Scottish Government proposals to hike council tax on the most expensive homes are "a small step in the right direction", but ministers are still "ducking" a key reform, a leading thinktank has said.

The respected Institute for Fiscal Studies (IFS) said raising the relative rates on Band E to H properties should made the levy fairer and raise up to £175million a year.

However it also criticised Scottish ministers for failing even to mention the need to revalue properties, with the tax still based on property values as they were in 1991.

Given the different increases in house prices in different areas since then, the IFS said it was reasonable to assume that “half or more of the properties in Scotland are in the wrong band”.

Associate Director David Philips said continuing to base council tax on 1991 values would eventually “graduate from the absurd to the lunatic” unless ministers grasped the nettle.

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The Labour-led government in Wales recently announced a valuation there. 

The SNP-Green Scottish Government is currently consulting on raising the tax on Band E to H homes by between 7.5% and 22.5% by changing the ratio between those bands and Band D.

This was last done in 2017, and if done again next year would mean the bills for Band E to H houses will have gone up between 16% and 50% in relative terms in eight years. 

The IFS said this would “reduce the regressivity of council tax in Scotland”, with a Band H home charged 4.5 times as much as a Band A, against three times as much in England.

In a newly published briefing, it said: “The Scottish Government’s proposals are therefore a small step in the right direction, and compare favourably with the situation in England, where reform seems a distant prospect.”

However it said the council tax in Scotland remained flawed as so many properties were in the wrong band and therefore paying the wrong tax rate.

“This is a situation that should be addressed via a revaluation, with new tax thresholds and bands based on up-to-date values,” it said. 

Most properties in Scotland are Band C or below, with 28% in Bands E to H.

First Minister Humza Yousaf recently defended the tax proposals, after an opposition backlash at Holyrood.

Mr Philips said: “Facing a difficult budgetary situation, the Scottish Government again proposes increased taxes on approximately the quarter of households living in properties that have the highest assessed values for council tax purposes. 

“This will be a progressive tax increase, with those in band H properties potentially paying around £800 a year more in council tax, raising up to £175 million: the equivalent of around a 2% increase in the higher (42%) rate of income tax.

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“However, the Scottish Government seems set on ducking the vital issue of revaluing properties - continuing to base council tax on property values from 1991 could easily mean half or more of properties are in effect in the wrong band and their occupiers therefore facing the wrong tax bills.

“When the Scottish Government sensibly designed its land and buildings transaction tax to avoid big and unfair jumps in tax bills at tax thresholds, the UK government soon followed suit, showing the potential for reform in one part of the country to catalyse it elsewhere. 

“The Welsh Government is now grasping the nettle with a proposed revaluation and more fundamental reform of council tax; it is disappointing that this does not yet appear to be encouraging Edinburgh and indeed Westminster to be bolder too.”

Liberal Democrat MSP Willie Rennie said: “The SNP and Greens are plotting a wave of council tax rises during the worst cost of living crisis for generations.

"The nationalists have been in government promising to abolish the council tax for 16 years, yet they keep finding excuses to prolong it and extend the lifetime of the current unfair system

"So many properties are in the wrong bands. It's clear that the broken system needs replaced.

“There is no guarantee that services will be saved even if bills were to go up because the SNP-Green Government’s systematic underfunding of local government has been so devastating for so long.

"People will end up paying more for less because nationalist ministers are so hopeless at getting the economy going."

SNP Public Finance Minister Tom Arthur said: “The potential changes to council tax would only affect around a quarter of properties and even after they are taken into account, average council tax in Scotland would still be less than anywhere else in the UK.

“We know that many people are struggling with their finances and our Council Tax Reduction scheme is there to ensure nobody has to pay a council tax bill they cannot be expected to afford, regardless of what band they are in.

“I would encourage anyone who has views on these proposals to complete our consultation before it closes on 20 September 2023, to help us determine if they should be taken forward.

“Longer term reforms to the council tax system are being considered by a joint working group on local government funding, chaired by COSLA and the Scottish Government.”