesbeyond
theirmeans,whichbuildsperversefiscal behaviourintothe systemandunderminesthe positive
effectof decentralisationonefficiency.
Giventhe difficulty of modellingthe adhoc nature of the local-national governmentrelationshipsin
the case of local governmentsspendingbeyondtheirmeans, academicresearchistherefore not
particularlyuseful ingaugingthe feasibilityof tax devolution.Rather, itisbesttodraw insightson
the SBC issue fromreal-worldexamples.
Economic benefits and practical obstacles:is atax devolution
feasible?
The Benefits
There isa wealthof theoretical andcase studyevidence thatgivingcitiesandlocalitiessomecontrol
overtax raisingpowersandexpenditure,canimprove bothpublicservicesandeconomicgrowth.In
the past yearthree independentcommissions(LondonFinance Commission,CityGrowth
CommissionandThe IndependentCommissiononLocal GovernmentFinance)lookingtoensure
Britain’seconomystaysgloballycompetitive andpublicservicessustainable have concludedthat
devolutionisthe mosteffective waytocreate jobs,buildhomes,andstrengthenhealthy
communities. ErnstandYoung,KeyCitiesGroupand SirJohnPeace’s independentcommissionon
future growthinnon-metropolitanEngland(2015) have supportedanLocal GovernmentAssociation
(LGA) campaign’sfindings(Investinginournation’sfuture) thatanewly-devolvedtax systemwill
deliver£11bnin savingstothe publicpurse,generate atleast£80bn ingrowth,create 700,000 new
jobs,andbuildhalf a millionnew homes.Buthow?
Probablythe strongestcase forthe devolutionof fiscal powerstoregional unitsisthatthese units
are far better placedthan are detachedandoftenself-servingcivil servantsinWestminstertojudge
the needsof theirlocal economiesandmake tax andspendingdecisionswhichcomplementlocal
businessandtradingpartnerships.LGA researchhasshownthat 7 outof 10 people findthistobe
the case. Notonlywouldatax devolutionavoidthe constraintsof aone-size-fits-all systemthatdoes
nothingtonarrow the wealthdisparityandwhicharbitrarilyassumesidentical standardsof living
throughoutthe UK, butit wouldensure accountability,andsomore justifiabletaxationof taxpayers
whonow knowwhere theirmoneyisgoing.
Secondly,afiscal devolutionwouldbe beneficial because of sharperincentives andeconomic
competition.Withself-sufficientregionslivingoff the backof theirowngrowth,whichistranslated
intoincreasedtax receiptsandsoincreasedreinvestmentbackintothe local economy,investment-
ledgrowthisstronglyincentivisedinapositive feedbackloop.Perhapsagreaterincentivewill be
createdby the competitionthatwill ensue betweenregional authoritiesfortrade deals,investment,
housingandinfrastructure grantsandeventhe labourforce throughtheirmanipulationof awide
array of taxesincluding businessrates,income tax,salestax,landandpropertytax andstamp duty.
Moreover,publicservice efficiencyandprovisioncanbe improvedsince adevolutionof tax powers
wouldovercome diseconomiesofscale thatcan occur ina large administration, whilstendowing
local policymakerswithmore responsibilitywouldincrease theirwillingnessandcapacityto
innovate,the risksof whichare greaterat a national level. Decentralisationcoupledwithgreater
fundingcertaintyandcontrol can alsomake iteasierto delivermore integratedservicesacrossand
withinlocal authorities.

4. Finally,devolutionwouldbe beneficial forthe national exchequertoo.Assumingthatitstill takesa
cut of receiptsfromsome taxes,competitive growthacrossthe regions asa resultof sharper
incentivesandgreaterefficiencycouldachieve asignificantincreaseinnational tax revenues,
withoutneedingtoraise the level of taxesacrossthe country.Itshouldnotbe forgot eitherthat
outside of London,non-metropolitan areas(NMAs) are England’smosteconomicallyproductive
regionsandthe bedrockof SMEs, whichhasno doubtleadto coiningof the terms‘Northern
powerhouse’andthe ‘Motormidlands’.
