More than a quarter of a century ago a small band of pro-devolution Scottish Conservatives embarked upon a quixotic attempt to make their party see sense.

The historian Michael Fry (now a Yes supporter), Struan Stevenson (who's just retired as one of Scotland's MEPs) and the late Brian Meek succeeded in getting the 1988 Scottish Tory conference to debate devolution and they set out an alternative vision of a fiscally autonomous Scotland within a federal UK. But after lively exchanges in Perth, devolution was rejected by a decisive 300 votes to 11.

Mrs Thatcher, who spoke following the debate, was "delighted". "As long as I am leader of this party," she added for good measure, "we shall defend the Union and reject legislative devolution unequivocally."

On this, as in other areas during her twilight years as Prime Minister, Thatcher's political instincts failed her. As far as she was concerned the 1979 referendum had settled the issue once and for all. Besides, devolution failed her all-important postbag test: no one ever wrote to her demanding a Scottish Parliament and therefore it wasn't a vote winner.

This morning in Glasgow the Scottish Conservative and Unionist Party - a shadow even of its 1988 self - should finally catch up with itself. Although the 'Commission on the Future Governance of Scotland' (bound, naturally, in Tory blue) advocates neither full fiscal autonomy nor a federal UK, it nevertheless represents a significant shift in Tory thinking.

Furthermore, it has the backing of Downing Street and (equally as usefully from the leadership's perspective) the condemnation of Lord Forsyth, who yesterday criticised the proposals as a 'distraction' from saving the Union. On the contrary, senior Scottish Tories see today's recommendations as central to that task as well as the revival of the party as an electoral force.

There has always been a strong Tory argument for fiscal responsibility and stronger self-government, it just took the party - particularly in Scotland - a long time to realise it. Indeed, when the devolution debate first began in the late 1960s several progressive Scottish Tories (including Sir Malcolm Rifkind) advocated federalist ideas. Ted Heath even promised a Scottish Assembly, the legislative culmination of decades of administrative devolution.

But this was rarely the majority view, and Heath's less pragmatic successor was able to unpick these commitments ahead of the 1979 election. Cynically, Lord Home was deployed to assure pro-reform Tories (and Scots, of whom nearly a million voted Conservative in that election) that devolution wasn't necessarily dead. Only when preparing her memoirs 15 years later would Baroness Thatcher wonder out loud about whether she'd done the right thing.

Curiously, even after the fall of the Iron Lady the Scottish Conservative Party proved reluctant to budge an inch on devolution. John Major took stock but little more, and while the Scottish Parliament was accepted in 1999 it hardly appeared loved. The Welsh Conservatives, by contrast, campaigned for greater powers from the outset, and today they're the official opposition in the National Assembly; not exactly popular but far from toxic.

In an elegant essay published yesterday, Scottish Tory leader Ruth Davidson was keen to elevate her devolution commission above crude party politics or the strategic demands of winning a referendum, although without the SNP's victories in 2007 or 2011 it's difficult to believe the Conservatives would have ended up at this point, while a clear attempt to "outbid" Labour further undermines lofty rhetoric about putting country before party.

At the same time Davidson's attempt to provide a philosophical justification for the recommendations is more or less convincing, relishing, as she put it, the opportunity to "marry these vital Conservative instincts" of responsibility and accountability. Even non-Conservatives might agree with her observation that Holyrood's ability to spend but not (necessarily) tax has proved "a licence to avoid difficult decisions and blame others".

There is also a welcome attempt to think in more holistic terms. "We have to accept," writes Davidson, "that the days when devolution can be sorted out in a bilateral shake of the hands between London and Edinburgh are coming to end." One newspaper alluded to a 'council of the isles'; federalism would be a better, more coherent fit, but the direction of travel is set: a general recognition that ad hoc devolution is reaching its end point.

The Scottish Tories, meanwhile, are clearly gearing up to make some sort of income tax pledge in time for the 2016 Holyrood elections, and in that context their 'more powers' stance represents a covert challenge to the so-called 'progressive' parties to put their tax plans where their mouths usually are: if the SNP is really serious about tackling inequality, why not revive its 1999 Penny for Scotland?

True to form, SNP business convener Derek Mackay yesterday dismissed the Tory proposals with the usual tired old lines about 1979 (a "pub bore" reaction anticipated by Davidson et al) while bizarrely playing down the importance of income tax as a fiscal lever (it "amounts to only 23 per cent of Scotland's revenues"). Yet cutting Corporation Tax, which accounts for less than 10 per cent of UK revenue, is considered central to a post-independence Scottish economy.

It highlights one of the myths of modern Scotland, that somehow Tory ideas and thinking were extinguished along with most of its elected representatives back in 1997.

That might look convincing in crude electoral terms but in reality Conservative philosophy endures even where the party doesn't; independence is now posited in low-tax, entrepreneurial terms of which many right-wingers could - and indeed do - approve. Perhaps the SNP's adoption of essentially Tory economic policies since the late 1980s has been one of less obvious barriers to any sort of Scottish Conservative recovery: how can 15 MSPs hope to preach the gospel of business, enterprise and hard-working families any better than Alex Salmond et al? A 25-year quest to make Scotland a 'Tory-free zone' was clearly never intended to include ideology.

Nevertheless the party, unlike in 1988, appears to be in a good place when it comes to rebooted devolution. "The party is past why we're doing this," one senior Tory told me, "now they want to know what we're doing." Similarly, one of the Strathclyde Commissioners was keen to emphasise that Downing Street - not least the Prime Minister - was fully signed up to the report's fiscal agenda.

The electoral backdrop has also given Scottish Tories, not exactly used to good news, modest cause for optimism. Their vote actually increased in last week's Euro elections (admittedly on a low turnout), in spite of the Ukip vote doubling. It also hasn't escaped Nationalist attention that in traditional SNP/Tory marginals such as Moray and Perthshire there wasn't much between the two parties.

As Murdo Fraser and others have argued, defending the Union has motivated the Tory grassroots more than most other issues. Further mobilise that spirit with a distinctly Conservative plan for devolution, the thinking goes, and it might emulate the Welsh party in electoral terms.

Will it work? If not then it's difficult to see what else can be done to reverse more than two decades of decline.