The Scottish Government has set a bold ambition to deliver a just transition to net zero by 2045. This presents both a huge economic opportunity, and a major fiscal challenge. 

For us at Future Economy Scotland, delivering a just transition isn't just about cutting emissions. Instead, it means high-quality public services, investment in workforce transitions, and a stronger social safety net. All of this requires additional resources. Yet Scotland is already facing growing fiscal pressure from health, workforce costs, and capital investment needs. The result is a growing mismatch between the demands of a just transition, and the fiscal framework within which they must be delivered.

The Scottish Government's current fiscal strategy isn't rising to meet this challenge. Recent tax reforms have been marginal, while the latest fiscal plans rely heavily on optimistic 'efficiency' savings. 

In our latest report, we explore options for tax reform designed to support the delivery of a just transition. Our central finding is clear: if Scotland wants to deliver a just transition and protect its proud social contract, more public revenue must be raised from taxation. Through detailed tax-benefit modelling, we set out an ambitious yet credible package of reforms to raise revenue, protect low-income households, improve economic performance, and support Scotland’s climate objectives. 

In total our reforms would raise an estimated £2.3 billion a year, which will help to protect Scotland’s social contract while supporting a just transition to net zero. Let’s look at each of our proposals in turn.

Since income tax was devolved, the Scottish Government has focused on raising additional revenue from high-earners. While this approach, designed to protect low and middle earners, may have been justified in the past, it is no longer a viable strategy. This is because there are simply not enough high earners in Scotland to raise the level of revenue required — or anything close to it. While the Scottish Government has shown reluctance to go further, this is unlikely to be sustainable. As Scotland’s most significant contributor to devolved revenue, income tax will almost certainly have a role to play in easing Scotland’s fiscal pressures and supporting the delivery of the just transition.

Relying solely on further increases at the top of the income distribution is neither sufficient nor sustainable. Analysing OECD data we find that comparable Northern European countries with high-quality public services and strong welfare states tend to combine progressive tax rates on high earners with relatively broad-based taxation across the income distribution. Raising the revenue required to fund a just transition therefore means confronting an uncomfortable truth: most Scots will need to pay a little more tax. Without this broader-based approach, Scotland risks a return to harmful spending cuts that would fall hardest on lower-income households and weaken public support for climate action.

We recommend increasing income tax by 1 percentage point on the lowest three bands and by 2 percentage points on the highest three bands, alongside reducing the higher rate threshold to £40,000. This broadens the base while making the system more progressive. Accounting for behavioural responses, we estimate this would raise £1.5 billion per year. Distributional analysis shows the reforms are highly progressive, with households in the bottom third of the income distribution seeing only relatively small tax rises – as most of their income is protected by the tax-free Personal Allowance. Most additional revenue raised comes from higher-earners, with two thirds coming from individuals earning more than £50,000 per year.

The two main taxes on residential property in Scotland today are Council Tax and Land and Buildings Transaction Tax (LBTT). Both are unfair and inefficient. 

Council Tax is widely recognised to be riddled with issues. First, bills are determined on the basis of property values that are more than 30 years old. Because house prices since the 1990s have diverged significantly between and within Local Authorities, the result is that Council Tax bills faced are often highly arbitrary. For example, a house worth £140,000 in Aberdeen and a house worth £310,000 in Edinburgh could both be in Council Tax Band D and face similar bills, despite the gap in values. Second, the band system is regressive by design, constituting a higher burden for low income households even after accounting for Council Tax Reduction.

LBTT, which replaced UK Stamp Duty Land Tax in Scotland in 2015, is a one-off tax charged on property purchases. While the tax burden is progressive, LBTT creates significant distortions in the housing market. Transaction taxes increase the cost of moving and can discourage households from relocating for work, downsizing, or moving closer to family – making it economically inefficient relative to recurrent property taxes.

We recommend replacing the inefficient Council Tax and LBTT with a recurring Progressive Property Tax (PPT) based on up-to-date property values. The tax would be set at 0.75% on property values up to £400,000, rising to 1.0% on the portion above that threshold. We further recommend applying surcharges or discounts linked to Energy Performance Certificate (EPC) ratings to incentivise energy efficiency improvements. We estimate this could raise £222 million per year, while improving fairness and economic efficiency. Most of the additional revenue would come from the top half of the income distribution, with the lower half seeing on average small changes in disposable income.

