Ministers are considering handing over billions of pounds raised by business rates to regional mayors as part of one of the biggest shake-ups of the English tax system in recent years.

Steve Reed, the local government secretary, said the government was working on plans to devolve the tax, which has been the subject of recent protests by pubs and other hospitality businesses.

The move is part of a wider plan to shift tax income to local leaders, due to be announced by the chancellor, Rachel Reeves, at this year’s budget.

Reeves’ position is in doubt given the questions surrounding Keir Starmer’s premiership, but the proposals are likely to be taken up by Andy Burnham if he takes over as prime minister, given Burnham’s commitment to devolution.

Reed told the Guardian: “The chancellor pointed to devolving aspects of income tax, as we discussed, but certainly we look at business rates, too – or elements of business rates.”

He added that local areas would not simply be allowed to keep whatever they raised in business rates, given this could exacerbate regional inequality, but that the new tax system would reward those areas that grew their economies more quickly.

“There will always have to be an equalisation mechanism, because you cannot allow areas that are poorer to just sink because they can’t generate the additional revenue from their starting point,” he said.

“But you want a system that would encourage and reward areas for growing their economy faster or supporting their businesses better, and that would need to be recognised within the system.”

He added: “Currently this is an idea that’s being looked at. It’s not a worked-up policy, but in principle, because fiscal devolution is on the table, that’s certainly an area we’d look at.”

The proposal is part of a wider move by Reeves to give local areas more control over the tax they raise – if not necessarily the power to set the rates themselves.

In her Mais Lecture earlier this year, Reeves said she was working on “plans to give regional leaders control of a share of some national taxes which have, for too long, been allocated by central government”.

Officials are looking at how to devolve various elements of tax, including business rates and even parts of income tax.

The plans are part of a broader push to give mayors more power over areas such as justice, health and education. Experts say the centralisation of tax and power in the Westminster government is one of the reasons the UK has some of the worst regional inequality in the developed world.

Reed said: “The sky’s the limit … nothing is off limits.”

The chancellor is also consulting on how to implement a tourist tax, something she promised in last year’s budget and would involve implementing a supplemental levy on people staying at hotels, holiday lets and b&bs in certain areas.

Ministers are deciding whether the tax should be set as a flat fee or a percentage of the cost of the overnight stay – though officials say they will not let mayors decide the rates for themselves.

Business rates have become a politically sensitive subject since the last budget, when many small businesses saw their taxable rates rocket because of a revaluation after the Covid pandemic.

The tax raised £26.4bn last year. Ministers are not thought to be considering handing all that to mayors. However, even a small percentage of it could give a significant boost to mayoral budgets. As London mayor, Sadiq Khan has the biggest budget of any mayor, at just over £22bn.

JP Spencer, director of devolution policy at the thinktank ThinkLabour, said: “Devolving the revenue from income tax or business rates to local areas would be a huge change in how our tax system and country works.

“It would give places the longer-term certainty to invest, plan and deliver better services for their residents.”