Choosing the right tax to fund councils

There was almost a sense of relief, even among supporters of the proposed tax, that the SNP's flagship plan had been dropped meantime as it contained too many flaws – including a 700m black hole in funding.

As Mr Swinney pointed out, it was also clear there was virtually no prospect of gaining any parliamentary majority that would approve a local income tax bill.

Mr Swinney promised his party would fight the next Scottish election on a further pledge to abolish council tax, resulting in a gap of more than two years before the issue was likely to be raised again.

However, there are already signs of the debate being revived. The body that represents leading local revenue officials – the Institute of Revenues Rating and Valuation (IRRV) – announced last week that it is holding an inquiry that will examine a range of funding options for local government.

Another professional finance organisation, the Chartered Institute of Public Finance and Accountancy (CIPFA), is planning to make a submission to the IRRV inquiry.

Angela Scott, head of CIFPA in Scotland, says she welcomes the latest attempt to seek a solution to the present system of local taxation "which, although relatively simple, clearly has a number of inefficiencies".

She adds: "We look forward to making a key contribution to this debate."

A seven-member working group set up by the Scottish Labour Party is also working on proposals for the future of local taxation. It is already committed to a tax based on property, arguing that it will be a system that is fairer than the current council tax.

The latest activity highlights the fact that bodies that were strongly critical of the Scottish Government's plans for a centrally-set local income tax of 3p in the pound are determined to be able to put forward viable alternatives if the SNP, as it has pledged, comes forward with new proposals at the next election in 2011.

But is it possible for any government, political party or organisation to produce any plan that will gain wide acceptance?

And can any inquiry, as that launched by the IRRV, shed new light on a complex problem that has been the subject of innumerable inquiries over the last three decades?

Brian Jeffrey, Scottish president of the IRRV, believes his organisation can produce an acceptable solution.

"I think we can come up with a 'best balanced' solution because we have the professional background and knowledge behind us and all the experience of how various previous taxation systems have been administered – we know their strengths and weaknesses", he says.

Mr Jeffrey rejects the suggestion that it is questionable whether a professional body that has been committed to a property tax can carry out an independent, dispassionate inquiry that looks at all the alternatives.

"It's a fact that we favour a property tax," he admits. But he adds: "The evidence we collect during our inquiry may well conclude that a property-based tax is perhaps not the right way to go. So we start with an open mind on the subject."

Mr Jeffrey points out that public opinion will be taken into account: "I would argue that the people who are the professionals who collect the tax at the moment and who also administer benefits are good judges of public opinion," he says.

"They hear every day from our customers about the level of tax, the current system of tax, the level benefits. We've had feedback for the last 15, 16 years of council tax every day of the week. So, yes, public opinion will feature in this."

Last month, Labour came under fire from all quarters when it emerged that the party is working on plans for a property tax that could be levied on capital values – the price of a house in the market place.

Critics claimed such a tax – calculated on a percentage of the house value and involving regular revaluations – would hit pensioners and home owners.

Andy Kerr, Labour's Scottish finance spokesman, insists that no decision has been taken by his tax working group on the precise form of property tax it wants to introduce.

"We have a long way to go yet before producing final proposals," he stressed when he participated in an all-party panel at last week's IRRV conference at Crieff.

"The last thing I want to do is end up where the government ended up by saying 'here is our alternative' and at the first whiff of any scrutiny it simply fell apart."

The Scottish Conservatives continue to back a council tax system that would provide a 50 per cent discount for pensioner households.

According to Scottish Liberal Democrat finance spokesman Jeremy Purvis, a local income tax that is set locally so that it gives local councils the discretion to decide their own priorities must continue to be part of the debate about local finance.

The IRRV inquiry will examine alternatives including a "basket" of different taxes. A local income tax has not been ruled out as one of a number of tax options. Other possible revenues include the "localisation" of existing taxes such as value-added tax and fuel taxes as well as lottery income.

So, it is a review that will be wide-ranging. But whether any organisation can come up with a solution that will be acceptable or workable and endorsed by the political parties must remain in doubt.

At the IRRV conference, Alasdair Allan, an SNP MSP, stressed his belief that a local income tax was the best alternative to the "unfair" council tax but added: "It is clear there is no parliamentary majority for that just as there is no clear majority at present for anybody's proposals to reform local tax."

And the Scottish Conservative finance spokesman, Derek Brownlee, probably summed up the feelings of many when he said: "Every party will go into the election promising the reform of local government finance, but I doubt whether it will happen no matter what it says before."