Rates Repatriation: How much is too much?

The more one looks, the more one realises that, without some form of equalisation, it quite simply does not add–up. Secretary of State, Eric Pickles’ turn of phrase about the ‘repatriation of business rates’ has been oft-quoted in the media since it bubbled to the surface in December. Given that my dictionary defines repatriation as “ being returned to one’s place of birth”, we can only hope that we are not to be returned to the very birth of rates as a form of taxation in the Poor Law Relief Act of 1601.

Joking aside, the uncorrected notes from the Comprehensive Spending Review’s submission of oral evidence by Mr Pickles is worth repeating here, if only in an attempt to contextualise his use of the word repatriation.

Having referred to the incomprehensible nature of the existing formula grant calculation(the calculation used to re-distribute funds from the centre to regional and local government), Mr Pickles went on to suggest that ‘quite a lot can be done with the repatriation of the business rates to local communities. I am hopeful that we can use that as a way of getting local authorities on a regular, predictable basis that is not subject as much to the decisions of central Government in terms of overall funding.’

The inference for all of us is that the government clearly views the local authority as the natural home of business rates, and so intends to press ahead with some form of relocalisation such that local authorities ‘are not subject as much’ to the vagaries of centrally managed funding decisions. For those of a Big Society persuasion, limiting the influence of central government is probably a good thing. However, it was unfortunate that Mr Pickles’ inquisitors did not think, during their evidence gathering efforts, to enquire about fairness, equality and the impact upon business.

A quick look at the numbers, crunched and published by the Local Government Chronicle, highlights the winners and losers in a scenario in which local authorities collect and retain 100% of local levies. Westminster, London City, Hillingdon, Camden and Chelsea are the big winners, whilst authorities such as Birmingham, Hackney, Liverpool, Lewisham and Newham stand to lose hundreds of millions in funding.

A politically and morally unconscionable thought. So, it won’t happen. The question is, what might happen? Whilst headline writers jumped upon the emotive term ‘repatriation’, the real nuance lies in how Mr Pickles plans to ensure that local authorities ‘are not subject as much’ to the effects of centrally-determined funding decisions. And therein lies the real question for UK plc; when it comes to local authority intervention in property taxation, how much is too much?

Economic development professionals in favour of relocalisation

It doesn’t really come as much of a surprise to hear that a piece of research by the Centre for Cities has concluded that 76% of senior economic development professionals, based in cities and towns throughout England, believe that relocalising business rates would be a positive step for their respective areas.

I think it is pretty clear that such a move would be almost certain to benefit cities. After all, the vast majority of business rates tax revenue is derived from urban locations. So, if local economic development professionals were to be handed control of these pots of money, they would clearly be failing in their duty to their local economies if they were unable to create some form of positive enhancement.

Aside from the fairly obvious conclusions of this research, there are three additional points to be considered, which will hopefully bring some balance back to the debate:

1) I have no doubt economic development professionals the length and breadth of the country are keen to seize local control of funding mechanisms, but what do business owners, employers and occupiers think of the idea of losing the predictability of a centrally-managed system in order to reap the benefits of local investment decision-making?
2) Rural communities benefit greatly from the existing process of tax income redistribution. Wouldn’t it be more beneficial to our overall understanding of the issues at stake for research such as this, albeit being carried out by the Centre for Cities, to consider the views of a broader range of interests? It is important for rural England’s voice to be heard too, and I encourage their representatives to join the debate.
3) More ominous is the comment which underpins the key rationale for the relocalisation of business rates – “With local finances under intense pressure, many[of the respondents] see these new [rates localisation]tools as a way to fill the gap left by public spending cuts.”

Fill the gap?? Dare I ask, at whose expense?

Chicago TIFs are a lesson for UK councils

The pressure is clearly building on the leaders of Chicago’s city administration to come clean on the question of Tax Increment Financing. The TIF model of infrastructure financing has been welcomed across much of the US in recent years as local politicians seek to access new sources of development funding. The Chicago experience is regularly cited by TIF proponents here in the UK because some of Chicago’s 160 TIF districts have clearly breathed new life into previously blighted communities. I have no doubt we can put TIF to similarly good use here.

