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England’s funding system for local government should ‘cut out’ Treasury

Council tax, stamp duty and business rates in England should be replaced with a devolved land value tax as part of a radical overhaul of the local government funding system that would “cut out” the Treasury, a think-tank chaired by former chancellor George Osborne has recommended.

A report by the Northern Powerhouse Partnership also called for a new funding model that would include diverting a penny from employer National Insurance contributions towards local infrastructure and transport services, mirroring the French model.

The lobby group, which includes northern business leaders and former Treasury minister Lord Jim O’Neill, published the study as calls mount for fiscal devolution to address regional inequalities.

The organisation also recommends a localised hotel tax, a levy commonly used in continental Europe, which it says could raise £5.5mn a year for the Lake District alone.

England has an unusually centralised fiscal model with the vast majority of taxation raised nationally. Local government therefore relies heavily on grants from Whitehall, which have dwindled since 2010. These are supplemented by council tax — a local residential property charge — and business rates, a local tax on firms that is mostly returned to the Treasury before being redistributed.

The amount a household pays in council tax is dictated by a property value band system dating back to 1991, creating a situation in which residents “in the highest band only pay three times that of those in the lowest — despite being worth at least eight times as much”, the report said.

Council tax has also continually risen above inflation as central government grants have reduced and town halls have sought to plug the resulting gap. Local taxes were among the “most unfair taxes, which do not correspond meaningfully to people’s actual circumstances”, the report added. The system “is, quite simply, broken and not fit for purpose” and requires more than “simple tweaking”.

It proposed the revaluation of council tax bands, the devolution of stamp duty and reform of business rates as an initial step. But it said ideally a new land value tax — set and raised locally but drawn up to a “common design” — should replace all three.

This model is commonly used by other countries, it argued, and should be underpinned by an agreed fiscal transfer formula to even out regional inequalities, which could be adapted over time as local economies grow.

“With this change, the local government grant could be eliminated and money returned to the public with a reduction in income tax or increase in benefits received by the most disadvantaged,” the report said.

“The Treasury would be permanently removed from funding local government, moving councils and combined authorities outside the political cycles of Westminster and Whitehall interference,” it added.

The report also recommended a penny from employer-paid National Insurance contributions is devolved to England’s directly elected mayors for transport and infrastructure projects, modelled on a French tax called the Versement Mobilité, used in large urban areas since 1999.

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