To be effective, Holyrood needs more tax powers

One of the key debates in this Holyrood election has been whether, and by how much, to use the Scottish parliament’s new income tax powers.

Yet this debate obscures a bigger question: are these new powers the right fit for Scotland’s needs?

Reform Scotland’s view is that for Holyrood to be truly effective it needs a better mix of tax powers. Only then can we introduce coherent tax reform that can create a better environment for economic growth.

When the Scottish parliament receives its new powers in 2017, income tax will account for 71 per cent of the revenue controlled by MSPs.  To put that in context, income tax accounts for 25% of UK tax revenue controlled by Westminster.

With such a large amount of its income coming from a single source the Scottish government will be overly reliant on this tax.

This leaves little scope for flexibility and imaginative thinking. In short it is a blunt tool that should be left alone.

So what should we do instead?

Reform Scotland has consistently called for greater tax powers to be devolved to the Scottish parliament. MSPs should be able to raise the vast majority of the money they spend. This would make them more accountable to the electorate and make spending decisions more transparent.

However even once income tax is devolved Holyrood will control only 37 per cent of its revenue.  Therefore it is vital more fiscal powers are transferred from Westminster.

Even devolving one more significant tax gives Scotland the breadth of tools necessary to introduce reform.

For example, devolving National Insurance (NI) would see the Scottish parliament responsible for raising nearly 60 per cent of its expenditure.

Reform Scotland believes that NI and income tax should be merged, a move that offers a chance to radically reform how taxes on income operate.

It also gives Scotland an opportunity to do something different – not focusing on whether a tax rate is simply higher or lower than the rest of the UK, but having a different system altogether.

Reform Scotland has also called for fuel and vehicle excise duties to be devolved, which would enable Scotland to consider replacing those taxes with a pay-as-you-go road pricing scheme.

In both those examples, reform and creating new ways of taxing can only be done if the necessary powers are devolved first.

New powers which bring the Scottish parliament closer to raising the money it spends are always welcome.  However, when those powers are insufficient to allow real reform we must be extremely careful how we use them, otherwise we risk doing harm.

The reality is that the new tax powers are not likely to allow real reform.  So until the Scottish parliament has control over a sufficiently varied basket of taxes, we would call on the next Holyrood government to peg income tax in Scotland to the UK rate.