Business rates
Withcontrol over businessratessettobe fullydevolvedby2020 thiswill be one areawhere local
authoritieswill be keentoflex theirmuscles,attractinginwardinvestmentwithlow ratesand
differentrate relief schemestailored towhattheirregionneeds,the correspondinglow receipts
beingoffsetbyotherlocal taxesorreducedspending.
As well asthe increase inoverall businessratesrevenuesto£26bn, conditional onhavinganelected
metromayor inplace and subjecttoa local vote of the LEP (Local Enterprise Partnership),city-
regionswill be able toraise the rate up to 2 per centin orderto fundinfrastructure improvements.
Some have commentedthatsuchsmall marginsare hardlyrevolutionary,the likesof whichcan
alreadybe achievedthroughvariousrate relief schemes.However,if the city-regionsthatagreed
devolutiondealsaheadof the 2015 SpendingReview hadbeenable toadoptsucha preceptthis
year,theycouldhave raised£76 milliontospendoninfrastructure investmentsthatsupportlocal
businessesandeconomicgrowth.Such isthe significanceof businessratesthattheirdevolutionto
local councilsformedthe centrepiece of George Osborne’sspeechatthe ConservativeParty
conference inManchesterthisyear,whoalsoestablishedanindependentbodytopushforward
majorlong-termbuildingprojectsthatthe local tax will helpfinance.Thisrepresentsabreakthrough
for small businessesandretailersforwhombusinessratesreformhasbeenalongbattle.Indeed,
duringthe financial crisis,manythousandsof businesseswereultimatelypushedintobankruptcy
because of businessratesbills.

5. Anotherpositiveisthatthe revenue receivedbylocal authoritiesintakingfull control of business
rateswill be greaterthanthe governmentgrantstheyare replacing(asshownbelow), grantswhich
were,inanycase, foundtobe falselycalculatedbythe Barnettformula:the IFSrecentlyfoundthat
throughthe Barnett formula, designedtoensure thatspendingperheadgoes upor downequallyin
all fournationsof the UK, ScotlandandNorthernIrelandavoided£600mand £200m respectivelyin
spendingcutsperyearby 2015-16, actuallyfuellingagreaterwealthgap.The complete retentionof
local rateswill therefore avoidreliance onapotentiallyfaultyandantiquatedsystem.
The decentralisationandflexibilityof businessrateswill alsoprovide awelcome opportunityto
addressthe weaknessesinthe currentsystem:Forinstance,itisvolatile,withfive yearly
revaluationscreating majorshockstothe businessratessystem andfundinguncertainty forboth
local governmentasa revenue stream, andforbusinesses.Itisalsonot responsivetoeconomic
conditions,the five yearlyrevaluationmeaning thatbusinessesare payingrates basedonout of-
date valuations.This penalisesbusinessesinstrugglingeconomiesandsubsidisesbusinessesin
thrivingeconomies,nottomentionthatthe ValuationOffice Agency(VOA) missedits2015
valuation,meaningthatcurrentratesare the 2010 valuesbasedonthe 2008 valuation.
Furthermore,thisincreasingmismatchbetweenbusinessesrateable value andtheircurrentability
to pay hascreatedgreaterneedforbroad and expandingreliefsprogrammesthatisbothcostlyto
governmentandhasmeantthat the businessratessystemisclose tocollapse underthe weightof
over300,000 overdue appeals, some datingbackto2010. Finally,the currentsystemcanreward
perverse behavioursince,basedongrowthincommercial floorspace, the currentsystemrewards
space-hungry,oftenedgeoroutof towndevelopment whichcanbe to the detrimentof townand
citycentres.
Some evenmaintainthatthe basicprinciple of aproperty-basedbusinesstax isflawed,withthe
BritishRetail Consortiumnotingthatthe changingbusinessenvironment awayfromfloorspace-
intensiveindustrial use,towards denserland-use incitycentres isnotreflectedinthe businessrates
system.However, the reductioninthe rate of floorspace growthin UK citiesafterthe nationalisation
of businessratesin1990, suggeststhat centralisationitself wasamajordisincentive forlocal
authoritiestoencourage businessgrowth,andthatdecentralisedcontrol overbusinessrateswillbe
betterplacedtoaddressthe problemsinthe system.
