Income tax: Difficult decisions lie ahead for Wales
The Senedd's Finance Committee has reported on the 'Impact of variations in national and sub-national income tax'. The report sets out a series of recommendations to stabilise and grow Welsh finances through income tax.
April 2021 will be the third year that a proportion of income tax has been devolved to Wales, and the final year of the current Welsh Government's commitment to not raise Welsh Rates of Income Tax.
Since April 2019, the UK Government has reduced the three rates of Income Tax paid by Welsh taxpayers by ten pence. The Welsh Government then decides the Welsh Rates of Income Tax to be added to the reduced UK rates and has set the rates at the same level as England and Northern Ireland.
The Committee, therefore, wanted to examine the impact different income tax rates between Wales and England would have on the 17 million people who live and work within 50 miles of the border.
The Committee concluded that more Welsh-specific data including, for example, on the different income bands of households, was needed to better understand the potential effects of changes in taxation on taxpayer behaviour.
International studies show high-income earners are particularly responsive to tax rates and some high-earning professions are more mobile than others.
However, tax rates are not the only reason people move; wages, family, house prices and quality of life cannot be underestimated. Therefore, the Committee recommends that these factors must form part of future Welsh Government research on the impact of tax divergence across the Wales-England border.
Another recommendation calls on ministers to attract and retain people in Wales who will provide the best boost to tax revenues, including high-earners and young graduates. According to the 2016-17 Survey of Personal Incomes, 44 per cent of the Welsh population pays income tax (compared with 47 per cent of the UK's population).
On the issue of Covid-19, a previous report from the Committee found more than £2 billion has already been made available to the Welsh Government to cope with the impact of the global pandemic.
However, more may still be needed, and little is known about what possible contingency funds are or should be in place in the event Wales is hit by a second wave of the virus.
The Committee wants ministers to develop policy options for the Welsh Rates of Income Tax and start considering contingencies to deal with the potential consequences of the pandemic and economic downturn.
"Wales faces some very difficult decisions in the coming months about how to get the economy moving again and what the current £2 billion cost of this pandemic means for our livelihoods and our public services afterwards," said Llyr Gruffydd MS, Chair of the Finance Committee.
"The Welsh Government needs to consider all economic levers at its disposable, including options around the Welsh Rates of Income Tax.
"It should also be establishing a clear picture of the England-Wales border area, exploring which tax bands households are in, what drives taxpayer behaviour, and how Wales could do more to attract the sort of responsive groups it needs to boost our revenues."
The Committee makes 12 recommendations in its report, including:
- The Welsh Government considers policy options for utilising its Welsh Rate of Income Tax powers to deal with adverse economic conditions and cuts in public spending;
- The Welsh Government develops policy options to attract the most responsive groups to Wales, such as high-income earners and young graduates, to boost tax revenues; and,
- Greater collaboration between the Welsh Government and HMRC to improve Welsh data collection and dissemination, and urges the Welsh Government to explore how HMRC's Knowledge, Analysis and Intelligence division can be utilised to support research into tax divergence.
The Committee's recommendations will now be considered by the Welsh Government.