Tories plan lower income tax rate for Scotland

• Tories preparing to make election pledge to cut 3p from income tax

• Move represents first time a party has used Executive's tax-altering powers

• Exactly how 900 million deficit would be covered has yet to be explained

Key quote

"We still have to look at the detail, about how it will work in practice and how to fund the savings but it is something we are looking at very seriously." - SENIOR PARTY OFFICIAL

Story in full THE Scottish Conservatives are preparing to go into the 2007 election with a radical pledge to cut the basic rate of income tax by 3p in the pound, The Scotsman has learned.

Party researchers have been told to come up with ways of funding the income tax cut, which would then be adopted as the centrepiece of the Scottish Tory manifesto for the next Holyrood election.

The Scottish Parliament has the power to vary the basic rate of income tax by up to 3p in the pound, up or down - the so-called Tartan Tax - but it has never been used. A 3p in the pound cut would save someone on a 25,000 salary 540 a year or 45 a month.

Using the Tartan Tax at the full 3p in the pound would cost the Executive about 750 million in lost revenue. Taken together with the Tories' existing commitment to cut business rates by 140 million, it would take almost 900 million from the Scottish block grant.

This would have to be found from somewhere, and the Tories are currently looking at ways of cutting bureaucracy and back-office staff in the public sector to pay for the cut.

This would be the first time any political party has gone into an election promising to use the Tartan Tax to reduce taxes - and the first time since the SNP's controversial decision to support a tax rise in 1999 that any party has made tax a major campaign issue in Scotland.

It is likely to shift the election debate away from the improvements to public services which all the main parties promised in 2003 to a much broader discussion on the best way forward for Scotland. It also will force the hand of other parties, notably the SNP, to reveal where they stand on tax cuts.

The policy has not been formally agreed yet because the party has not worked out exactly where the money would come from. But senior Conservatives, including the party's MSPs, agreed to back the idea in principle at a recent policy awayday, deciding that cutting back on bureaucracy and the size of the state to fund a tax cut was the best way to reflect Tory values in practice.

One senior party figure said: "We still have to look at the detail, about how it will work in practice and how to fund the savings but it is something we are looking at very seriously."

Asked whether he expected the party to go into the 2007 elections promising to cut the maximum 3p in the pound from income tax, the Tory figure replied: "Yes."

He added: "The mood from the awayday was that this is something we should be heading towards if we can make it work."

The Tory source said there was a general expectation in the party that there would be more tax hikes from the Labour Government in the two years leading up to the Scottish elections of 2007. "It's quite important we mark ourselves as a party as something quite different. It's important we say things which are a bit more radical," he said.

A similar debate about tax has started in the SNP and although Alex Salmond, the party leader, has made it clear he does not believe cuts in personal tax should be on the agenda, some of his senior colleagues at Holyrood want the SNP to promise to reduce the Tartan Tax, but probably by not more than 1p in the pound.

Another Tory insider said senior party managers were aware of the debate in the SNP and did not want to be "outflanked" by the Nationalists in the election.

He said the Tories had committed themselves to being a tax-cutting party and the only question was whether the Tartan Tax should be cut by 1p in the pound or by the maximum 3p in the pound.

Initial estimates predict that setting up the tax machinery to use the Scottish Parliament's tax-varying powers could cost as much as 200 million, in addition to the 250 million cost of every 1p cut from the basic tax rate.

The Tories believe that the only way to have an effective cut and to really make a dramatic statement about the party's tax-cutting intentions is to cut the full 3p in the pound.

The insider said: "There is a general acceptance that 1p will not do much because of the cost of setting up the mechanism which means the only realistic option is a 3p cut. All we need to do now is the maths, but that will take time."

David McLetchie, the Tory leader, has come around to the tax-cutting plan after fighting the 2003 election on much the same ground as his opponents - more nurses, teachers and police officers - and failing to make headway as a result.

It is understood that Mr McLetchie wants the party to pursue a more radical agenda and fight the election on the twin themes of smaller government and lower taxes.

If the Tories can come up with ways of saving the 1 billion needed to finance their plans by cutting back on the size of government, it will allow Mr McLetchie to produce a manifesto which is genuinely different from his opponents.

He is also aware, however, of the twin dangers which face the Tories if they adopt such a radical policy. Opponents, particularly Labour, will claim that a 1 billion cut in the Scottish block grant will inevitably mean cuts in frontline services and the Tories will have to produce expert figures to back up their policy to resist Labour arguments successfully.

Mr McLetchie also will know that such a radical policy, of not just cutting tax in Scotland but cutting it by the maximum allowed, will look like being a desperate, last-ditch measure to rescue Tory support and if it does not work in attracting back voters, the party will have little left to offer.

But the Tory leader is expected to stand down after the 2007 elections and will want to leave his successor a party on the way up, rather than in terminal decline.

The pressure on the Tory leader to back more radical policies has come partly from his party's failure to make any progress in the last few elections and also from within his own parliamentary group.

Brian Monteith, the Tories' former finance spokesman, resigned from the frontbench last week to pursue his own policy agenda and it has been well known Mr Monteith has been frustrated with the lack of radicalism from the Tories for some time. Mr Monteith's departure, as well as pressure from other senior Tories, has persuaded Mr McLetchie that it is time to ditch a cautious approach and go for something a bit more risky.

However, there are some in the Tory Party who will fiercely resist the move, arguing that any decision to give Scotland its own tax regime would be a step towards independence.

Some in the UK Tory Party will also object, worried about the Scottish party setting the agenda but it is understood David Davis, favourite to be the next Tory leader, is relaxed about the Scottish party adopting such policies on its own.

The facts and figures on Scotland's 'tartan tax'

The so-called "tartan tax" is the tax-varying power of the Scottish Parliament which was agreed in the 1997 devolution referendum. It gives the Scottish Executive the ability to vary the basic rate of income tax in Scotland by up to 3p in the pound, up or down.

If it was raised, it would provide the Executive with about 250 million for every extra penny in the pound; if it was cut, 250 million per penny would go back to taxpayers.

Initial estimates suggest it could cost up to 200 million to implement.

If adopted, the Inland Revenue would change the tax code for everybody living in Scotland and adjust the tax take accordingly. The Treasury would then reduce or increase the amount of the Scottish block grant which it gives to the Executive every year.

The Labour-led Executives which have run Scotland since devolution have refused to use the tartan tax.

The SNP went into the 1999 election with a "Penny for Scotland" campaign, promising to raise the tartan tax by 1p in the pound if elected. It abandoned its policy in 2003 and did not adopt a tax-raising approach.

The Liberal Democrats suggested in 2003 that they might raise income tax by 1p in the pound for public services, but they did not adopt a definitive policy on the issue.