Government considers local income tax to aid the poor

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The council tax, target of growing protests from householders hit by above-inflation rises,could be scrapped and replaced with a local income tax. The surprise proposal, which could hit middle-class families hard but significantly reduce bills for low-income households, was revealed yesterday by Nick Raynsford, the Local Government minister.

Labour fears a backlash from the voters as the impact of council tax rises - which this year averaged 12.9 per cent - is felt. The town hall funding system could probably not be reformed before 2006, but the government could fight the next election on a commitment to abolish council tax. The move would also mean Labour adopting a flagship Liberal Democrat policy.

The idea emerged after a Whitehall review of local government finance discovered deep hostility to the council tax among people who thought it was too high and should be reformed. Several options will be examined by ministers, including introducing a local income tax, reforming business rates and a complete overhaul of council tax.

Variations of local income tax operate in several European countries, including Norway, Finland and Switzerland, as well as in Canada and some American states. Mr Raynsford, who is chairing the review, told MPs: "We aren't going to come out with glib promises of quick improvements.

"We want to look closely because this is a serious issue and you rightly highlight one of the obvious anomalies that would flow from the abolition of the only property tax that exists in this country."

A spokeswoman for the Office of the Deputy Prime Minister said later: "The Government is looking at a local income tax. Nothing has been decided. We're very much at the preliminary stage. The Government starts with an open mind." She said the aim of the review, which will reach its conclusions next summer, was to arrive with a system that was "fair and sustainable".

Under the Liberal Democrat proposal, local income tax would be administered by the Inland Revenue at an estimated rate of 3.5p in the pound. The party reckons households with an annual income below £39,000 would be better off while those above that would pay more.

Central government block grants would be phased out eventually, but a "safety net" system would ensure disparities between wealthier and poorer parts of the country are evened out. The party says it will be able to make large savings in administration costs by the move, because 4 per cent of council tax revenue went on bureaucracy alone, compared with 1 per cent of income tax.

Edward Davey, Liberal Democrat local government spokesman, called for Labour to announce the end of the council tax immediately. "Labour inherited this unfair tax from the Conservatives, so what is stopping ministers addressing the council tax problem directly? Council tax is now so unfair to millions of pensioners, and people on low incomes, that it must be scrapped."

Mr Raynsford has already conceded that this year's tax rises have reached the "limit of acceptability". The government has ruled out capping town hall budgets this year, but warned it was prepared to limit local authority spending in 2004-05. This year's biggest increases have included: Wandsworth (45 per cent); Westminster (28 per cent); Croydon (27 per cent); Ealing (26 per cent); Barnet, Eastbourne (24 per cent each); Lambeth (23 per cent); Brent (23 per cent); Harrow, Islington, Runnymeade, Portsmouth, Weymouth & Portland, Elmbridge (21 per cent each) and Hastings, Mole Valley, Rother Thurrock and Surrey Heath (20 per cent).