Andy Burnham might be on his way from Manchester to Downing Street, but power is heading in the other direction, according to his allies.
“The one thing, if it is going to be Andy, that for sure we will get is devolution on a much more ambitious scale,” according to Lord O’Neill, the former minister and chief economist of Goldman Sachs who has been advising the presumptive prime minister.
That means cash, as well as power. O’Neill said this week that Burnham was studying handing local authorities power to set taxes, including income tax.
“It is definitely something that would be on the agenda to study in a serious way,” he told LBC.
Sir Keir Starmer’s Government has already been looking at ways to allow local politicians more access to taxes paid by their voters.
Rachel Reeves, the Chancellor, told Treasury officials in March to “set out plans to give regional leaders control of a share of some national taxes which have, for too long, been allocated by central government”.
Critically, though, she said: “This is not about new taxes and it’s not about higher tax rates – I will not ask taxpayers to pay more.”
But as Burnham prepares for power, the Chancellor has acknowledged the pressure to go further. This week, she told the British Chambers of Commerce’s conference she had “unfinished business is on fiscal devolution”.
“That’s one area where I certainly want to make further progress, and I know that’s an area that Andy wants to,” she said.
It raises the prospect of the Treasury losing some control of key taxes, allowing local politicians more of a say.
“Business rates devolution is a very strong probability,” O’Neill said in his radio interview. “I think exploring [devolving] aspects of income tax is possible.”
That sounds a lot like mayors could gain the power to raise rates locally. Potentially this could lead to the end of income tax as the national levy, breaking the charge up into a patchwork of varying rates depending on location.
Burnham has long championed devolution and has signalled that more is on the way if he moves into Downing Street.
Just last month he demanded “a serious transfer of power and resources right across the North of England”, though his team is coy about the precise details of what this might mean for tax policy.
Some will see this as an expensive postcode lottery in which residents, tied to one place by family, employment and the exorbitant costs of moving, are almost randomly allocated a tax rate which differs from those in other local authorities.
Others may view it as an important experiment in local democracy, economic policy and voters’ choices.
Anthony Breach, at the Centre for Cities, a think tank, notes that allowing local authorities to keep more of the revenue generated locally should encourage pro-growth policies.
Stronger growth incentives
“You would have stronger growth incentives at the mayoral level to grow the tax base and to create more jobs, get people into work, increase wages, and use proceeds to fund more local investment or perhaps to cut the council tax precept,” he says.
But others fear the strategy will simply lead to higher taxes. After all, the average local authority increased council tax by 4.9pc this year, just shy of the 5pc maximum allowed without gaining special permission.
Sir Mel Stride, the shadow chancellor, warns that it means higher taxes are on the way.
“Devolving income tax rates to the regions risks opening the door to tax rises on working people,” he says.
“Rachel Reeves has already brought in a holiday tax under the guise of fiscal devolution. If Andy Burnham now wants to look at income tax as well, working families across the country should brace themselves for yet more taxes.”
Income tax bills are already rising sharply via the stealth tax of frozen thresholds. The Government raked in just under £200bn in income tax in 2019-20, the year before Covid. It is set to take almost £360bn this year, rising to £430bn in 2030-31.
However, new powers do not inevitably mean every mayor will want to jack up taxes locally.
Lord Houchen, the Conservative Mayor of Tees Valley, for instance, claims he will not levy a tourist tax on visitors to his corner of the North East.
Mayors might also choose not to spend extra revenues from local income tax, instead using the funds to cut other charges such as council tax or business rates.
It means businesses and anyone considering moving in or out of an area would be able to consider a different set of costs when weighing up where to live and work.
Such devolution is already in action. The Scottish Government has used its powers to introduce new tax rates, putting up taxes for some workers and cutting income tax for others.
In Scotland, there is a starter rate of 19pc, an intermediate rate of 21pc, a higher rate of 42pc – which kicks in at £43,663 – the advanced rate of 45pc, from £75,001, and the top rate of 48pc for anyone earning more than £125,140.
That is compared to a tax rate of 20pc for workers in England, Wales and Northern Ireland once they earn more than £12,570 per year. This rises to 40pc on pay more than £50,270, then 45pc on earnings above £125,140.
Rates apply only to residents of Scotland, rather than everyone with a Scottish employer.
That opens the possibility of one employee living in England, but commuting over the border paying a different rate of tax to their colleagues living in Scotland.
Both sides of the border are relatively sparsely populated, limiting the numbers who might choose their home based on the tax rate, though now working from home is well-established, the incentive to move south becomes clear.
This could be a bigger phenomenon if neighbouring English local authorities and mayoralties choose different tax rates, as workers in more densely populated areas have more choice regarding where to live and where to work.
“Places can make different choices. Do we want to have loads of really high quality local services and we are prepared to pay high levels of local tax to achieve that? Or are we going to compete on a low tax, low cost regime to attract residents and businesses into the area?” says Breach.
“Those preferences are going to vary across the country and by political party. Currently, we are in a system where places cannot vary their tax rates and it is all decided by Whitehall regardless of what local people think.”
Other difficulties could arise. While devolving income tax might sound progressive, in practice it could make poor areas even poorer.
Almost half of all income tax is paid by people living in London and the South East, though public spending is only 13pc higher per head in the capital than across the nation as a whole.
A formula could be used to enable mayors in wealthy areas to keep some of the increase in revenues when businesses and workers prosper, while still distributing some of the cash to poorer regions demanding more funds.
But that would create a fiendishly complicated tax system that critics say already needs to be trimmed.
Whatever else it might be, Burnham’s ambition to devolve tax certainly matches the promise to be “ambitious”.