Yet, Chicago’s voracious appetite for the TIF model, as exposed by local newspaper The Chicago Reader, provides a foretaste of what can happen when the advantage of focused and autonomous local decision-making collapses under the weight of commercial interest and partisan political influence. Not only have there been accusations of goalposts being moved, funds being diverted and the poor getting poorer, but the suggestion of a ‘slush fund’ at City Hall sounds ominous, and has raised the political stakes considerably.

It all seems a far cry from the way we do business in the UK, yet we cannot afford to avert our eyes. TIF is not a panacea. Hard-pushed business ratepayers deserve protection from local government decision-makers who may come to view TIF and the non-domestic rates levy as a bottomless pit of cash.

Councillor maintains rates localisation pressure

Is Councillor Colin Barrow, Leader of Westminster City Council alone amongst councillors in his view that councils should be given the power to retain a greater share of the business rates which they collect from local businesses? I suspect not. Having written eloquently on this subject in our current issue of Rating in Brief, the Councillor continues to present his case in public.

Most other councils have remained silent on the issue, perhaps for fear of rocking the boat at a time when public sector employment levels are in the spotlight. This, in spite of the fact that the coalition government is positively encouraging the presentation of new ideas.

There is clearly a debate to be had on the question of non-domestic rates localisation. Whether one agrees or disagrees with his views, the Councillor is doing all of us a favour by presenting an opinion on a divisive topic, and being prepared to stand by that opinion in public.

We need to hear the views of more councillors, not just those from inner city councils who many suspect stand to gain most from rates localisation, but also from councillors representing rural England.

And what about our business leaders? Around the time of Sir Michael Lyons’ ‘place-shaping’ review of local government finance in 2007, representatives of the business community queued-up to argue the case for the status quo. The place-shaping agenda was quietly shelved…… until now.

Let the debate commence!

Tax Increment Financing: the good, the bad and the ugly

Notwithstanding the statement in the White Paper, Local Growth: Realising Every Place’s Potential, that the government’s proposed introduction of Tax Increment Financing will require legislative amendment, TIF in the UK currently appears a simple case of robbing Peter to pay Paul.

The TIF model, as widely deployed in many American cities, finances the regeneration of ‘blighted’ communities. It funds, from future tax revenues, the development of shopping malls, offices and other supporting commercial infrastructure. The resulting increases in employment, spending and property valuation deliver an enhanced tax yield which pays down the investment over time.

Large businesses and city administrators are keen to publicise the success of TIF, yet there is growing community resentment that funds are poorly targeted, wealthy areas benefit most and local government cronyism is rife. The chorus of dissent continues to rise.

Here in the UK, we have much to learn from America’s experience of TIF. 3 areas of contention warrant further consideration:

1)      Our existing tax legislation prescribes business rates as a zero-sum game, meaning that the tax yield is essentially fixed. Therefore, where one community benefits from increased collections, others inevitably lose out. A change to this basic premise would require significant legislative amendment. 

2)      Borrowing against future rates income is akin to spending tomorrow’s predicted tax yield today. Just as Crossrail has committed future generations of London ratepayers to the Business Rate Supplement, TIF will commit local communities for the foreseeable future.

3)      On the surface, the American experience of TIF has been good. However, as more information comes to light regarding how funds are targeted, questions are being asked about transparency, cronyism and undue influence. In the UK, officials must recognise, and prepare for these inevitabilities.

With the tacit approval of Downing Street, local government officers are preparing to deploy TIF to make local decisions which directly benefit local businesses and local people. Yet, there is good reason for central government to demand the final say. In America, the TIF model has moved too far from its original goal of aiding the regeneration of blighted communities. Inequalities have crept into their system and already prosperous districts appear to be benefiting most.

In the UK, the same question of equalisation remains unanswered. The regional inequalities which schemes such as TIF precipitate may further polarise our communities. Before a single TIF is approved in England, the government must make clear how it plans to maintain the fairness, equality and predictability of our non-domestic rating system.

Hopefully, the Local Government Resource Review, planned to commence in January, will face-up to the issues and respond to these genuine and warranted concerns.