Growing pains: Property taxation and revenue incentives in English local government

Abstract

Devolution of business rate revenue to English local authorities has been cast as a far-reaching act of fiscal devolution, with the explicit aim of enhancing local economic growth by providing financial incentives to local authorities. The system is based on three tacit assumptions: that local authorities can systematically increase their business rate revenue via local policy decisions, that increasing business rate revenue correlates with growth in the local economy, and that the structural effects of the business rate system upon local authority behaviour and revenue outcomes are negligible. This article makes the first known attempt to analyse the outcomes of the Business Rate Retention Scheme since its inception in 2013, using previously unavailable data from the 2010–17 valuation list for England. Findings indicate that all three of the tacit assumptions can be challenged. Links between local policy and revenue growth are subject to macroeconomic confounders, links between rate revenue and economic growth are ambivalent, and the structure of the system has a decisive effect on individual authority outcomes. The system is not a game of chess, with outcomes based on skill; it is more akin to cards, where results are dependent in part on the cards dealt.

A review of the current business rates scheme in Wales and the effects of a potential local retention

“…A major change in tax systems of several Western countries has been recorded during the last 30 years, following a transition in the governance system. The decentralisation of power accompanied by fiscal devolution has changed the governance of finance systems in several countries (Bahl and Martinez-Vazquez, 2008; Harrison, 2012; Marks et al., 2008; Mor and Sandford, 2017). Fiscal devolution could be related to the financialisation of urban areas, decentralisation and market reforms focusing on growth (Brenner, 2003; Cox, 2009; Pike and Pollard, 2010).…”

“…The decisions for tax devolution have been made, among other reasons, in order to provide incentives to local government to strengthen the prospects for economic growth, according to the advocates of fiscal decentralisation, as Muldoon-Smith and Greenhalgh (2015) have pointed out. However, serious questions arise about the relation between local tax policy decisions and tax revenue increase and the correlation of a rise in local tax income with economic growth (Mor and Sandford, 2017). Indeed, evidence shows that local economic growth in England has not been strongly correlated with the increase in local property tax revenues (Muldoon-Smith and Greenhalgh, 2015; Sandford and Mor, 2017).…”

“…Under the simple scheme of a hypothetical 100% retention of NDR without RSG adjustment, some councils would see their revenue falling relative to a fully pooled system while others would record higher revenues. Such a hypothetical system could result in an increasing divergence between councils in their relative income and spending (geographical impact), as fiscal devolution, closely related to decentralisation and urban financialisation, is likely to increase the unequal finance of LAs, thus deepening the geographical unevenness (Brenner, 2003; Cox, 2009; Mor and Sandford, 2017). Councils with vibrant property markets and bigger increases in local tax base would be more likely to secure higher income.…”

“…Primarily, it is the first in-depth investigation of the business rates system in Wales, which currently presents crucial differences with England and Scotland. Further, most studies in retention of business rates in the UK have sought to evaluate the impact of policy changes that have been already adopted (Amin-Smith and Phillips, 2017; Greenhalgh et al., 2016; Mor and Sandford, 2017; Muldoon-Smith and Greenhalgh, 2015). This paper adds to this literature by studying the potential impacts of a future retention of NDR by the Welsh councils, responding to calls of the National Audit Office (2017) for an ex ante evaluation of the NDR system changes’ implications.…”

Is it possible to incentivise and capture local wealth? The business rate challenge

“…The timeliness of this Viewpoint article is bound up in the same central contradiction. The speed with which fiscal decentralisation (and its growing reliance on commercial property tax) is taking place makes it imperative to understand its implications for the funding of public services and the management of local and regional economic development (Mor and Sandford, 2018; Muldoon-Smith and Greenahalgh, 2015). Concurrently, the influence of commercial property tax on businesses is also acute.…”