Think-tank Onward calls for tax reforms as it reveals how much more people in Yorkshire pay in council tax than in London

The Government’s “levelling up” agenda must go beyond spending more and also focus on reforming taxes to unlock opportunity or growth in less prosperous places, according to Onward.

In a new report Levelling Up the Tax System, the think-tank founded by Yorkshire-born Tory MP Neil O'Brien explores how different regions contribute more or less in different taxes than they did ten years ago as a result of demographic and industrial changes.

It reveals that London now generates £1 in every £5 of tax receipts or £162 billion a year in total. This has been driven by surging income and wealth tax receipts, which have increased by 55 per cent in London but only eight per cent in the rest of the UK since 1999/00.

It means that 36 per cent of tax revenue is now generated in London and the South East, despite these regions only accounting for 27 per cent of the population.

But as a share of its regional economy London contributes the least of any region at 33 per cent of its regional Gross Domestic Product, versus 40 per cent in the South West, North East and East Midlands.

The analysis reveals that many taxes are regionally regressive, meaning they are borne disproportionately by the poorest regions. These include property taxes such as council tax, excise levies such as tobacco and alcohol duty and VAT.

Average council tax per head in London is the lowest in England at £481 a year, despite house values being much higher in the capital than elsewhere and per capita council taxes in London are a fifth lower than in much poorer regions such as the East of England and South West.

Council tax as a share of post-tax income in London is the lowest in the UK at 1.64 per cent, just over half that of Yorkshire and the Humber (3.06 per cent) and the North East (2.91 per cent).

Fuel and environmental duties are skewed towards poorer regions because of public transport and industry mix in London, says the report. As a share of post-tax income, fuel duty is four times higher in Yorkshire and the Humber at 2.72 per cent and Northern Ireland at 2.68 per cent than it is London.

Onward says cutting Corporation Tax by one percentage point would disproportionately benefit London but that increasing certain capital allowances, particularly those within categories like plant and machinery or industrial buildings, would likely generate large savings for regions such as East Yorkshire, Northern Lincolnshire and Cumbria.

The paper argues that the Treasury should publish regional distributional analysis at every Budget and Spending Review so that policymakers can systematically examine the regional impacts of different tax changes and to ensure that the levelling up agenda is not held back by the tax system.

Will Tanner, Director of Onward, said: “Levelling up is mostly associated with new infrastructure or extra funding for skills and research, but these things take time to have an impact. There is another tool available to ministers that can deliver immediate results and which should appeal to pro-market conservatives - the tax system.

“By not considering the geographic impact of different tax policies, ministers are trying to overturn decades of regional economic divergence with one hand tied behind their back. If levelling up is to succeed, we need to use the tax system to drive regional growth.”

Carl Les, the Conservative leader of North Yorkshire County Council, said the disparity in council tax payments between London and Yorkshire was "a message we have been banging on about for a number of years".

The Government launched the Fair Funding Review looking at the distribution of funding between different councils in 2016 and it was scheduled for April 2020 but delayed due to the pandemic.

Coun Les said this review would likely address the issue but that "whenever you have winners and losers those of us who won will be very happy but the losers will be very unhappy".

"The MP Kevin Hollinrake says 'a rising ride floats all boats' but I am not sure it will be a rising tide. It may have to be a redistribution. The clue is in the title 'fair funding'."

Last year Onward set up a Levelling Up Taskforce to "champion ideas to boost Britain’s lagging areas and ensure that everyone has the opportunity to make the best of their talents, no matter where they are from." It includes Rother Valley's Alex Stafford, Harrogate's Andrew Jones and Penistone and Stocksbridge's Miriam Cates.

A Treasury spokesperson said: “Levelling up is a key priority - which is why we’re investing £100 billion in infrastructure, creating a new £4 billion Levelling Up Fund, establishing new Freeports across the UK and reforming the Green Book, as well as opening a new Treasury office and UK infrastructure bank in the North in the coming year. We keep all taxes under review.”

It comes amid reports that Treasury officials have modelled a plan to scrap council tax and stamp duty and replace them with a property tax based on a percentage of a home's value.

Chancellor and North Yorkshire MP Rishi Sunak is understood to be resisting the property tax idea, and there is no prospect of it being introduced in the Budget on March 3 according to the Daily Mail.

But the Budget could include moves such as an increase in corporation tax. Mr Sunak is said to believe it is the fairest way to begin raising significant sums because it targets business profits rather than people and firms who have been plunged into the red.