Crucially though, the estimates of average impact by decile hide significant variation within deciles. In the higher income households (deciles 7-10) most would see an increase in bills from a move to a Progressive Property Tax, but there are still at least a fifth of households who benefit from the change. In the middle of the income distribution (deciles 3-6) a majority of households see either no change or a reduction in their bills from the reform, but there are still some (up to 40% in decile 6) who would face higher bills.

The fact that there are both winners and losers to reforming Council Tax makes it a challenging reform politically. However, it is important to remember that some of these impacts result from correcting the distortions in the current Council Tax system and the result will be a more efficient and fairer tax. There is widespread public support for reforming Council Tax and making residential property taxation more progressive. A recent Tax Justice Scotland poll found that 56% of Scots want Council Tax reformed in the next Parliament, while just 11% oppose this. And if it is reformed, 83% want a fairer system – with most preferring those living in higher-value properties paying proportionately more (57%).

3. Non-Residential Property Taxation

Non-domestic rates (NDR) are Scotland’s primary recurring tax on non-residential land and property. The NDR system includes a number of long-standing statutory exemptions, most notably for agricultural land and buildings, as well as forestry and woodland. These land uses are not included on the valuation roll and are therefore not subject to NDR. The system also relies heavily on reliefs, for example the Small Business Bonus Scheme, the cost-effectiveness of which has been questioned. Importantly, net zero considerations have not been embedded into the design of the tax or its relief system. 

Up to 90% of Scottish land sits outside the NDR tax base entirely – a major distortion whose economic justification is unclear. Furthermore the NDR system itself is inefficient, taxing productive investment rather than just land. There is therefore a strong case for replacing NDR with a more efficient and comprehensive form of taxation.

We recommend replacing Non-Domestic Rates (NDR) with a Green Land Value Tax set at 2.9% of market land value. This should include widening the tax base to include forestry land, which is currently exempt from NDR. The reform would be broadly revenue neutral for existing NDR payers, but improve efficiency and fairness. While this reform would take time to implement, and should be phased in gradually, over the long-term we estimate it could raise an additional £482 million a year.

We also recommend introducing a Delayed Degraded Peatlands Tax to incentivise peatland restoration. Although this is unlikely to raise revenue, it can help meet Scotland’s net zero target by incentivising behavioural change.

4. Taxation of Development

When planning permission for a new development is granted, the value of land can increase dramatically, simply because it can now be used for housing or commercial development. The vast majority of this uplift in value accrues to the landowner, not because they have invested in it, but because of a decision taken by the planning authority.

We recommend introducing a new betterment levy to capture land value uplift arising from the granting of planning permission. With a 30% capture rate, this could raise £75 million per year from residential development alone and ensure that unearned windfall gains are shared with the public.

5. Air Passenger Travel

Scotland needs to reduce the emissions from the aviation sector, but how we do that has implications for both net zero targets and inequality. Future Economy Scotland research has shown that for aviation, the carbon footprint of the richest 5% of households is 11 times higher than the poorest 5% of households. The Scottish Government can use its powers over aviation taxation more effectively to drive behavioural change and reduce emissions

We recommend replacing Air Passenger Duty (APD) with a Frequent Flyer Tax (FFT). Under this system, a person’s first flight in a year would be charged low or no departure tax, but every subsequent flight would be charged at an escalating rate. As the primary objective is behavioural change and fairness rather than revenue maximisation, we do not include revenue estimates in our central recommendations.

Scotland faces an extremely challenging fiscal outlook, and delivering a just transition will add to existing pressures. To avoid damaging cuts that would fall hardest on those who can least afford them, the Scottish Government must consider ambitious tax reform. Our package of reforms would raise an estimated £2.3 billion a year — enough to protect Scotland's social contract, invest in the workforce and communities at the heart of the transition, and put public finances on a sustainable footing. 

Read the full report for more detail on our analysis and proposals.