LOCAL authorities could be given powers to cut local income tax under plans being discussed by SNP and LibDem ministers.
The SNP may be willing to drop its plan for a centrally imposed "national tax" if local authorities do not raise the charge above 3p in the pound.
The idea has been floated by the first minister, Alex Salmond, and his ministerial team in talks with the Liberal Democrats on scrapping the council tax.
The Sunday Herald can also reveal the existence of Treasury documents showing that council tax benefit - £400 million of which the UK government is threatening to withdraw if Holyrood scraps the property-based tax - belongs to Scotland.
The SNP administration will this week publish a consultation on replacing council tax with a local charge based on ability to pay. Salmond will lay out plans for a nationally set 3p rate on all earned taxable income. But the LibDems, whose support Salmond needs to push through his scheme, want the rate to be set by councils rather than government Salmond and his finance minister John Swinney met LibDem leader Nicol Stephen and his deputy Tavish Scott on Thursday to discuss a compromise. The talks will continue tomorrow.
The SNP-LibDem summit discussed an idea whereby a centrally imposed 3p tax could be introduced in the short-term, after which councils would be given the power to vary the charge. Another suggestion was to cap the tax at 3p, in exchange for giving local authorities the flexibility to lower the levy.
Any local income tax plan is thought to depend on SNP ministers securing access to £400m of council tax benefit, which the UK government says will be lost to Scotland if the Nationalist administration pushes ahead with its scheme.
UK work and pensions secretary James Purnell said earlier this month that he would not help "subsidise" the SNP's local income tax plan by handing over the £400m. However, in Treasury documents obtained by the Sunday Herald, the UK government states that council tax benefit should be part of the devolved government's block grant.
The "statement of funding policy" - dated October 2007 - reveals how council tax benefit was to be given to Scotland. It states: "The government will also want to consider whether this approach the Barnett Formula or another formula is appropriate in relation to provision for council tax benefit and housing benefit which will both come within the Scottish block for the first time after devolution."
A LibDem spokesman said that scrapping council tax in favour of a local income tax was an important issue for the party. He added: "There are differences between the Liberal Democrats and SNP on whether the rate should be set by government or local councils. These are the issues which need to be discussed if we are to build a parliamentary majority in favour of change."
A spokesman for John Swinney said: "The meeting was very constructive. It is clear our agreement about the need to scrap the council tax in favour of a fair local-income tax based on ability to pay far outweighs the differences."
Labour local government spokesman Andy Kerr said: "This is further evidence that the Nationalists' plans on income tax are in complete disarray. The SNP and Lib Dems are like the two ends of a pantomime horse, each pulling in a different direction and neither knowing which way to go next."
He added: "The SNP cynically promised the Scottish electorate they could deliver existing service levels on a 3p rate but their sums don't add up."
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