Tax: Raising revenue with Holyrood’s devolved powers

At present, the Scottish Government is in a difficult position – with high inflation and a cost-of-living crisis to deal with, it is currently forecast to have a funding gap of approximately £1 billion for the 2024-25 financial year. With many public services already short on funds, the SNP-Green coalition has begun to consider whether the tax powers devolved to Holyrood are enough to help plug that gap.

Wealth tax

One potential solution – proposed by the Scottish Trades Union Congress – would be the introduction of a wealth tax. In the form proposed by the STUC, the wealth tax would be an annual tax at a rate of 1%, levied on households with a total wealth greater than
£1 million.

There are, as yet, no concrete plans for its introduction – First Minister Humza Yousaf (pictured) was careful to state that a decision had not yet been made, but that “we shouldn’t rule these matters out, because we are facing extraordinary pressures”.

The obvious difficulty for the Scottish Government is that Holyrood does not have the power to impose a national wealth tax, as this would be beyond the scope of its devolved powers. The approval of the UK Parliament would be needed to impose a new national tax, which is unlikely to be forthcoming under the incumbent Conservative Government. It is possible that a Labour Government could take a different view, but as Shadow Chancellor Rachel Reeves has recently ruled out a UK-wide wealth tax, that is not guaranteed.

There is a potential workaround, which is to have councils across Scotland impose local levies. The councils would then be responsible for working out who and what ought to be taxed, and for the collection and enforcement of the tax. However, the Chartered Institute of Taxation has noted that councils are likely to find this difficult to implement given that they are already under-resourced.

The Finance & Public Administration Committee recently considered the introduction of a wealth tax, noting that the richest households have 217 times the wealth of the poorest. However, while some attendees thought that the introduction of a wealth tax could be a solution for Scotland’s budget in the long term, the economists and academics attending noted that it would take a long time to implement and was therefore unlikely to resolve the Government’s current predicament. The need for the approval of and cooperation with the UK Parliament was also considered a substantial barrier by some.

Income tax rates

A much simpler solution, which could be implemented in short order, would be to use the devolved powers of the Scottish Government to raise income tax. Given the difficulties faced by low- and middle-income earners in the current financial climate, any increase to the basic rate would likely be unpopular, so the burden of any increases would probably fall on higher earners, as has been the case in previous changes to the Scottish income tax rates.

However, as the higher rate of income tax payable in Scotland is not payable on dividend income, which is subject to the lower UK rate, it is easier for some wealthy individuals to avoid paying it, so the potential increase in tax revenue might be partially reduced by the wealthy taking their pay in dividends.

Additionally, as the First Minister acknowledged, “If the UK Government cuts tax, for example, we will have to be mindful of the divergence that exists… we have to be careful around the behavioural impacts of any divergence.” This forces the Scottish Government to walk a tightrope – set the tax rate too low, and it will have difficulty providing the services that are desperately needed by Scotland’s less fortunate, but set the tax rate too high, and it risks incentivising the wealthy to relocate to England, reducing the overall tax take.

Council tax

The Scottish Government has also proposed raising council tax for the wealthier bands E to H, in a move expected to raise more than £170 million for local authorities. While it seems fairer that those with more expensive properties should pay more, critics have argued that as council tax is not exactly correlated with taxpayers’ ability to pay, approximately 80,000 of Scotland’s poorest 30% of households could be subject to the increases.

Ultimately, while the Scottish Government’s devolved powers are undoubtedly useful for achieving their stated goal of “building a greener, fairer Scotland”, the limited scope of those powers, as well as current financial circumstances and the inherent difficulties of imposing any new, complex tax, mean that the decision on how to use them is a delicate balancing act.