Government plans for tax revenue sharing with England’s mayors: IFS response

Andy Burnham has confirmed that he will proceed with Rachel Reeves’s plan to replace much of the grant funding that England’s regional mayors get with a share of the income tax and business rates raised in their areas. Income tax revenue sharing is expected to commence from April 2028. Business rates sharing is planned to commence from April 2027, building on pre-existing sharing arrangements with councils and some mayors.  

The key aim of this ‘revenue assignment’ funding model is to ensure England’s mayoral strategic authorities retain more of the benefits of local growth, enabling more investment in local priorities. Directly linking mayors’ funding to the performance of local income tax and business rates revenues could provide stronger financial incentives for policies and investments that help boost incomes and support the development of commercial property. And the permanent assignment of a share of tax revenues to mayors could also give them longer-term clarity over their future funding than existing grant funding – often confirmed for only a few years at best – enabling longer-term spending and investment.  

But replacing grant funding with a share of tax revenues is not an unalloyed good. Revenues in different places may diverge for reasons completely outside mayoral control – greater rewards also mean greater risks. Revenues can also be volatile and uncertain on a year-to-year basis. Aligning the design of the new system with the government’s – and mayors’ – objectives and appetite for risk will therefore be important. 

David Phillips, Head of Devolved and Local Government Finance at IFS, said:

“While far from radical when compared with how regional governments are funded in other countries, the plans confirmed today are significant in an English context. Currently, England’s mayoral strategic authorities – particularly those outside London – rely overwhelmingly on grant funding from the government. By 2028, much more of their funding will come from tax revenues raised in their areas. This will provide greater financial reward if their economies and revenues perform strongly, but also more risk if the economy and revenues perform poorly – perhaps due to factors entirely outside of their control.  

With the new PM Andy Burnham placing a priority not just on growth but also on tackling regional inequalities, designing an appropriate system of ‘equalisation’ will be vital. Trade-offs between providing rewards for growth and protection from the risk of things going wrong cannot be avoided entirely. But as IFS researchers will show in work to be published in the run-up to the government finalising its plans, clever design can help ameliorate the trade-offs somewhat, helping to better balance incentives for growth, and equalisation according to need.” 

Further analysis of the government’s plans

Full details of the government’s plans will be confirmed in a ‘roadmap’ published as part of a new devolution White Paper alongside this autumn’s Budget. In designing the new system, the government will need to consider several key issues: 

• How much tax revenue to share with mayors and what grants this should replace. We estimate that between 6% and 9% of local income tax revenues would be sufficient to fully replace the ‘integrated settlements’ for economy-related functions provided to the ‘established’ mayoral strategic authorities in the North and Midlands. For Greater London, less than 1% of local income tax revenues would fully cover its existing integrated settlement – reflecting the fact that the existing settlement is lower and income tax revenues much higher per person than for the other mayoral authorities. The government will therefore need to decide whether to roll other grants, on top of the integrated settlements, into the new revenue assignment system, particularly for Greater London. It will also need to decide whether Greater London receives as big a share of local revenue (and future revenue growth or decline) as other mayoral strategic authorities.  
• How much and in what way to adjust for differences in how much revenue can be raised in different areas. The government has said there will be a system of equalisation so that ‘areas benefit from local growth while funding remains fair across the country’. Big differences in income tax revenue mean some sort of equalisation system will be vital if the government does not want to exacerbate (rather than help address) regional inequalities: we estimate income tax revenues per person are over 3.5 times higher in Greater London than in the West Midlands. But there is an inherent trade-off between equalising on the basis of spending needs and providing financial rewards for areas with growing local tax revenues. The government and mayors need to decide how much divergence they are willing to see in order to provide financial incentives for growth. Carefully designed equalisation systems can ameliorate the trade-offs between equalisation and incentives, but not eliminate them.
• What form of revenue assignment to put in place. The simplest is just to allocate a fixed percentage of all the income tax revenue raised in an area. But because income tax rates increase with income levels, this means mayoral authorities would benefit most from increases in the incomes of the rich. For example, assigning 10% of all income tax revenue would mean mayors benefiting from 2% of any increase in income for basic-rate taxpayers (10% times the 20% basic rate), but 4.5% of any increase in income for top-rate taxpayers (10% times the 45% top rate). An alternative would be to assign a fixed number of percentage points of each tax band. For example, 3 percentage points of each tax band would mean mayors would benefit from 3% of any increase in income for all taxpayers. This approach would also reduce both inequalities in tax revenues between mayoral strategic authorities and the volatility of tax revenues over time – it is top incomes that vary most across places and over time. 
• How mayors will be provided with a share of business rates in areas that already have 100% local retention arrangements. In four mayoral strategic authority areas (Greater Manchester, Liverpool City Region, West Midlands and West of England), local councils and mayors together already retain 100% of business rates revenues. Allocating a (bigger) share to mayors would require reducing the share allocated to local councils. While councils could be compensated for the initial transfer of business rates revenues with higher grant funding, they would forgo any subsequent increases (or decreases) in the transferred business rate revenues. This proposal may therefore cause tension between strategic authorities and their constituent councils. 

IFS researchers will explore these and other issues in an upcoming report, which will also set out the current responsibilities and funding arrangements for England’s strategic authorities. We will discuss the potential benefits and risks of revenue assignment, including evidence of effects on growth, and assess income tax and business rates as candidates for assignment. We will then examine the options for systems of equalisation and insurance to accompany revenue assignment.

Notes

1. The established mayoral strategic authorities are Greater Manchester, Liverpool City Region, North East, South Yorkshire, West Midlands and West Yorkshire, plus the Greater London Authority.  
2. The Greater London Authority’s integrated settlement is lower because much more of its funding is provided in separate grants for transport and policing, and in a pre-existing share of business rates revenues raised in London.  
3. IFS’s work on revenue assignment is supported by the Chartered Institute for Public Finance and Accountancy (CIPFA). CIPFA is a UK-based international accountancy membership and standard-setting body and is the only such body globally dedicated to public financial management.