Scrap council tax? Concern Scots pensioners could be penalised if major reform is adopted by councils

It believes a new annual fairer property tax, similar to that developed in Northern Ireland, which would see Scots householders pay a percentage of their home value every year, with area variations, is the way forward, as the nation pays for the huge public debts incurred by the Covid-19 lockdown.

But Age Scotland, the national charity for older people, has warned that any replacement for the council tax had to be "fair and affordable" and not penalise the elderly who have lived in their homes for many years but whose income is fixed, low or modest.

“The next Scottish Government should take a hard look at council tax to ensure that local services are funded to the degree they need and it is fairer for people on low incomes," said Age Scotland chief executive Brian Sloan.

To raise the same amount of money as the council tax this year, a 0.75 per cent levy would be imposed, the research revealed.

The plan would also involve cutting bills for those on the lowest incomes.

The move would require a full-scale revaluation of property in Scotland - and would need to run alongside radical tax-raising powers - while protecting those in poverty.

The plan has come at a time when all of Scotland's 32 local authorities have frozen council tax rates at last year's levels.

The Scottish government offered councils incentives in return for not raising the cost of the bills.

READ MORE: Scots face huge council tax rises to fill £500m funding black hole

To do that, local authorities were to receive a £90m, the cash equivalent of a 3% council tax increase from the Scottish Government in return for not putting up levels.

IPPR Scotland says the public spending plan has been drawn up at a time when council tax in Scotland currently does not raise enough money.

And with more income required in future years to pay for services and balance books to avoid service cuts, it is only likely to get worse.

Director of IPPR Scotland Scotland, Russell Gunson and joint author of the study said: "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.

"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."

The new percentage of property value tax would include additional support to ensure no one in poverty had to pay the tax, and there would be assistance to help low to middle income households with increases.

It would be set up to ensure that only higher income households in higher value properties pay more than now.

It could be phased in and run alongside the current council tax system initially, and include the possiblity of introducing it only for those who moved home - protecting pensioners who may have lived in their house all their lives.

A wholesale move to the new system would have transitional arrangements to cushion any tax increases.

In Northern Ireland, the tax on property consists of a regional rate set by the Northern Ireland Assembly and a district rate set by local councils.

The suggestion comes as Covid-19 has made the UK and Scotland significantly poorer.

GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing.

And in December 2020, it was almost 10% lower than it was at the start of the year - before the Covid-19 pandemic hit.

In January, UK government borrowing hit £8.8bn, the highest January figure since records began in 1993, reflecting the cost of pandemic support measures.

It was the first time in 10 years that more has been borrowed in January than collected through tax and other income.

Government borrowing for this financial year as of January had reached £270.6bn, which is £222bn more than a year ago, according to the Office for National Statistics.

The deficit will need to come down at some point once recovery has been secured.

The new analysis says that while undertaking radical tax-raising reform, the next Scottish Government should commit to "closing the tax gap" in council tax revenues between Scotland and the rest of the UK, worth an estimated £600m and £900m per year.

It said if Scotland’s council tax bills were on average the same level as Wales, we have around £600m more to spend each year.

And if bills were the same on average as in England, the nation would have around £900m more to spend each year.

So while local authorities agreed on a council tax freeze this year, IPPR Scotland says there is "significant headroom" to raise council tax in Scotland and help "rebuild Scotland" post-Covid.

And they suggest, that before scrapping the council tax, and throughout the next parliament, council tax bills should go up more quickly for higher value properties than for lower value ones.

One proposal would see higher increases for higher value properties in each years of the next parliament which could raise and additional £380m a year by 2025/26.

He said the replacement of the council tax was needed as it is "out of date" with property value having changed hugely over the last 30 years and while the system has "not kept up to date". This has left properties in the wrong bands with some paying too much and others paying too little.

But the think tank said the replacement of the council tax system should run alongside developing a fresh baskets of other levies to ensure the system "is as broad and as fair as possible". This would include testing of local carbon, land and inheritance taxes.

Mr Gunson said: "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."

The revolutionary council tax plan has come against a background where, as the pandemic hit the country’s finances, those on higher incomes and those with wealth and property have on average seen their finances improve, IPPR Scotland said.

Those on higher incomes, were more likely to be able to work from home, have on average seen incomes and health protected at the same time as seeing spending fall – through ‘forced saving’ as luxuries such as dinners out and holidays became impossible.

Those who own their own home, have seen house prices in Scotland jump by over 8% through 2020.

And IPPR Scotland says that when it comes to paying for the pandemic, "we must do so fairly" and says that those who lost the least through the crisis should contribute the most through the recovery..

IPPR Scotland has already suggested the Scottish Government should hike taxes for anyone earning more than £40,000 a year to avoid having to make spending cuts.

The think tank said the decision by Rishi Sunak, the chancellor, to freeze basic and higher rates of income tax in other parts of the UK through to 2026 meant Scotland would need to bring in hundreds of millions of pounds of additional money just so their budget could "stand still".

The Scottish higher rate of income tax, charged at 41%, will start at £43,662 from next month. Scots earning that much also pay national insurance, which is overseen by Westminster, on the portion of their wages between that sum and £50,270.

IPPR Scotland proposed to add about £260 a year to the income tax bill for higher rate taxpayers, of which there are thought to be 370,000 in Scotland. It would also reduce the threshold at which that rate becomes payable to £40,000.

It estimates if those changes are carried out, by 2024/25 they would be bringing in an additional £700 million annually for Holyrood.

IPPR Scotland said about £500 million of the money raised could be used to increase the Scottish child payment to £40 a week from April 2025.

The Chartered Institute of Public Finance and Accountancy, the professional institute for accountants working in the public services, recognised that new ideas and reform was needed to cover the cost of council services.

Richard Lloyd-Bithell, senior technical manager at CIPFA said: “Covid-19 has further emphasised that the primary streams of income for local authorities, which include council tax, are no longer sufficient to cover the cost of public services. The financial resilience of local authorities has never been so fragile and local taxation as a whole is in desperate need of reform.

“CIPFA continues to advocate for greater devolution of powers to local authorities, including greater fiscal powers, to give councils greater access to a plurality of income streams.”

Public finance minister Ivan McKee, said: "The SNP is already leading the way on making council tax fairer in the UK.

"While households in England have just seen an average hike of 4.3%, all of Scotland's 32 local authorities agreed to freeze council tax rates.

"The SNP in government ensured every Scottish household benefits from cheaper council tax bills - with households paying on average £500 less than those in England under the Tories.

"If re-elected, the SNP has pledged to scrap the council tax charge for everyone under the age of 22 - expanding the current exemption for students to all young people, including those in work and apprenticeships - and resume the discussions we were having on a replacement for council tax, which had to be paused during the pandemic.

"Reforming council tax and local government is one of the issues we will look at in the annual Citizens' Assemblies the SNP will establish if re-elected."