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What are the tax options in the Scottish budget? What are the tax options in the Scottish budget?
(about 13 hours later)
Shona Robison will unveil her proposals on Wednesday
A month on from Rachel Reeves' first Budget at Westminster, could there be a further tax grab at Holyrood this week?A month on from Rachel Reeves' first Budget at Westminster, could there be a further tax grab at Holyrood this week?
The Labour chancellor unveiled plans to raise taxes by £40bn, mostly from businesses – and, indirectly, from their employees, customers and shareholders – along with a large chunk from wealth.The Labour chancellor unveiled plans to raise taxes by £40bn, mostly from businesses – and, indirectly, from their employees, customers and shareholders – along with a large chunk from wealth.
At Holyrood, the SNP’s Finance Secretary Shona Robison has far fewer tax levers to pull, so the effect is unlikely to be as dramatic.At Holyrood, the SNP’s Finance Secretary Shona Robison has far fewer tax levers to pull, so the effect is unlikely to be as dramatic.
However, the Scottish Parliament has gained significant additional tax powers since 2016 - and after a long delay, the government is expected to publish its tax strategy alongside the Scottish budget.However, the Scottish Parliament has gained significant additional tax powers since 2016 - and after a long delay, the government is expected to publish its tax strategy alongside the Scottish budget.
What are the issues being faced, what could the tax strategy address? and what are the options?What are the issues being faced, what could the tax strategy address? and what are the options?
What are the challenges facing Shona Robison?What are the challenges facing Shona Robison?
Last month, Scotland’s spending watchdog warned the finance secretary that her budgets had not been sustainable, with tax revenue not matching spending commitments.Last month, Scotland’s spending watchdog warned the finance secretary that her budgets had not been sustainable, with tax revenue not matching spending commitments.
The auditor general said fundamental change was needed to keep services affordable.The auditor general said fundamental change was needed to keep services affordable.
There has also been a warning from the Institute for Public Policy Research (IPPR), whose Scottish director, Stephen Boyd, was recently recruited from the Scottish government.There has also been a warning from the Institute for Public Policy Research (IPPR), whose Scottish director, Stephen Boyd, was recently recruited from the Scottish government.
He says it is "a stark reality” that taxes will have to rise in the coming decades, and that politicians “must start to acknowledge the truth of the situation".He says it is "a stark reality” that taxes will have to rise in the coming decades, and that politicians “must start to acknowledge the truth of the situation".
That is not the position of the Conservative leadership, which sees lower tax as a stimulus to faster growth.That is not the position of the Conservative leadership, which sees lower tax as a stimulus to faster growth.
The SNP’s response to a gap in last year's Budget was to raise income tax on higher earners, with an extra tax band and a continued freeze on tax thresholds which draws an increasing share of earners into higher tax brackets.The SNP’s response to a gap in last year's Budget was to raise income tax on higher earners, with an extra tax band and a continued freeze on tax thresholds which draws an increasing share of earners into higher tax brackets.
Shona Robison will unveil her proposals on Wednesday
The Institute for Fiscal Studies (IFS) has since observed that increased income tax on the highest earners may have led to reduced revenue.The Institute for Fiscal Studies (IFS) has since observed that increased income tax on the highest earners may have led to reduced revenue.
How? The bigger the divergence with tax in the rest of the UK, the less of an incentive to earn, or to earn in Scotland - and the greater the incentive to “tax plan” your way out of Holyrood's income tax grasp.How? The bigger the divergence with tax in the rest of the UK, the less of an incentive to earn, or to earn in Scotland - and the greater the incentive to “tax plan” your way out of Holyrood's income tax grasp.
For example, if a company owner takes income as dividend rather than salary, all the tax from such dividends is paid, at lower rates, to the Westminster government.For example, if a company owner takes income as dividend rather than salary, all the tax from such dividends is paid, at lower rates, to the Westminster government.
How much these “behavioural effects” reduce the tax revenue for Shona Robison is unclear. The Scottish Fiscal Commission will update its estimates when the draft budget is published on Wednesday.How much these “behavioural effects” reduce the tax revenue for Shona Robison is unclear. The Scottish Fiscal Commission will update its estimates when the draft budget is published on Wednesday.
Robison has told Holyrood's finance committee that her 12-member Tax Advisory Group is looking for high levels of compliance and a system that is “fair, understandable and easy to navigate”.Robison has told Holyrood's finance committee that her 12-member Tax Advisory Group is looking for high levels of compliance and a system that is “fair, understandable and easy to navigate”.
She says the system should also “take cognisance of how it drives behaviours”.She says the system should also “take cognisance of how it drives behaviours”.
What could happen to income tax?What could happen to income tax?
The big money raiser for Holyrood, after the block grant it gets from the Treasury, is income tax.The big money raiser for Holyrood, after the block grant it gets from the Treasury, is income tax.
