The Welsh government should have the power to vary income tax by 2020, an influential report on the future of devolution has said.
The Silk Commission says a referendum should be held on whether Welsh ministers ought to have new powers over income tax rates.
Control over other smaller taxes should also be devolved, it says.
The changes would make the Welsh government responsible for raising around a quarter of its own budget.
Since 1999, most of the devolved administration's budget has come in an annual block grant from the Treasury, currently worth more than £15bn.
The 33 recommendations of the Silk Commission's first report would change the system dramatically, giving the Welsh government a further stake in the economy.
Taxation and representation
Daniel Davies BBC Wales political reporter
Voters gave the Welsh assembly more law-making powers in a referendum last year.
That puts the assembly in a unique situation compared to other legislatures around the world, the Silk Commission says.
It means AMs can make laws and spend money, but they can't control how much we pay in tax.
To remedy this "anomaly" it recommends another referendum, this time on whether we want the assembly to vary income tax rates.
Opinion polls carried out for the Silk Commission suggest we like the idea.
Income tax is the biggest source of tax revenue collected in Wales, accounting for about 30% of taxes collected. More than £4.8bn was collected in 2010-11, down from £5.1bn in 2007-08.
Devolving income tax would be a "fundamental constitutional shift", the Silk report says.
Hence the need for another referendum. A bill allowing that referendum should be introduced in this parliament, it adds.
If the commission's timetable is implemented, a new system where the Welsh and UK governments share the proceeds of income tax will be up and running in 2020.
Arguably the biggest change is a call to move to a system where the Welsh and UK governments share the yield from income tax by 2020. It would be conditional on both sides agreeing to changes to the funding system for Wales.
For example, on the 20p basic rate of income tax, 10p would go to the Treasury while the Welsh government would get the other half and would have powers to raise or lower it.
Because it represents such a "major" change, the commission proposes a transitional arrangement. This would "assign" a chunk of income tax receipts to the Welsh government, but without it having the power to vary rates.
Control of other smaller taxes, which Welsh Labour ministers want to see devolved, would also be transferred to Cardiff under the Silk recommendations. They are:
- the aggregates levy, which is a tax on the commercial exploitation of sand, gravel and rock.
- the stamp duty paid by house-buyers.
- landfill tax on licensed waste sites.
- and air passenger duty for long-haul flights.
The commission also recommends giving the Welsh government sole responsibility for business rates.
"Start Quote
End Quote Paul Silk"What we are recommending is significant and historic. It will give Wales its own tax and borrowing system for the first time"
But it rules out devolving corporation tax unless it is also devolved to Scotland and Northern Ireland, national insurance, capital gains tax, VAT and fuel duty.
The proposal for a referendum on income tax would require legislation in parliament.
Combined with the effect of the smaller taxes, it would make the Welsh government responsible for raising around 25% of its budget. The rest would continue to come for the block grant.
First Minister Carwyn Jones has said powers to change income tax levels should not be devolved without a referendum.
Led by former assembly clerk Paul Silk, the commission was set up as part of the Westminster coalition agreement between the Conservatives and Liberal Democrats.
'Mature democracy'He said: "Our proposals would provide the Welsh government with an important set of fiscal levers and would enable political parties in Wales to offer people real fiscal choices.
"What we are recommending is significant and historic. It will give Wales its own tax and borrowing system for the first time."
The report also says the Welsh government should have new powers to borrow money. The Treasury has agreed that Welsh minister should have limited borrowing powers.
The assembly is unusual, if not unique, in having law-making and spending powers, but not tax and borrowing powers, according to the commission's report.
It says the current arrangements "do not meet the requirements of a mature democracy and are anomalous in an international context".
Reforming the system would benefit Wales and the UK, it says.
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