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Local income tax could give councils billions in extra funding, IFS report reveals

A ‘local income tax’ could provide councils in the UK with an extra £6bn a year per 1% in order to help them meet rising costs and rising demands, economists have suggested.

A report from the Institute of Fiscal Studies (IFS) assessing the potential for devolving further tax revenues and powers to English councils suggests that a local income tax would be the best option for the government if it wanted to devolve significant revenue sources to councils.

The IFS estimated that devolution of a portion of income tax would provide broader financial incentives for councils to grow their economies and raise employment and incomes.

It would also give councils a buoyant revenue stream that automatically keeps pace with inflation and growth – unlike council tax and business rates which can be “politically difficult.”

But the IFS warned that a local income tax would raise significantly more funding in some areas compared with others.

It estimated that revenues per person would be six times higher in certain areas of London compared to areas such as Hull and Leicester, and said that a system to redistribute revenues between councils would be required.

David Phillips, an associate director at the IFS and an author of the report, said: “A local income tax looks to be the best option if the government wanted to pursue significant tax devolution.

“However, there would still be a trade-off between the stronger financial incentives and greater local control that tax devolution brings, and the risk of bigger divergences in funding and public services that go alongside this.”

Other options in the IFS’s report included a local corporation and value-added tax and a stamp duty land tax.

Tom Harris, a researcher at the IFS and another author of the report, added: “While tax devolution could give councils more options and discretion over how to raise funding, it is not a panacea for their funding issues.

“Addressing these ultimately requires either tax increases (whether via local or national taxes) or lower expectations of what councils can provide in future.”



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