In orderto tackle these issues,local authorities,whetherstillthroughthe VOA orotherwise,will
have to conductmore frequentvaluationstoreduce the riskof suddenshiftsintax burdens,and
witha simplersystemtosupportamore accurate and timelybusinessratessystem.Also,the

6. requirementthatbusinessratesshouldgenerateafixedyieldinrevenue fromtaxationeachyear
createsdistortionsinthe system,andshouldbe replacedwithafixedrate. Thiswouldreduce
volatilityinthe systemand improveresponsivenesstolocal economicconditions.
Providedsuchmeasuresare implementedandcorrectoversightisinplace,businessrateswill
certainlyremainavaluable source of income andserve asan areaof competitionforbusiness
investment.
Other taxes
If the devolutionpackage forEnglandissetto resemble thatof Wales,ScotlandandIreland,thenits
regional assembliescanexpectpowerovermore thanjustbusinessrates.
Salestax
Initially,there isastrongcase for differential ratesof salestax toreplace a flatrate VATthat hinders
attemptsto erode the regional wealthdivide,anddoesnottake advantage of spendingbyever-
increasingnumbersof touristsandforeignstudents. Indeed,consumptionby35mvisitorstothe UK
everyyearandover 400,000 foreignstudentswhosenumbersare swellingby4% each yearisa
majorsource of income tobe capitalisedupon.Inaddition,itisintuitive thatlevelsof salestax – on
positional goodsonly,toavoida‘race to the bottom’ - shouldvaryregionallytoreflectdifferencesin
purchasingpoweracrossthe countriesandregionstherein,butcouldalsovaryacrossgoodsto the
same effect,levyinganincreasedrate onVeblengoodstobenefitfromthe phenomenonof
conspicuousconsumptionforexample. Whichgoodsandservicesare specificallytargetedwith
differentiallevelsof salestax isbeyondthe scope of thiswork,butthat theyshouldbe differentiated
across goodsand especiallyregionsiscrucial inanyefforttonarrow regional wealthdispersion.
Propertytaxes
Moreover,manycommentatorsincludingthe LondonFinance Commissionandthe Core Citiesin
Britaingrouphave voicedthe needtogo furtherthanthe currentlyoutlinedtax devolutionto
include landandpropertytaxes.
Accordingto the report ‘Beyondbusinessrates:incentivisingcitiestogrow’,supportedbythe
BusinessServicesAssociation(BSA),devolvinglandandpropertytaxes,ontopof businessrates,
wouldgive local authoritiesresponsibilityfor41% of theirspending(basedon2014/15 figures),
comparedto just19% in the current systemof funding, enablinglocal leaderstotake spending
decisionswhichbettermeetthe needsof theireconomies. The reportfound thatwhiledevolving
landand propertytaxeswill increase disparitiesinrevenue betweendifferentplaces,itwill also
increase the size of the overall local governmentfundingpot, encouragingcitieswithstrong
economiestogrowfasterandprovidingrevenuetobe redistributedto weakereconomies. In
addition,since there existsastrongcorrelationbetweenlandandpropertytaxesandothertax bases
such as income tax,datashowsthat if local governmentwere incentivisedtoachieve 1% growthin
landand propertytaxesthroughdevolution,anextra£1 billioninincometax wouldbe generated
annually(basedon2014-15 data).Moreover,landand propertytaxesare well suitedtodevolution
as theyare non-mobile andnon-redistributive taxes,whichmeanstheyare lesslikelytocause tax
competition (whichshouldbe reservedforbusinessandsalestaxes) andtax distortionsbetween
places.The BSA-backedreportalso callsforlocal responsibilityof fundinghousingbenefit,onthe
premise thatmore powerscangenerate sharperincentivesinkeyareasforgrowthsuchas housing
and infrastructure.
