Minister bows to pressure for local income tax inquiry

The prospects of a local income tax being introduced alongside council tax increased substantially yesterday after the Government commissioned plans for the implementation of the scheme.

The prospects of a local income tax being introduced alongside council tax increased substantially yesterday after the Government commissioned plans for the implementation of the scheme.

Supporters of the new tax, which would be related to ability to pay, were delighted that Nick Raynsford, the Local Government minister, agreed that further detailed work was needed on its introduction.

The decision came as the business lobby warned that councils needed to improve their efficiency before contemplating a rise in the business rate to ease the burden on homeowners.

A report by the Confederation of British Industry said that town halls could cut council tax bills by 15 per cent if they contracted out more services to private firms. Nationwide this would save £3bn, the organisation said. Progress on reforms such as the greater use of competition and joint local authority purchasing was "far too slow", it said.

The idea of a local income tax is now a realistic possibility. Some in the Government have been pushing it as a means of countering the perceived unfairness of the council tax.

A technical group - which includes the Treasury, the Office of the Deputy Prime Minister, the Local Government Association and the Chartered Institute of Public Finance and Accountancy - is being created to look at the practical introduction of the new tax. The Deputy Prime Minister John Prescott's balance of funding review group, which was given the job of reviewing the council tax and town hall finance, has agreed to set up the new group. The group will also look at the idea of a three-yearly budget cycle for councils, which would echo the spending review of the Chancellor.

Sir Jeremy Beecham, the Labour chairman of the Local Government Association, said that although no vote was taken at the group's meeting, there was a "feeling" in favour of local income tax to supplement, rather than replace,a property-based tax. He said: "There was a reasonable consensus round the table that partial rather than total [introduction] was the likelier option." The Government is keen to distance itself from the Liberal Democrats' proposal for the council tax to be completely replaced by a local income tax.

Professor Gerry Stoker, a fellow review group member and chairman of the New Local Government Network think tank, said that there had been general support for the idea of a local income tax to run alongside a modified property-based tax.

He said: "Among those who expressed an opinion, there was a sense that was the direction the discussion was taking." Professor Stoker said it was "highly likely" a property tax would remain in some form.

Councils finalised their budgets yesterday, but the Government said that decisions on council tax capping, with those boroughs that have had large bill increases hit hardest, would not be made until late next month.