Devolving air passenger duty, or not

One of the important decisions that came out with the UK Government’s Autumn Statement relates to the devolution of air passenger duty (APD).  The debate about devolving APD has now been going on for some time.  The Calman Commission recommended its devolution in unequivocal terms, along with stamp duty land tax and some smaller land taxes, noting that these

tax items which are less mobile, and so are unlikely to cause significant economic distortions.  These also provide useful additional fiscal levers to the Scottish Parliament … [A]llowing a Scottish rate of such taxes would offer a better match of policy instruments to the existing powers whilst not necessarily creating economic inefficiencies. (Executive summary, para. 27; Consultation Response – Evidence from the Independent Expert Group: Summary and Conclusions, para. 5)

 The Labour UK Government didn’t agree.  In the 2009 white paper Scotland’s Future in the United Kingdom, Cm 7738, it said:

 The Government’s assessment is that state aid rules, competition considerations and international aviation agreements restrict its ability to devolve air passenger duty. The Government does not therefore attach priority to the implementation of this recommendation although it will keep the position under review. (para .4.22)

The Coalition took a different view.  The 2010 Command paper Strengthening Scotland’s Future, Cm 7973, said:

On air passenger duty, the Government is considering the wider future of aviation duty, and it would not be practical to devolve this duty while these considerations are ongoing. The Government will consider devolution as part of the ongoing work on aviation taxation. (p. 13)

That consultation related to the Lib Dems’ favoured idea of moving to charging APD per plane, not per seat – so encouraging airlines to fill all seats on a plane, and reducing emissions per passenger.  Now, we have the result of the UK Government’s wider consultation on APD.  Essentially, that idea has been abandoned.  Subject to two changes already announced, APD will not alter and will still be charged on a per seat basis. The exceptions are that it will also be charged on business jets, and different rates will be charged on long haul flights departing from Northern Ireland.  That is in recognition of ‘the unique challenges’ faced by Northern Ireland as a result of the land border with the Republic.  For the time being, we have differential rates of APD being charged by UK Government, but the devolution of the tax to the Northern Ireland Assembly in the longer term is proposed.  All that is said about Scotland (and Wales) is that ‘the Government will continue to explore the feasibility and likely effects of devolution of APD to Scotland and Wales’ (para 3.38).

HM Treasury’s ‘response to consultation’ on APD is available here, and HM Revenue & Customs’s note on the practicalities of the change, including amendments to the Finance bill to allow for the lower rate set at Westminster, is here.

The Coalition therefore appears to have resiled from its earlier commitment in principle to devolving APD, in favour of yet further consideration of the issue, with Wales now thrown into the mix.

This line of argument isn’t hugely convincing.  There are risks of tax competition with APD devolution, and such competition could have adverse environmental consequences.  (If it led to a lower rate for flights departing from Scotland, that might encourage use of a relatively environmentally damaging form of transport.  Weighing against that is the extra cost for passengers from northern England of getting to Scottish airports to take advantage of that potential saving in APD, which is likely to outweigh the duty saved.)  In fact, as Calman and its advisers assessed, APD is a pretty ‘sticky’ tax, so suitable for devolution in accordance with general principles of fiscal federalism.  The failure to devolve it as part of the review underlines the reluctance of the UK Government to address fiscal devolution for Scotland, even where the case for it is strong in itself and was endorsed by a body such as the Calman Commission.

The issue of state aids raised in the 2009 white paper is particularly interesting.  The approach taken for Northern Ireland (a UK-imposed cut) certainly looks at first glance like selective assistance of the sort normally prohibited by what is now Article 107 of the Lisbon Treaty.  It’s open to the European Commission to review and authorise such assistance if it accepts that it will not distort the working of the single market (under Article 108), and for the Council of Ministers to overrule a refusal of authorisation by the Commission – but in any event the state aid must be notified to the Commission by the member state involved before it is brought into effect.  It has already given several such authorisations for special measures for Northern Ireland, and is considering similar exemptions for the Republic of Ireland’s air passenger tax.  The principles set out in European Court of Justice cases for corporation tax suggest that a decision that a) is made by a devolved authority and b) is on its own fiscal responsibility, with no prospect of a bail-out if its actions result in a shortfall of tax revenue, would be acceptable.  It’s hard to see how those criteria are satisfied in the case of UK reduction of the rate for Northern Ireland, though presumably the UK Government has considered the issue with care.  As it does not appear to have notified this to the Commission, it has presumably satisfied itself that in fact no state aids issue arises.

The way Northern Ireland is treated in the APD announcement is interesting in a wider context.  The exceptional nature of Northern Ireland’s problems is being emphasised, with attention drawn to the problems arising from the land border with the Republic.  All this stands in implicit contrast to the position of Scotland.  This position may well also apply to arguments about devolution of corporation tax, which increasingly looks like a matter of ‘when’ not ‘if’.  The first joint ministerial meeting between UK and Northern Ireland ministers to discuss vital practical issues of this took place earlier this week; meetings of that sort don’t happen if there isn’t already an underlying agreement on the principle involved.

This approach is a very dangerous one for the UK to take; it looks very like rewarding political friends and punishing political adversaries, with little regard for either the wider landscape in Scotland (an independence referendum) or the expressed wishes of Scottish voters for wider devolution.  Ad-hockery needs some stronger guiding principle behind it beyond that of rewarding friends, but doesn’t seem to have one here.