SCOTTISH Labour is proposing to hand full control over income tax to Holyrood as part of a radical package of measures to bolster the parliament's powers.

The move is the key recommendation of the party's internal devolution commission, which has been assessing ways to develop the parliament 14 years on from its inception.

The panel of Scottish MPs, MSPs and experts has ruled out devolving other major taxes or welfare and pensions but said revenues from Crown Estate properties should go direct to local authorities.

The commission's report, seen by The Herald, will be officially unveiled tomorrow at the start of Scottish Labour's conference in Inverness.

The report was commissioned by Scottish Labour leader Johann Lamont, who is expected to refer to it in her keynote speech to party members at the weekend.

As part of plans to make Holyrood responsible for raising about half the £30 billion it spends annually, it says: "In our view, a strong case exists for devolving income tax in full, and we are minded to do so."

About £5bn per year is raised through income tax in Scotland.

Holyrood will become responsible for raising approximately half of that from 2015 under powers in the new Scotland Act.

However, Labour's plan would give ministers greater flexibility to set different rates rather than simply collect a portion of income tax within UK-wide brackets, as provided by the new Act.

It would also allow the Scottish Government to make taxation more progressive – targeting better-off Scots with a higher rate while potentially reducing the burden on the less well-off. However, the report warns that Labour should not press ahead if it emerged the cost of collecting a fully devolved income tax proved prohibitive or if it tied firms in red tape.

It also stresses that extra financial powers should not come at the cost of removing the Barnett formula, which determines spending allocations across the UK, or a reduction in the number of Scottish MPs at Westminster – a plan tentatively being suggested by the Conservatives.

A Labour spokesman stressed: "It is the start of a debate, not the end of it."

The commission ruled out devolving corporation tax, and said giving Holyrood control over VAT would breach European Union rules. It was highly sceptical about devolving National Insurance, which is linked to pensions and benefits.

Handing Holyrood control over North Sea revenues would expose the Scottish Government to a "fiscal cliff" as income would fluctuate widely from year to year.

On smaller taxes, the commission said vehicle excise duty – better known as road tax – should be devolved and there was a "strong case" for Holyrood to take over air passenger duty.

However, it warned that devolving alcohol and tobacco duties would result in "problems of avoidance", while there would be "administrative challenges" to devolving inheritance tax or capital gains tax.

The commission ruled out devolving welfare and pensions, which represent the biggest single item of public spending in Scotland.

The report attacks Tory welfare cuts but insists the solution is not to "tear up the welfare state that has served us well". It says "sharing resources and risks with the rest of the country" is the safest way to provide welfare.

Labour has also backed the devolution of Crown Estate revenues – but with funds bypassing Holyrood and going straight to local authorities where the cash is generated.

Other powers – not spelled out in the report – are also likely to be promised to councils which, the commission claimed, have been "disempowered" by the SNP Government.

The report warns the council tax freeze, in place since 2007, "is beginning to have serious effects on services". It adds: "The council tax freeze does not come without a cost.

"We must consider whether this is sustainable in the long-term."