The graph belowillustratesthe enormousfundingcapabilitythatcouldunlocklocal growthandgive
authoritiesgreaterresponsibilityof theirspendingdecisions,butwhichiscurrentlyunavailable to

7. them.For example,landandpropertytaxescomprise asmuchas 69% of whatis spentbylocal
governmentinthe Enterprise M3LEP region.
Similarargumentscanbe usedto advocate the devolutionof local control of roughly£10bn
generatedinStampDutyinEnglandas addedincentive togrow,givinglocal authoritiesthe
equivalentof 37 per centof local spend,comparedtojust19 percent inthe current system.A study
has shownthatin the Oxfordshire LEPalone,if authoritiesdeliveredonexistinghousebuilding
targetsbetweennowand2031, between£707 millionand£805 millionwouldbe generatedin
stampduty onlocal newbuildsalesalone.Equallysalientisthe factthat devolvingmore taxes
reducesthe reliance on anarrow and therefore riskytax base,andsodevolvingpowersoverStamp
Duty as part of a portfolioapproachwouldoffer more control overabroaderrange of tax revenues
givingcitiesmore fundingcertaintyandincentivestosupporteconomicgrowth.
Council tax
There are alsochangesto council tax that wouldimprove the abilityof local governmenttosupport
growth.Local powers overcouncil tax are still verylimited - inrecentyearscouncilshave neededa
referendumtoapprove increasingcouncil tax bymore than2% a year, onlyavoidingthiswherethe
extraspendingisonsocial care.To improve the abilityof local governmenttosupportgrowth,cities
needthe freedomtoraise council tax rateswithout areferendumandtointroduce extracouncil
bandsin orderto betterreflectthe local economyanddistributionof propertyprices.
A lookat the differentlevelsof revenue fromdifferentregionsservestoillustratewhymore
flexibilityinthe realmof council tax isnecessary,particularlytoencourage revenue pooling.Around
half of all workersinBritainlive inone local authoritybutworkinanother,meaningthatthese
workersgenerate tax inone authority,butconsume publicservicesinanother.Thismeansthat
withinacity-regionthe tax base of more residentialauthoritiesisreliantoncouncil tax,whileinthe
core urbanauthoritybusinessratesmake upa largershare of the tax take.Authoritiesacrosscity-

8. regionsshouldnotbe encouragedtocompete onthese tax revenues.Forexample,inthe contextof
GreaterManchester,Stockportshouldnotbe penalisedforbeingalargelyresidentialarea- which
therefore generateslessinbusinessrates - norshoulditbe incentivisedtotryand attract jobsaway
fromManchestercity centre inorderto generate more businesstax.Thisexamplehighlightsthe
needforauthoritieslikeStockporttohave more freedomandflexibilityovercouncil tax revenues,
introducingextrabandsasappropriate andhavingthe abilitytorevenue pool tomeettheirspending
needs.
Comparative evidence
The UK has one of the most centralisedtax regimesinthe OECDwitha mere 1.7% of GDP collected
as tax locally(shownbelow),causingUKcitiestobe far more reliantongovernmenttransfers. For
example, whereas Londonreceives74per centof itsrevenuesthroughtransfers,inNew Yorkitis31
percent, inParis18 per centand inTokyo 8 per cent,meaningthe redistributionof revenuesto
those local authoritieslessable togenerate tax revenuesistypical,andisseennotas a drawbackof
decentralisation,butatool whichfacilitatesflexibilityandequality.Probablythe strongest
endorsementforthe feasibilityof adecentralisedtax systemisprovidedbythe successof such
systemsinmanyothercountries,afewof whichwill be discussedhere.
Lookingacross the Atlantic,some mayunderstandablycautionwhetherthe UKcan be reasonably
comparedto the US where the size andsophisticationof the tax systemisfarbeyondanythingseen
inthe UK, differentiatingsales taxesbetweengoodseven.However,the studyof the breakdownof
local tax powerswithinindividual USstatesactuallypaintsapicture of whatdevolutioncouldlook
like inthe UK, andis somethingwe shouldlooktoemulate.

