England regions tax devolution plan targets grant replacement

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England regions tax devolution

Highlights

Elected mayors in England could fund themselves by retaining about 7% of regional income tax and 2% of corporation tax, replacing nearly £5 billion in grants.
Centre for Cities urges excluding Swiss-style redistribution for corporation tax retention to incentivize local business growth and high-productivity investment.
A proposed funding floor would be financed by tariffs on wealthier regions to prevent inequality as fiscal devolution expands ahead of John Healey's October 28 budget.

Mayoral funding model and tax retention

As reported by Reuters, the Centre for Cities says elected mayors in England should be funded from taxes raised in their own regions rather than through grants from Britain's finance ministry.

The think tank says mayors should be allowed to retain about 7% of locally generated income tax receipts and 2% of corporation tax revenues from their regions. It says that approach would replace almost 5 billion pounds, equivalent to $6.74 billion, in existing grant funding and remain cost-neutral.

Andrew Carter, chief executive of Centre for Cities, says the government has put fiscal devolution at the heart of its plans to rewire the state and should not miss the chance to use it in a way that supports economic growth. He welcomes a proposal by Prime Minister Andy Burnham to let regions keep part of their income tax revenue, but says there is a risk the government avoids using corporation tax because of its perceived complexity.

Centre for Cities also says mayors should keep their share of corporation tax revenues without being subject to the Swiss-style redistribution mechanism proposed for income tax. The report says that would encourage local leaders to back business activity and invest in high-productivity sectors.

Redistribution safeguards and wider devolution push

To prevent wealthier regions from pulling further ahead, the think tank proposes a system based on Switzerland that guarantees every area a minimum funding floor. That mechanism would be financed by a tariff on regions with the largest tax bases.

Fiscal devolution is presented as a core part of Burnham's drive to reduce London's economic and political dominance in one of the developed world's most centralised and unequal democracies. Data cited from the Organisation for Economic Co-operation and Development shows that only about 6% of tax in Britain is raised below the national level, compared with 20% in France and roughly half in Germany and the United States.

The government is likely to set out more of its fiscal devolution plans in the coming weeks before finance minister John Healey's budget on October 28. Wales and Scotland already have devolved parliaments and partial tax-raising powers, unlike English regions.

Our earlier report on Wandsworth’s council tax rise explained how cuts to central government grant support and a new funding formula are pushing even traditionally low-tax London boroughs to raise bills sharply. We noted the overhaul is designed to redirect resources toward more deprived areas, effectively increasing expectations that councils fund more of their budgets through local taxation, while sparking political backlash and concerns over service pressures.

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