Labour is to consider radical options on devolution that would include giving local authorities some power over VAT and income tax, a shadow minister for communities and local government has said.

Steve Reed said there was a clear financial case for faster devolution of powers, including greater local control over taxation. In a speech to the Local Government Association, Reed said Labour would look at devolution of education, welfare, housing, health, and infrastructure. But, more significantly, the party would examine devolving further fiscal powers, including a “need to look at localising elements of VAT and income tax”.

The MP for Croydon North also said the party had to “look too at a land use tax” to encourage owners to use land for socially beneficial purposes and put a stop to speculative land banking.

Devolution is set to be a political battleground in this parliament. The chancellor, George Osborne has been trying to win support in the north of England with his “northern powerhouse” project by promising greater local powers for city regions if they adopt elected mayors.

Many in Labour, including Jon Trickett, the shadow communities secretary, are extremely wary of Osborne’s embrace of devolution, believing it a smokescreen for shifting responsibility for budget cuts to local authorities. However, Labour sources said there was a growing realisation in the party that it needed to examine ways to proceed with devolution in a different and radical way to help restore trust in politics and give people a bigger say over how their local areas were run.

Corbyn’s commitment to considering devolution is illustrated by his appointment of Emma Lewell-Buck to the new post of shadow devolution minister in the recent cabinet reshuffle.

Reed, attacking Conservative claims to be pushing localism, said the government was actually centralising powers in the housing bill and in education, where they favoured academisation of schools, rather than schools run by local authorities.

“Labour wants to see a constitutional convention set up so the country can shape a new settlement,” he said. “Devolution can’t just be about shifting powers from Whitehall to town halls, or even combined authorities. It must go deeper. People’s trust in politics is broken, and we won’t fix that until we show people that politicians trust them.”

The biggest advocate of radical devolution in Labour is Jon Cruddas, Ed Miliband’s former policy chief, who said last year that Labour needed to wake up to the existential challenge that Osborne and his vision of devolution presented.

Chuka Umunna, the former shadow business secretary, has also called on Labour not to dismiss Osborne’s “northern powerhouse” but instead embrace devolution and champion the idea of a wholly federalised Britain. In October he called the chancellor’s plans “style over substance” and full of spin, but said Labour ought to be making a bolder bid to be the party of decentralisation, handing over more power from Whitehall to local councils.