9. The US tax systemissignificantlymore decentralisedthaninBritain,splitbetweenFederal,
State and local levels.Federal governmentaccountsforjusthalf of total publicexpendituresbut
federal taxesaccountfor65 percent of tax revenues.Combined,state andlocal taxesrepresent34
percent of governmentrevenues,local taxescomprisingafargreaterscope than in the UK to
include real estate taxes,salestaxes,income taxes(onpersonal income andcorporations) aswell as
hotel roomoccupancy,commercial rent,andbeerandliquorexcise.The argumentsabove have
shownthe hostof benefitsintermsof greatereconomicincentivesasaresultof more local
responsibility,aswell asgreaterflexibility,whichcome withincreasedlocal tax power.Alsowhere
the US systemdiffersisthatFederal grantsare allocatedtostatesand local governmentsnotjuston
a needsandpopulationbasis,butona competitivebasis,where competitionbetweengovernments
isgood forthe same reasoncompetitionbetweenbusinessesisgood.However,little redistribution
occurs at the federal level,andismore commonwithinstateswhichare thereforemore
autonomous.A particularlyfiscallyandautonomouscitygovernmentisNew Yorkwhere receipts
fromextensivelocal taxes,comprising64% of cityrevenue,fundseducationandmanysocial
services,includingchildcare,employmentandtraining,foodassistance,seniorbenefitsandrent
assistance programmes.Lessonsforthe UKare that more local tax powersoffer betterdecision
makinginmore areas and formore people.
Local governmentsinFrance alsobenefitfromahighdegree of fiscal autonomy,where local
taxesaccountfor 48% of theirspendingcomparedtojust19% in England.Here,althoughmost
redistributionor‘equalisationgrants’tosupportdisadvantagedauthoritieshave beentop-down,
there hasbeena recentshiftto increase redistributionbetweenlocal authorities,withseveral
‘horizontal’redistributionfundscreatedbetween2010 and 2013. This providesagoodexample fora
moderneconomywhichhasharnessedthe non-mutuallyexclusiveelementsof local tax competition
and horizontal redistributiontostrengthenlocal economies.
Finlandsimilarlyboastsarelativelyhighlydevolvedtax systemwithlocal government
accountingfor40% of publicexpenditure,andusesatop-downcompensationredistribution
betweenlocalitiesbasedonmunicipal tax income.Municipalitiescansetbothcorporate and
propertytaxeswithinlimits, buttheirmajorpoweristheirautonomytosetdifferentbandsforlocal
income tax whichcontributesupto95% of local tax revenues.The benefitsof thisare evidentin
welfare,butmore soinFinland’seducationsystem,performingverywell byinternational standards
not inspite of school age educationbeingfinancedanddeliveredbylocal authorities.Again,the
rewardsfrommore closelytargetedlocal spendingforpublicservicesare inplainsight.
It comesas no surprise then,thatthe LGA and itssisterorganisationsinScotland,Walesand
NorthernIreland(COSLA,WLGA andNILGA) have includedregional fiscal autonomyasone of three
principlestoensure gooddevolution.Economicarguments,reinforcedwithcomparativeevidence
suggestthata full scale tax devolutionwill unlockthe growthpotential of England’sNMAsasthe
real engine roomof growth,turningthemfromunder-fundedafterthoughtsinWestminsterinto
catalyststo deliverinvestmentandtradingpartnersintheirownright.
Obstacles
The political question
Apart fromconstituenciesinthe southeastandnorth where majorityrepresentationsby
Conservative andlabourpartymembersrespectivelyare expectedinthe new CombinedAuthorities,
it isentirelypossible thatamuch more diverse mix of political voicesinwhatwillbecome coalition
authorities inotherregions will resultinparalysisandresentment. AccordingtoanNLGN the
creationof verylarge and sophisticatedentitiescomprisingof upto 22 authoritiesisalready

10. hamperingprogressinthe NorthMidlandsandEast Anglia,whilstsome local MPsandcouncillors
are opposingdevolutiononthe groundsthatit isa threat to theirpersonal power. The planneduse
of the AdditionalMembervotingsystemwillalsoensure avarietyof voicesvyingforpowerinthe
CombinedAuthorities,whilstvaryingcommitmentstodecentralisationacrossthe regionscanonly
slowthe devolutionroll out.
