Mayors and taxes: to raise or to cut?

Would North East mayors raise local taxes or cut them, given the chance?

That question has been given added significance by Levelling Up Secretary Michael Gove, who has spoken twice in Parliament recently in  favour of new fiscal (taxation) powers for mayors alongside devolution.

Gove told the Levelling Up Select Committee yesterday (June 13) that he was ‘very keen’ to see a move towards fiscal devolution, but he was very conscious that there were people in combined and local authorities who were wary about it.

There was a tension, he said, between devolution and equalisation across the country. Greater control over retention of business rates, for example, would be fantastic for London but not so great for the rest of the country.

Nevertheless, he did believe it was necessary to move in that direction because the more widespread and deeper devolution became, so there needed to be accountability for what mayors and others were doing about raising revenue as well as spending it.

Pressed on which taxes might be placed in the hands of mayors, Gove refused to go beyond the possibility of business rates because, he said conversations in which new taxes were proposed were fraught. He admitted that he was shamelessly ducking the question.

Business rates retention was also mentioned by Gove when he spoke in the House of Commons at the second reading of the Levelling Up and Regeneration Bill on June 8, when he mentioned Ben Houchen, Mayor of Tees Valley Combined Authority:

‘He [Houchen] talked about the vital importance of leaders of combined authorities and others having more control over business rates and other fiscal levers,’ said Gove. ‘This legislation and the devolution negotiations that we are conducting with Ben and others are designed to move completely in that direction.’

As well as tax raising, Gove also brought up the possibility of local tax reductions. Experience in Germany, Switzerland, the US and the Netherlands, he said, was that if you have devolution sooner or later if you want to raise economic activity then you reduce taxes. He mentioned Nashville, Tennessee, as an example.

This point was seized on by Houchen, who tweeted: ‘I prefer Singapore on Tees… but whatever the name – fiscal devolution with the ability to cut taxes for my area would be a game changer boosting jobs, business growth and investment’.

North of Tyne Mayor Jamie Driscoll, in contrast, has at various times proposed a £500m wealth fund, a land value uplift levy and an Earnback payroll tax on new jobs created by the combined authority, as reported here on October 25, 2021. None, he says, would involve new taxes on the public.

North East councillors have hopes that land value capture could contribute, alongside other sources of revenue, towards the £3.4bn cost of their ambitious Metro and Rail Strategy: ‘For certain investments’ says the Strategy, ‘developer contributions will form a viable part of the financial model. In others land value capture could be a viable proposition.’

The Local Government Association has received two reports on financial freedom and fiscal devolution for combined authorities, one in 2018 and one in 2022, from Matthew Oakley and Steve Hughes WPI Economics.  The second report concluded that: ‘Overall, it is clear that the system of government finance in the UK remains highly centralised and that the progress towards decentralisation has stalled and has arguably gone backwards.’

The report found that it can be challenging to use existing powers effectively: ‘Uncertainty of future funds was a prominent theme in the previous research, and a more general lack of long-termism has been a prominent theme in this research’ it says. ‘The counterproductive nature of restrictions and monitoring in how certain funds were spent were noted again in the latest research’.

In spite, or perhaps because of, these difficulties, the report found that: ‘There was no widespread desire for new financial instruments. All interviewees were asked whether they would like any additional financial powers. It was notable that there were not too many calls for it. By and large, combined authorities were trying to implement – or iron out problems with – the financial freedoms that they had already.’