devolving income tax

As the argument over whether or not to devolve income tax takes place I would like to address not the desirability or otherwise of the principle but to address the criteria needed to be met and the practicalities of devolving income tax.

Firstly there are three criteria that need to be met in the Wales Act, its Command paper or by other means before we can get to the stage of discussing the practicalities and these are the no detriment rule, needs based funding and no lockstep.

We need the same no detriment rule as Scotland has been given as Wales would have no control over tax allowances and band points. Scotland has been protected from any negative affect on their budget by this in the Command paper that was produced alongside the bill. This protection would need to be either in the Wales bill or the Command paper published with it, otherwise in year changes in tax allowances and bands would affect the amount of income tax received without the Welsh government having any control over it.

We need a minimum of a Barnett Floor now but the first step for fair funding has been secured by the Finance Minister (addressing convergence if it is thought to occur at each Spending Review). A proper needs-based distribution formula needs to be created and whilst I would prefer it in the legislation in order to get it through the Treasury and to avoid locking in the under funding of Wales I accept other methods of achieving the same end result are possible. If this is not committed to and undertaken then the underfunding of Wales could be locked in to the finance system for ever. Of course it is not only Wales that would benefit from a needs based formula some of the English regions would as well.

The Lock step needs removing because if it stays it means that tax changes could not be used. Whilst changes to the higher rates could be made and would either raise or cost relatively small sums, a substantial change in the basic rate would either cost large sums of money or cause a huge public outcry. A finance policy could include increasing the upper rates and decreasing the basic rate or vice versa but with the lockstep in place this would be impossible. Any government that accepted the devolution of income tax with the lockstep would be accepting the risk on tax receipts without having any effective control on tax rates. Remembering that since 1999 Scotland has had the power to vary the basic rate of income tax by up to 3p but no government in Scotland has used this power.

If the above are met then we move into the detailed discussion regarding devolving income tax.

Income Tax whilst not as volatile as other taxes has shown up to £300 million difference between years. We would need to start any devolved income tax as the financial cycle was moving up so that money could be accumulated in order to avoid the need to borrow on the down cycle. We would also need to keep underspends and build up balances, just like a local authority does, in order to deal with years when the tax take is reduced.

Wales would need protection against external factors e.g. a major closure caused by a Westminster Government decision that would seriously reduce the Welsh government tax income. The governments would need to agree a value above which the Westminster Government would start to compensate for the reduced tax caused by their policies.

We would need borrowing powers to cover shortfall in income tax and borrowing is also required to fund infrastructure. There is a need to have two borrowing limits one for capital and one for revenue otherwise capital projects would be cancelled in order to fund revenue commitments made at the beginning of the year. We would need the equivalent of the Scottish cash reserve to deal with fluctuations in devolved tax receipts.

Finally a definition of the Welsh tax payer will be needed preferably based upon the Scottish model but defining Welsh tax payers especially in border areas may be problematic. This depends on the Income tax collection service knowing the up to date home address of all tax payers and would involve additional work to ensure that Wales receives its correct funding.

When all this is resolved we will then be ready for a referendum on the partial devolution of income tax.