George Osborne’s plans to devolve tax raising powers must go further to prevent local authorities fighting over dwindling revenues, according to a leading thinktank.
The chancellor, who said earlier this year he will allow newly combined authorities in the north and Midlands to keep extra revenues from business rates collections by 2020, should hand over more tax raising powers to the regions to raise billions of pounds more to attract jobs and investment.
Related: Stamp duty changes
A new report by the think tank Centre for Cities said that control of stamp duty revenues would combine £23bn of business rates revenues with £10bn of stamp duty. It said the proposal would persuade local councillors to push through planning permission for house building to gain another £1bn for council coffers.
The report, Beyond business rates: incentivising cities to grow, builds on criticism of Osborne’s plans for limited tax raising and borrowing by local authorities.
In October, the credit ratings agency Moody’s warned that devolving full business rate growth to local authorities would benefit some urban and richer authorities at the expense of rural councils and those in poorer regions.
It said some authorities that suffered tax shortfalls would borrow under the new arrangements to fill the gap, undermining their credit rating. Cuts across the board in council funding outlined by Osborne in the recent Whitehall spending review will generate a £4.3bn funding gap, heaping even more pressure on councils to borrow.
Richard Murphy, an independent tax expert, said forcing councils to rely on business rates for extra revenue would have the opposite effect as councils came under pressure to offer cut-price deals in a “a race to the bottom”.
The report argues that authorities that lack large and prosperous commercial sectors to tax with higher business rates would also gain from devolution if they were given power over stamp duty revenues to encourage an increase in development.
It said that most other countries allowed local authorities and regions to have more tax-raising powers than UK councils, including in France and the US. Local taxes in the US include property taxes, sales taxes,taxes on hotel room occupancy, commercial rents and alcohol sales.
In France, which like the UK is highly centralised, local government accounts for 20% of local expenditure compared with 25% in the UK. But local taxes make up 48% of local revenues in France and only 22% in the UK. A succession of council tax freezes since 2010 has only made local councils more dependent on central funding.
Alexandra Jones, chief executive of the Centre for Cities said: “The government’s move to devolve business rates was an important step in the right direction, but it doesn’t go far enough.
“Devolving land and property taxes would encourage places with weaker economies to develop their tax base, while also giving places with high economic demand more incentives to take the often difficult decisions needed to invest in infrastructure and new housing.
“This should be the next step in the government’s devolution agenda; to ensure that local leaders across the country have the powers and responsibilities they need to help their local economies thrive in the years to come.”
She said devolving land and property taxes, on top of business rates, would give local authorities responsibility for 41% of their spending.
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