Most Scottish government funds come from the Treasury in a block grant. Last year’s was around £48bn. The Treasury calculates what it would have raised in Scotland if its income tax rules applied north of the Border, and that has been deducted from the block grant.Most Scottish government funds come from the Treasury in a block grant. Last year’s was around £48bn. The Treasury calculates what it would have raised in Scotland if its income tax rules applied north of the Border, and that has been deducted from the block grant.
Scottish ministers then have to raise additional tax revenue, and most of it comes from Scottish income tax.Scottish ministers then have to raise additional tax revenue, and most of it comes from Scottish income tax.
Since this was largely devolved from 2017, the direction of travel has been towards more complexity and more tax bands in Scotland. While those on the lower levels are £20 a year better off than the rest of the UK, the higher tax rates kick in earlier in Scotland.Since this was largely devolved from 2017, the direction of travel has been towards more complexity and more tax bands in Scotland. While those on the lower levels are £20 a year better off than the rest of the UK, the higher tax rates kick in earlier in Scotland.
The strategic choice is whether and how far to let this divergence from Westminster’s tax rates continue - and that requires a judgement on those behavioural effects.The strategic choice is whether and how far to let this divergence from Westminster’s tax rates continue - and that requires a judgement on those behavioural effects.
A significant share of businesses say higher taxes in Scotland make it more difficult to recruit the people they need, so there can be an impact on growth of firms and of the economy.A significant share of businesses say higher taxes in Scotland make it more difficult to recruit the people they need, so there can be an impact on growth of firms and of the economy.
Under the previous first minister, Humza Yousaf, taxes on higher earners were increased as a symbol of a fairer nation, paying for a higher standard of public services.Under the previous first minister, Humza Yousaf, taxes on higher earners were increased as a symbol of a fairer nation, paying for a higher standard of public services.
Under his successor John Swinney, and his deputy Kate Forbes, the language has shifted to measures that help business to grow the economy. Wednesday's budget will show how far that shift has influenced tax.Under his successor John Swinney, and his deputy Kate Forbes, the language has shifted to measures that help business to grow the economy. Wednesday's budget will show how far that shift has influenced tax.
Will council tax be frozen?Will council tax be frozen?
Probably not, because ministers cannot afford to alienate council leaders even more than last year's surprise freeze by Yousaf. Whether a cap could be imposed is a trickier question to answer.Probably not, because ministers cannot afford to alienate council leaders even more than last year's surprise freeze by Yousaf. Whether a cap could be imposed is a trickier question to answer.
In the longer term, tax experts all say that council tax needs to be reformed.In the longer term, tax experts all say that council tax needs to be reformed.
It is regressive: those on lower income pay a higher proportion of their income in council tax than those who live in more valuable homes.It is regressive: those on lower income pay a higher proportion of their income in council tax than those who live in more valuable homes.
Council tax bills are based on the estimated rental value of each home. There was some logic to that when it was introduced, more than 30 years ago, to replace the notorious poll tax.Council tax bills are based on the estimated rental value of each home. There was some logic to that when it was introduced, more than 30 years ago, to replace the notorious poll tax.
But there is no logic to this still being based on valuation levels from 1991.But there is no logic to this still being based on valuation levels from 1991.
Every administration since then has ducked the challenge of revaluing, for fear of the backlash by those whose home value has risen faster than average since then and would face higher bills as a result.Every administration since then has ducked the challenge of revaluing, for fear of the backlash by those whose home value has risen faster than average since then and would face higher bills as a result.
Others would gain from revaluation, but it would be a bold strategy that tackles the unfairness of the council tax, so don't hold your breath for that.Others would gain from revaluation, but it would be a bold strategy that tackles the unfairness of the council tax, so don't hold your breath for that.
What about the cost of moving house?What about the cost of moving house?
If you have to move home because of work, or perhaps a change in family circumstances, you may find you're paying a large tax bill.If you have to move home because of work, or perhaps a change in family circumstances, you may find you're paying a large tax bill.
This used to be known as stamp duty - and in England, it still is. In Scotland, this is known as Land and Buildings Transactions Tax, and it is ramped up to high rates at a lower price level than in England.This used to be known as stamp duty - and in England, it still is. In Scotland, this is known as Land and Buildings Transactions Tax, and it is ramped up to high rates at a lower price level than in England.
While there isn't much to pay on below-average house purchases, a £400,000 home (twice the average price) carries a £13,350 bill in Scotland and £7,500 in England. If it's a second home, as an investment for rental perhaps, it rises to £37,350 in Scotland and £27,500 in England.While there isn't much to pay on below-average house purchases, a £400,000 home (twice the average price) carries a £13,350 bill in Scotland and £7,500 in England. If it's a second home, as an investment for rental perhaps, it rises to £37,350 in Scotland and £27,500 in England.
Tax experts, including the IFS, say this is also due for a big reform.Tax experts, including the IFS, say this is also due for a big reform.
