Blog: When are we going to talk tax in Scotland?

13 April 2021

The Covid crisis has affected us all, but it has not done so equally. We must remember that when it comes to paying for the recovery.

Regardless of who wins the election in May, it’s likely that taxes will have to go up next term by more than we have seen throughout the history of devolution. You’d be forgiven for not knowing, given the campaign hasn’t mentioned tax so far in any great detail.

With the UK government currently planning a combination of spending cuts outside of health, and tax rises (including freezing the income thresholds in the rest of the UK) the next Scottish parliament is likely to need to be one that raises significantly more tax revenue than now, just to ensure spending cuts in Scotland are no worse than in the rest of the UK. To go beyond spending plans seen elsewhere, and deliver on Scotland’s bigger ambitions around child poverty, fair work or wellbeing we will need to see tax revenues rise by even more.

So when are we going to talk about tax?

We at IPPR Scotland have set out our proposals for increases to income tax in Scotland, a Social Renewal Supplement that would see higher earners pay a little more to help pay for increased investment to tackle poverty in Scotland. However, given the scale of the challenge, the next Scottish government will likely need to look elsewhere too.

That’s where we think council tax should come in.

Council tax is incredibly overdue reform. It’s outdated, based on values from 30 years ago. It’s regressive by value, in that the highest value properties have the lowest bills as a percentage. And it’s regressive by income, with lower income families paying more council tax as a proportion of their income than the richest.

But there’s also something else. Council tax doesn’t raise enough money. If Scotland’s council tax bills were on average the same level as Wales, we would have around £600m more to spend each year. If bills were the same on average as in England, we’d have around £900m more to spend each year.

There is therefore significant headroom to raise council tax in Scotland.

At the same time, house prices have increased significantly, increasing by over 8 per cent through the crisis. And there’s good evidence that higher income families have on average seen their finances improve through the pandemic, as incomes have been protected and spending dropped – as spending on many luxuries became impossible – while low-income families have seen incomes drop and costs increase.

Given the sacrifices of the last year, surely it seems fair to ask for more from those with the broadest shoulders to help pay for recovery.

We have five proposals for the next Scottish government that would do just that.

First, the next Scottish government should commit to closing the gap between council tax revenues in Scotland and council tax revenues seen in the rest of the UK. This could raise hundreds of millions of pounds a year to rebuild Scotland following Covid-19.

Second, throughout the next parliament council tax bills should go up more quickly for higher value properties than for lower value ones. Our proposal, which would see higher increases for higher value properties in each year of the next parliament, could raise an additional £380m per by 2025/26.

Third, we should extend support for low-income families, so that no family in poverty is asked to pay council tax. If we’re serious about tackling poverty then it makes no sense to give with one hand and take with the other.

Fourth, and crucially, we must see radical reform of local tax in Scotland, with primary legislation introduced in the first year of the parliament. Implementation would take a number of years which is why we must move quickly, and also why we must improve council tax in the meantime. Our proposal is to implement a percentage of value tax, that would see annual property tax bills set at 0.75 per cent of home value, with local variation. This could either be implemented gradually for new purchases only, and alongside the ongoing council tax system, or it could be implemented for everyone in one go to replace council tax altogether.

And fifth, we need to move beyond property taxes. The Scottish parliament’s powers over local tax are very extensive. The next Scottish government should work with local councils to create a basket of local taxes to ensure the system is broad and as fair as possible. In our view this should include testing of local carbon, land and inheritance taxes.

Securing a recovery from Covid will not be easy. It will be harder-still to deliver a recovery that does justice to the sacrifices of the last year. But if we are bold and ambitious, and make the hard choices needed to match our high-level of ambitions with action, we can secure the recovery we need to build a Scotland better than before.

This article first appeared on the IPPR Scotland blog and is reproduced here with kind permission.