However,conflictof interestsare boundtobe facedby anysort of mixedrepresentationdecision
maker,and a general vestedinterestof local growthshouldactas a social cohesive inhelpingnew
CombinedAuthoritiesovercomeconflictsof interestbetter,say,thanwouldanational parliament.
By the same token,evenif commitmentstodevolutionare varyingatfirst,a jointconsciousnessof
neighbouringauthorities’post-devolutionprogressshouldspurneighbouringregionsintoquickly
signingdevolutiondeals.
In addition,since electedmetromayorswill be subjecttorelativelyshorttenures inpower,asisa
prime ministerinnational government,theywillbe subjecttothe same regressiveincentivesof
takingshortterm economicandsocial measuresinordertomake theirmark. Inlightof this,the
precedence of the regions’ longtermsocio-economicdevelopmentovershorttermpolitical agendas
mustbe paramount inthe criteriaof the oversightcommitteeswhichwill have the powerto
suspendmayoral decisions,asstipulatedinthe 2016 devolutionbill.Other checkssuggested on
metromayors’ include limitingto2%the premiummayorscan add to businessratesinordertopay
for newinfrastructure.
The ex-Chancellorsawdevolutionashispet-project,andwiththisprominentpillarof supporttaken
away inthe cabinetreshufflethe question hastobe askedwhetherTheresaMay’snew teamhasthe
convictiontosee througha projectthat will fundamentallyreshape the relationshipbetween
national andlocal government. AnNLGN reporthasalreadyvoicedconcernsovera distrustful
mindsetof ‘us and them’asan obstacle to central governmentdevolvingpower,butalsoadvocating
that local governmentshowsitselfwillingtotake risks.
Is it simplyanother layer of redtape?
Will all effortstounshackle the UKfromthe restraintsof bureaucracybyleavingthe EU have beenin
vainthanksto a newsystemwhichclogsupthe arteriesof governmentwithanotherwave of
authorities,committeesandacronyms?Will the sophisticatedlevel of economicregulationand
oversightorthe abuse of powerby wayward‘metro-mayors’cause more strifeforthe national
governmentandatmore expensetothe tax-payer?
If a whole hostof newbodies,committeesandsub-committeesiscreatedtopushthroughthe
devolutionprogramme thismaywell have adiseconomiesof scale effect,the veryeffect
decentralisationwasmeanttoresolve, slowingdownthe processesof local government.However,
several commissionshave citedevidence thatCombinedAuthorities havingdirectcontrol over
spendingunderadevolvedsystemwouldmeanlocal governmentsnolonger havingtoapply for
thingslike housingandinfrastructurefundingfromvarioussourceswhichwastedtime andslowed
the pace and of growth.
Winnersand losers,disincentives
Placeswithlesssuccessfuleconomieshave less abilitytoraise revenuesfromtaxation,andthese are
oftenthe placesthatalsohave highlevelsof needandrequire publicfunding.Inamore devolved
system,the fearisthat these placeswill be unabletocope,ultimatelycreatingasituationof winners
and losers. Some fearpostcode lotteriesinpublicservice delivery, basedonthe principlethatthe
qualityandaccessto servicesshouldnotbe determinedbywhere youare bornor happentolive;
the belief beingthatif servicesare fundedcentrally theywill be equal.

