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Welsh Government warned of pressures to make taxes less "fair"

Wales is much more dependent on the income tax paid by basic rate payers than the rest of the UK Credit: Wales Centre for Public Policy

There will be no simple way to increase income tax revenue using Wales’ new devolved tax powers, according to a new report by Cardiff University academics for the Wales Centre for Public Policy. The Centre is a think tank backed by the Welsh Government to look at the challenges it faces.

Once the partial devolution of income tax is complete in April 2019, the Welsh Government and local councils will control nearly £5billion of tax revenues – 30% of their current spending.

With greater tax powers comes greater responsibility, and our report sets out what needs to be kept in mind so these powers can be used responsibly.

There’s a limit to which tax policy should itself be used to achieve wider policy goals, as even small well-meaning changes could have profound effects on the amount of money brought in.

– Dan Bristow, Wales Centre for Public Policy

The report looks at the possible impact of cutting the very top income tax band -the additional rate- by 5p in the pound. It states that if it led to more than 845 highly paid people moving to Wales -or designating their second homes here as their main residences- the Welsh Government would see its revenue increase. A 5p cut for basic rate payers would only bring in extra money if more than half a million more taxpayers were attracted to Wales.

Making income tax more regressive -less skewed towards taxing the wealthiest- could be widely seen as unfair. One way of making such a change more politically palatable would be to tackle the council tax system at the same time.

There are large variations in the proportion of dwellings in each band across local authorities. Across Wales the percentage of properties rated in the lowest band (A) is less than 10 per cent in 10 local authorities, but this proportion rises to more than 50 per cent in Blaenau Gwent and Merthyr Tydfil. More than half of all properties rated in the top two bands (H and I) are located in just three local authorities: Monmouthshire, the Vale of Glamorgan, and Cardiff.

– Wales Centre for Public Policy report

The report's authors make no recommendations but they see scope for making council tax much fairer, by moving to a system where more expensive houses attract much moire tax -and the income is redistributed around Wales.

Given the potential knock-on effects of any change in income tax rates in Wales, it would be sensible to reform Council Tax at the same time to create a holistic approach to taxation.

Given the influence that wider policy areas like education and housing have on the economy, there are cross-departmental challenges for the Welsh Government to ensure it successfully manages the increased risk inherent to fiscal devolution.

– Guto Ifan, Wales Governance Centre

On the idea of a tax increase earmarked for the NHS, the report points out that an extra 1p on the standard rate would raise £184 million, equivalent to only 2% of the current health and social care budget.