Noisy tax havens: how to make airport expansion popular

Airport expansion is almost always unpopular among local residents. It is possible to build whole political careers on anti-airport sentiments, as the example of Zac Goldsmith, MP for Richmond Park and North Kingston, arguably shows.

This unpopularity is not as self-evident as it may seem. Yes, airports are noisy, but they also generate huge amounts of tax revenue. Modern airports are no longer just places where planes take off and land; instead, they have become more like small towns. They are retail parks, they are clusters of catering venues and hotels, they are car parks, and centres for services like car rental and currency exchange. If you are looking for a rich source of tax revenue, they are the sort of place you would want to have near you.

Such thinking is, of course, alien to local policymakers in the UK. For all the fancy talk about ‘localism’ and ‘empowering local communities’ that politicians are so fond of, the reality is that the UK is one of the most heavily centralised countries in the world. 95 per cent of all tax revenue accrues to the national level. The remaining 5 per cent are mostly explained by Council Tax, but even that is not a genuinely local tax. Councils can set the rate, but they have no influence over the tax base or other parameters.   

 

Figure 1: Tax revenue of the national level in % of total tax revenue

 

 

- based on data from the OECD Fiscal Decentralization Database

This fiscal hypercentralism is reflected in the finances of the big cities. Out of every £4 spent by the Greater London Authority, £3 have been received in the form of a grant from the national level, an absurd outcome given that London is such a large net contributor to the nation’s public finances. London could be self-funding many times over if a large enough share of the tax revenue generated in London simply stayed in London. But it doesn’t. It is transferred to the national level, which then returns some of it in the form of grants, but for designated purposes and with strings attached.

 

Figure 2: Per cent of municipal revenue that does not consist of a central government grant

 

 

- based on data from the London Finance Commission

To an outside observer, it may often seem as if the national level in the UK was generally growth-friendly, while the local level was dominated by obstructionists. But this division of roles has probably more to do with differences in incentives structures than with differences in mentality. Roughly speaking, national politicians are in favour of greater economic activity because it entails higher tax revenue for them, which they can then use to enhance their popularity. Local politicians, meanwhile, are also in favour of greater economic activity somewhere, but if it is disruptive or visually unattractive, they prefer that to be somewhere far away. And why wouldn’t they, if they have nothing to gain from permitting the activity in their area?

Most of the tax revenue generated at and around airports should remain at the local level. It should accrue to the councils where those affected by airport noise live, and they should also be the ones who get to decide whether an airport is given permission for expansion or not. Local voters could then make informed trade-offs, with higher noise levels becoming the price to pay for lower local tax rates and/or a better local infrastructure. Places very close to a busy airport could then become low-tax areas. Or not. If residents prefer to forego tax cuts in order to keep noise levels down, they could still reject the expansion plans, and airport activity would gradually shift towards places where people are less noise-averse. 

Places with high levels of airport activities, however, could turn into popular places to live. They could become places that offer high-quality infrastructure and good public services at low tax rates. They could become noisy tax havens.

 

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