CBI furious at council leaders' call for locally controlled business rates and income tax

Council leaders in England called yesterday for a sweeping reform of town hall finances by transferring a proportion of income tax to directly fund local services. This would be coupled with returning business rates to local authority control.

Claiming that the 10-year-old council tax had reached the end of its life, the Local Government Association said a "reformed and more equitable" property charge should be introduced along with a range of other taxes.

As ministers acknowledge that the council tax is becoming unsustainable - it rose by a record 13% last year - the LGA said a rebranded property tax, with new bands to supplement the current eight levels, should be considered. The tax raises £19bn annually, a quarter of council spending.

But to the horror of the CBI, the association also said that business rates, collected locally and then redistributed nationally by the government since 1990, should be returned to local control to increase accountability.

The contribution this rate makes to local government has fallen to 22% in 13 years because it is tied directly to the inflation rate. It raises £15.6bn a year.

More controversially, the LGA said a proportion of income tax should be directly assigned to local government. Authorities already receive around £24bn annually- 26% of national income tax - through a Whitehall grant. But the LGA says the system should be formalised with an annual guaranteed assigned transfer.

The LGA also says that a "basket" of smaller taxes and charges should be considered, such as local sales, land value and tourist taxes in hotels.

With the government due to publish the result of a study on the balance of funding between Whitehall and town halls this July, Sir Jeremy Beecham, chairman of the LGA, said: "The council tax system is buckling under the weight of new responsibilities and expectations placed on local government to deliver more and better public services. There is a growing consensus around the belief that council tax needs reform."

But the LGA's proposals, which have been agreed by all three political parties represented in the association, went down badly with the CBI.

It said the return of the business rate to local councils would be disastrous for commerce, and cost business dearly.