Nicola Sturgeon is under pressure to top up a £500 "thank you" bonus for NHS and social care workers after her challenge to Boris Johnson not to tax the money backfired spectacularly.
One of Scotland's most eminent economic think tanks said the best way for workers to receive the entire sum would be for the Scottish Government to pay a higher "gross" amount, which would reduce to £500 on payment of income tax.
The Fraser of Allander Institute (FAI), based at Strathclyde University, said there would be no additional cost to the Scottish Government as it controls income tax on earnings north of the Border, so the additional money would be paid back to them.
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In her SNP conference speech on Monday, Ms Sturgeon challenged Mr Johnson to create a special tax exemption for the payment, saying the Covid "heroes" deserve to pocket "every penny".
After the Treasury pointed out SNP ministers had the power to "gross up the payment", Ian Blackford, the SNP's Westminster leader, accused the Prime Minister of trying to "punish" NHS and care workers.
But the FAI said the SNP's exemption demand "opens the possibility of endless future lobbying for tax-exempt bonuses" and "would gift higher rate taxpayers a significantly larger tax break than basic rate taxpayers."
In a damning intervention, they said there was a "healthy dose of politics" in Ms Sturgeon's challenge to the Prime Minister and what the Scottish Government "really wanted" was an example of the devolved tax powers "apparently not working."
— Fraser of Allander Institute (@Strath_FAI) December 1, 2020
Opposition parties said the First Minister should apologise and "get on" with topping up the money instead of "playing politics with the pandemic."
The Scottish Tories said increasing the payment to £625 would give NHS workers the full £500 and the Scottish Government would receive the additional £125 back in income tax.
The row broke out after the Institute estimated last week that SNP ministers had failed to spend around £1 billion of the extra money handed to them by the Chancellor to tackle the Covid crisis.
Douglas Ross, the Scottish Tory leader, said: "The SNP have all the funding and powers they need to top up this payment today. Any extra income tax would go to the Scottish, not the UK Government, so if they increase it, no-one misses out.
"The SNP are pushing for indy ref two in the middle of a pandemic and creating a political bunfight out of thin air. As the Fraser of Allander Institute have now made clear, this is all a political game from the SNP."
Jackie Baillie, Scottish Labour's finance spokeswoman, said: "The payment announced is welcome, but it is clear that the SNP could not resist another constitutional row rather than simply helping working people.
“The Scottish Government can gross up the payment if it wishes to: it should just get on with it.”
Income tax on these payments would be paid to the Scottish Government, not the U.K. Government, as Ian Blackford knows fine well.
Why is it that even on a ‘thank you’ payment to health workers that we can all support, the SNP still try and divide us? https://t.co/xTdVjsE4tc
— Douglas Ross MP (@Douglas4Moray) December 1, 2020
The gesture will cost in the region of £180 million, with those who work part time receiving a proportionate amount.
In a blog on the tax row, David Eiser, the FAI's lead on fiscal policy, and director Graeme Roy said it was "perfectly legitimate - and indeed desirable" to reward NHS and social care workers but rejected the creation of an exemption.
They said: "If policymakers want those employees to benefit by £500 after tax, the solution is to pay a higher gross bonus.
"There is little reason for these rewards to be exempt from the existing social contract, or for them to require administrative and legislative hurdles to implement."
"Grossing up" utterly misses the point - it isn't an exemption and will still be taxed. Why? Because we can't set tax exemptions! The more we gross up, the more health and social care workers have to pay in tax. We're asking for a tax exemption. https://t.co/ab2Qb0GRCb
— Kate Forbes MSP (@KateForbesMSP) December 1, 2020
But Kate Forbes, the Scottish Finance Secretary, tweeted: "'Grossing up' utterly misses the point - it isn't an exemption and will still be taxed. Why? Because we can't set tax exemptions!
"The more we gross up, the more health and social care workers have to pay in tax. We're asking for a tax exemption."
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