John Swinney: Local income tax will create a fairer and wealthier Scotland

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THE issue of how local tax is collected is an important one for Scottish business as well as the general public. That is why improving the deeply unpopular situation inherited from the previous Labour/ Liberal Democrat administration – which in turn inherited the council tax from the Conservatives – was a key manifesto pledge for the SNP, and is now a priority for the Scottish Government.

Since 1997, the council tax has increased by more than 60 per cent – causing real hardship for individuals as well as cutting spending power in the economy – which is why we moved in our first year to freeze this unfair tax.

We delivered a freeze as part of our concordat with local government, exactly as we said we would do.

But rather than just mitigate the worst aspects of an unfair tax, Scotland needs a local tax system with fairness at its very foundation – based on the ability to pay.

All surveys of public opinion show massive support for local income tax (LIT) compared to the unfair council tax. Maintaining a dialogue on our proposals with the institutions of Scotland, as well as individuals, has been the hallmark of how the Scottish Government has gone about its business right across the policy agenda over the past year, and will continue to do so.

Scotland's parliament has already voted in favour of abolishing the council tax, and last Friday the consultation on the government's LIT proposals closed. I am grateful to everyone who responded.

So what are we proposing? We want to see the regressive council tax system replaced with a far more equitable local income tax, set at 3p in the pound. Because the LIT will – sensibly – be based on people's ability to pay, low and middle earners will be immediately better off.

On average, pensioner couples will be 13.80 a week better off, and married couples and single people will be over 3 a week better off.

Overall, four out of five households will be better off or no worse off with our proposed LIT – a huge achievement, and a big step towards creating a fairer Scotland for hard-pressed taxpayers.

Scotland's army of self-employed will benefit from being relieved of the burden of council tax.

Our proposals contain key advantages for Scottish business, in terms of simpler and lower – as well as fairer – local tax.

We propose that LIT is collected through the existing pay as you earn (PAYE) system, and self-assessments.

The Scottish Government will pay Her Majesty's Revenue and Customs (HMRC) to administer and collect the tax, fitting smoothly into the current arrangements used every day by companies up and down the country.

We believe this is the most efficient method of delivering LIT, and will save money – councils in Scotland spent 62 million in 2006-7 administering the council tax.

The costs to HMRC for administering LIT under our proposals would be considerably less than that.

Not only is the local income tax fairer, but we are also proposing to reduce the overall burden – delivering the lowest as well as the fairest form of local tax in the UK.

Our scheme represents an overall 281m tax cut compared to the existing council tax, which will be fully funded by central government – in the same way as we delivered the council tax freeze.

It represents the biggest tax cut in a generation. The Convention of Scottish Local Authorities (COSLA), the umbrella group for Scottish councils, voted to back the LIT in June because it sees the logic in our argument.

Councils will decide which local priorities and services they should spend on and invest in – the difference being that this part of their budget has been fairly collected in the first place.

Enterprise in Scotland will enjoy real benefits under the proposed new system. HMRC and employers already share the administration of income tax.

Setting a single 3p rate takes account of the business interest by specifically avoiding the administration costs that would apply with 32 different rates.

We will work closely with industry to ensure that the transition to LIT is smooth and efficient.

Building business competitiveness is one of the most important priorities for this government, and I believe that our LIT proposals can bring Scotland a competitive advantage.

LIT builds on the success of our small business bonus scheme – which means that small businesses in Scotland are the lowest taxed in the UK – by matching that with a lower, fairer local taxation policy.

A successful Scotland will continue to attract people to the country for all the right reasons – particularly one that will have the lowest local tax in the UK.

People decide where to live for a variety of reasons, and the wealthier and fairer Scotland we are building will create an environment where people want to live and work.

What happens next? Over the coming months ministers will consider all of the responses to the consultation carefully, and will come forward with our proposals for Scotland's parliament to decide.

There is a clear majority in the country for local income tax, but I recognise that as a minority government we face a challenge in translating that popular support into a parliamentary majority.

We will continue to move forward in dialogue with the people and institutions of Scotland, including the business community.

The end of the consultation marks the start of the next phase in bringing fairer taxation to everyone in Scotland – and another step in creating a fairer and more prosperous nation.

&#149 John Swinney is Cabinet secretary for finance and sustainable growth