11. However,bothof these argumentstendtoignore the realitythatthere isalreadydivergence
inthe qualityof servicesdeliveredandlocal outcomes. The recentcentral fundingcutsforlocal UK
governmenthave reducedthe resourcesavailabletothem, andmanylocal authoritieshave warned
that by 2016 theywill nolongerbe able tocoverbasicservices.The increasingcostof social care,
drivenbyan ageingpopulationandpopulationgrowth,isof particularconcern.Itis estimatedthat
by 2020 councilswill needtofindanadditional £4.3 billion,or2.5 per cent,increase incurrentlocal
governmentspend,justtomanage care at currentlevels. A shifttoa devolvedtaxationsystem
couldaddressthese issuesbyboosting incentivesandresourcesavailabletolocal governments.
The graph belowillustratesinwhichauthoritiesmore orlesswasgeneratedinbusinessratesthan
was allocatedthroughrevenue supportgrantandredistributedretainedratesin2014-15. In 145
local authorities,more businessratesrevenuewasgeneratedthanwasreceivedinfunding,while
the reverse istrue in181 local authoritieswherelesswasgenerated,giving anideaasto the
forecasted‘winnersandlosers’of a devolvedbusinessratessystem. However, the governmenthas
beenclearthat a systemof top-ups,tariffsandsafetynetswillcontinueto redistribute revenues
fromauthorities thatgenerate the mosttothose that generate the leastfrombusinessrates,andis
consultingoncappingfundingdivergence,all mitigatingthe chancesof anoutcome whichproduces
‘winnersandlosers’.
Finally, perhapsthe strongestargumentagainst tax devolutionisthe dangerthatcertainauthorities
may spendbeyondtheirregion’smeanssafe inthe knowledge thatthe national governmentwillbe
obligedtobail themout,justas the banksthat threw cheapcreditat everyone andanyone inthe
leadupto the Global Financial Crisisof 2008 knew theywere ‘toobigto fail’. Assucha major
incentive towardsfiscallyindependentcity-statesconcernedwithbringinginenoughrevenue to
covertheirexpenditureswhilstcompetingfor investmentandgrowthwouldbecome obsolete.The
same couldbe said of plansto equalise spendingcapacityacrossregionsbyredistributingrevenues
rightfullyearnedinwell-performingregionstounderperformingregions,asoccursbetweenFrench
and Finnish regions.

12. However,muchof the fiscal federalismliterature contendsthathorizontal local governmentalgrants
inparticularare importantto close the revenue gap,andthattheycan be justifiedbyusingbenefit
spill-overs,authoritiesonlyredistributingwhentheyhave coveredtheirownspending needs.That
waythe incentives of autonomyandefficiencyinspending decisionsshould remainstrongamong
well-performingregions,whilstunderperformers,now limitedinwhattheycando due to top-down
interference,will be incentivisedtoachieve the fiscal autonomyandefficiencyof well-performing
neighbours.Asoccursinmanydecentralisedcountries,asystemof grantsto equalise fiscal
capacitieswill be necessary,butshouldbe kepttoa minimum, withlocal authoritiesstrongly
encouragedtogrow off theirownback.AlexandraJones,Chief Executive of Centre forCitieshas
stressed thatthe bestwayof generatingmore revenueforareaswithlow demandisbyincreasing
the overall potof local governmentfunding,bygivingplaces strongincentivestoreallydrivegrowth
intheirlocal economies,achievedinturnthroughmore fiscal devolution.Therefore, Ibelievethe
correct use of incentives will make aUK tax devolutionfeasible.
Conclusion
Overall,the prospectof the self-sufficiencyandautonomythatcomeswithanincreasedtax base,
onlyredistributingbenefitspill-oversbetweenlocal governments,combinedwiththe successof
decentralisedtax regimesinothercountrieswherelocal competitionandcooperationhappilyco-
exist,suggestthatatax devolutioninthe UKisfeasible.Prudentmacroeconomicoversightof local
taxation,spendingdecisions,andespeciallyof the redistributionof fundsfromnational andbetween
local governmentsinordertomitigate anydistortedincentivesshouldensure thisisthe case.
Under the currentsystem,local governmenthastoofew incentivesandresourcesatitsdisposal to
significantlyshape andstimulate the local economy,orto delivermore effective andmore efficient
publicservices.A shifttodevolvedpowercouldtackle this.