They argue there is no sense in penalising those who have to move house. It would make more sense to lower this tax and raise a similar amount of money for living in a house rather than buying it - taking us back to council tax reform.They argue there is no sense in penalising those who have to move house. It would make more sense to lower this tax and raise a similar amount of money for living in a house rather than buying it - taking us back to council tax reform.
These are the taxes closest to levying a share of wealth. From the left, including the Scottish Trades Union Congress (STUC), there are calls for wealth taxes, because that is where there has been widening inequality.These are the taxes closest to levying a share of wealth. From the left, including the Scottish Trades Union Congress (STUC), there are calls for wealth taxes, because that is where there has been widening inequality.
The Labour government at Westminster has tackled wealth as it passed down generations in the form of farmland and family businesses, provoking an angry response.The Labour government at Westminster has tackled wealth as it passed down generations in the form of farmland and family businesses, provoking an angry response.
Making a wealth tax work in any country, and Scotland in particular, would be complex and face those “behavioural effects” of avoidance. But it could be part of a tax strategy in the longer term.Making a wealth tax work in any country, and Scotland in particular, would be complex and face those “behavioural effects” of avoidance. But it could be part of a tax strategy in the longer term.
Could flights be taxed differently?Could flights be taxed differently?
Air Departure Tax could have been levied by the Scottish government from 2016, but it has not taken the opportunity to diverge from the Air Passenger Duty which is levied on flights from other parts of the UK.Air Departure Tax could have been levied by the Scottish government from 2016, but it has not taken the opportunity to diverge from the Air Passenger Duty which is levied on flights from other parts of the UK.
Flights out of airports in the Highlands and Islands are exempt, and a complication about retaining that exemption while devolving the tax is cited as the reason this power isn't being used.Flights out of airports in the Highlands and Islands are exempt, and a complication about retaining that exemption while devolving the tax is cited as the reason this power isn't being used.
It could be used to create incentives for travel, helping inbound tourism and the costs of doing business internationally, or to create incentives to reduce emissions. It's unlikely to achieve all three.It could be used to create incentives for travel, helping inbound tourism and the costs of doing business internationally, or to create incentives to reduce emissions. It's unlikely to achieve all three.
The Scottish government was due to receive the share of VAT, or value added tax, paid by Scottish consumers on most goods and services, but with none of the powers to vary it.The Scottish government was due to receive the share of VAT, or value added tax, paid by Scottish consumers on most goods and services, but with none of the powers to vary it.
Similar to Air Departure Tax, the ‘assignment’ of VAT to Holyrood has been stalled for nearly a decade, as it’s hard to calculate reliably and it would add more uncertainty to Holyrood budgeting. Neither government seems keen to push this.Similar to Air Departure Tax, the ‘assignment’ of VAT to Holyrood has been stalled for nearly a decade, as it’s hard to calculate reliably and it would add more uncertainty to Holyrood budgeting. Neither government seems keen to push this.
What about business rates?What about business rates?
As with the council tax, the Scottish Parliament could have diverged from Westminster and created a system that's better suited to raising tax from firms in a way that reflects their ability to pay.As with the council tax, the Scottish Parliament could have diverged from Westminster and created a system that's better suited to raising tax from firms in a way that reflects their ability to pay.
Instead of turnover or profit, business rates are currently based on the rental value of a shop, office, factory or warehouse.Instead of turnover or profit, business rates are currently based on the rental value of a shop, office, factory or warehouse.
Scotland has done little to diverge from Westminster's system, beyond a scheme that exempts the smallest firms from paying for the premises where they operate. That's not been used as an incentive to those that grow, and an additional tax rate is charged on big retailers.Scotland has done little to diverge from Westminster's system, beyond a scheme that exempts the smallest firms from paying for the premises where they operate. That's not been used as an incentive to those that grow, and an additional tax rate is charged on big retailers.
It is retailers who are to the fore in calling for change. This tax system appears to penalise those who occupy city and town centre sites, when compared with the warehouses which supply online e-commerce.It is retailers who are to the fore in calling for change. This tax system appears to penalise those who occupy city and town centre sites, when compared with the warehouses which supply online e-commerce.
What else could be done?What else could be done?
The Scottish government controls many other non-tax measures.The Scottish government controls many other non-tax measures.
Recently, these regulations have ranged from the licensing of self-catering cottages to tightened building controls for energy efficiency.Recently, these regulations have ranged from the licensing of self-catering cottages to tightened building controls for energy efficiency.
Further regulation is coming down the line to reduce greenhouse gas emissions, packaging waste and consumption of less healthy food.Further regulation is coming down the line to reduce greenhouse gas emissions, packaging waste and consumption of less healthy food.
While employers continue to digest the implications of Rachel Reeves' huge rise in National Insurance bills and a sharp increase in the minimum wage, they are resistant to further tax or regulatory costs being loaded on them from Holyrood.While employers continue to digest the implications of Rachel Reeves' huge rise in National Insurance bills and a sharp increase in the minimum wage, they are resistant to further tax or regulatory costs being loaded on them from Holyrood.