Think-tank: London should share income and corporation tax

Central government grants provided to mayoral authorities, such as the Greater London Authority, should be substituted with a combination of income and corporation tax sharing, according to a report by the Centre for Cities think-tank. Currently, London receives almost £5 billion in grants annually, with £2.16 billion allocated to the Greater London Authority, equating to £237 per resident.

Proposed Tax Sharing Mechanism

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The think-tank recommends that the Mayor of London be granted 2.3% of income tax and 0.8% of corporation tax generated within the city. This would provide City Hall with significantly more control over its financial resources and establish a direct revenue stream for funding development initiatives. The report identifies income tax as the primary component of this proposed local finance system, describing it as the "workhorse of the local finance system."

Corporation tax, while representing a smaller portion of local funding, would be exempt from equalisation processes. This exemption is intended to serve as an incentive for mayoral authorities to stimulate economic growth, as there would be no upper limit on the amount of corporation tax revenue that could be retained, capped at the proposed 0.8% share.

Oscar Selby, an analyst at Centre for Cities, stated that these changes would enable the mayor to "have much more control" over City Hall's finances. He added that any expansion of the local tax base, resulting from local economic development and pro-growth policies, would directly translate into increased resources for public transport, housing, and local services. This would reduce reliance on direct grants from central government and provide a guarantee for borrowing to fund new development projects.

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“We won’t see the mayor going cap in hand to the chancellor for new sources of revenue.”

Oscar Selby, analyst at Centre for Cities

Fiscal Devolution and Economic Growth

Bassam Mahfouz, Labour’s oversight spokesperson on the London Assembly, supported the calls for greater revenue-raising powers for London. He stated that while devolving more power to a local level is important, it is "meaningless" without the ability to raise the necessary funds. He believes that greater fiscal devolution should be a central part of any new devolution deal, allowing the GLA more control over investments in housing, transport, and public services, while also driving economic growth across the city.

The report also suggests a 'Swiss style' system for distributing funds among mayoral authorities, where a levy is placed on income tax revenue exceeding a defined threshold. This redistributed cash would ensure that less affluent areas are not disadvantaged. In London, a specific arrangement currently allocates 33% of business rates to central government, 37% to the GLA, and 30% to London boroughs. The Centre for Cities proposes that central government devolve its share to all mayoral strategic authorities, mirroring practices in the West Midlands and Greater Manchester.

The current centralised local finance system, which aims to equalise funding based on local need versus tax base, is seen by the report as penalising successful areas. As places become more prosperous and grow their tax base, they often see reductions in central government grants. The proposed recommendations aim to create a fiscal devolution system that offers a strong growth incentive in every mayoral strategic authority while guaranteeing a fair level of funding.

The report estimates that approximately £21.5 billion could be devolved to mayors over the four years leading up to 2030, assuming historical growth rates. London currently retains a small fraction of the taxes generated by its residents and businesses. A 2019 City Hall report indicated that London retains "barely 6% of all the tax paid by Londoners and businesses, compared to 50% in New York and 70% in Tokyo."

Currently, London contributes about £4 in every £10 of government revenue, with only 5% of all tax revenue raised in England remaining with mayors and local authorities, while 95% goes to central government. While significant tax-raising powers are unlikely under the current government, plans for an overnight visitor levy could allow mayors to generate millions by early 2028. This levy, expected not to exceed 5% in London, would be a percentage of accommodation costs.

What Happens Next

The proposals from the Centre for Cities are recommendations to government. It is unclear when or if these specific tax-sharing arrangements will be implemented. Discussions regarding devolution and potential new revenue streams, such as the overnight visitor levy, are ongoing.