Wednesday 22 February 2017 4:15 am

Our overly centralised tax system has exacerbated the business rates debacle

Alexander Jan is chief economist at Arup.

Business rates may not be the most captivating subject for most City A.M. readers. But the impact of a delayed revaluation on our shops, pubs and cafes might well be.

Changes affecting the £25bn a year tax that ultimately goes to pay for social care, schools, Tube trains and roads are due to come into effect in April. In national terms these are supposed to shift the same tax burden onto more valuable business properties. Inevitably, the revaluation process has the effect of creating winners and losers.

And that’s where the government’s problems begin. Because of London’s economic resilience, those businesses being asked to pay more are concentrated in the capital. As many as 7,500 could see a rise of 45 per cent in their bills. London First has estimated that the increase in tax take on the city could total around £1bn a year. As the New West End Company has pointed out, smaller enterprises will suffer alongside flagship stores in the West End. The row has created a remarkable alliance that includes Conservative and Labour councils, the CBI and London Chamber of Commerce plus Sadiq Khan and Lord Tebbit.

Back in the 1980s, Margaret Thatcher effectively nationalised business rates. This policy was designed to rein in the excesses of so-called loony left councils. But the change also weakened a crucial link between local authorities and businesses. Rate increases were no longer in the hands of councillors. It also made it easier for some councils to say no to development as they no longer suffered in tax terms from it not going ahead.

Read more: Should business rates be scrapped?

In its quest to balance the books, central government has tended to put up taxes that it thinks are perhaps less likely to be noticed by voters. These have included air travel, alcohol and fuel duties plus arguably hard to follow changes to income tax allowances. The disconnect between council taxes and business rates is another example. Research by the British Property Federation shows that, in 2015, the tax take on commercial property was around 80 per cent of that for council tax but on an asset base with just one sixth of the value. Apart from in the City of London, businesses don’t get to vote.

For the government to avoid a rerun of today’s rates row, reform to local taxes will be required. It will not be straightforward. The poll tax debacle of the 1990s no doubt haunts Whitehall policy-makers today. They will be wary about changes to a system where significant numbers of people lose out.

But England’s creaking property tax regime is increasingly no longer fit for purpose, and a one-size-fits-all regime for a country with major economic disparities is no longer sustainable. Holding off on modest increases or revaluations stores up trouble. By stalling, ministers have created “cliff-edge” shocks that could now see businesses of all sizes in London go to the wall or suffer lasting economic damage.

Read more: In full: The letter Sadiq Khan sent to Philip Hammond on business rates

By any modern democratic standards, England’s tax regime is heavily centralised. The linkage between economic growth and local taxes is weak. Accountability is impaired.

Other parts of the United Kingdom have rightly been given greater freedom over their taxes. Their local politicians can choose to raise or cut them. The government should now embark on reform for England. It should restore meaningful revenue-raising powers to local government including London and the South East. As professor Tony Travers of the London Finance Commission points out, despite its apparent affluence, London has the largest concentration of deprived communities in the UK. Devolution would help to tackle this. It would allow London’s government to respond more effectively to the needs of its citizens and businesses. Investment in housing, transport and skills could be boosted.

In the short term, the focus of campaigners will be on securing a deal to soften the blow of imminent increases in business rates. They should then redouble their efforts to secure lasting reform to our outdated system of local taxation once and for all.