Levelling Up the Tax System

Tax reform can help level up and potentially have faster effects than infrastructure

This report reveals that many taxes are regionally regressive, in that they are borne disproportionately by the less affluent regions. These include taxes such as council tax, some green levies, tobacco and alcohol duty, and VAT. In particular:

• Average council tax per head in London is the lowest in England (£481), despite house prices being much higher in the capital than elsewhere. Per capita council taxes in London are a fifth lower than in much poorer regions such as the East of England (£593) and South West (£620). Council tax as a share of disposable income (GDHI) in London (1.64%) is the lowest in the UK, and just over half that of Yorkshire and the Humber (3.06%) and the North East (2.91%).
• Fuel and environmental duties are skewed towards poorer regions because of different transport patterns and more industrial economies in poorer areas. As a share of post-tax income, fuel duty is four times higher in Yorkshire and the Humber (2.72%) and Northern Ireland (2.68%) than it is London (0.68%), which has more public transport, more cycling and more electric vehicles.
• As a share of GDP, environmental levies on business are between a third and half lower in London (0.48%) than in more industrialised places like Scotland (0.99%) and the East Midlands (0.79%).
• Excise duties weigh most heavily on the poorest regions. Per head the average person in Northern Ireland pays £469 a year in tobacco and alcohol duties combined, while in London it is just £210. Demographic trends have also meant that the capital’s tobacco and alcohol duty contributions combined have fallen by 16%, the fastest fall of any region.

The report also models different tax changes to understand which regions would benefit most from different approaches. The analysis finds that:

• Reforming council tax could disproportionately benefit poorer regions. Cutting Band A council tax, from 6/9 of Band D to 5/9, for example, would save 54% of households in the North East an average of £147 a year, compared to a saving of £125 for just 4% of households in London. By contrast, increasing Bands F-H would increase tax for 15% of households in London and the South East but just 3% in the North East.
• Increasing capital allowances, particularly those for plant and machinery or industrial buildings, would likely generate larger gains for the midlands, the north and Wales. Businesses in places like Warwickshire, Cheshire, Derbyshire, Nottinghamshire, the West Midlands, Teesside, East Yorkshire, Northern Lincolnshire and Cumbria, invest the most in such things as a share of their local economy, and would be likely to see larger gains from increasing such tax allowances.
• Removing the tax advantages for self employed people would disproportionately be borne in more prosperous regions, resulting in a £3,452 tax increase per self-employee worker in London compared to a UK average of £2,344 and just £1,565 per self-employed worker in the North East and Wales.
• In cash terms a £1,000 increase in the income tax personal allowance would see the largest gains per capita in London.  But as a share of income the gains would be larger in lower income regions. For Londoners this amounts to a 0.35% boost to income, compared to 0.52% in the North East, the East Midlands and Wales.

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.