Midland councils are being forced to hand over millions of pounds to pay off debts run up by highspending London authorities.
The subsidy is a result of the way council housing is funded and means authorities with low levels of housing debt are paying £630 million each year to those with high borrowing.
Money is pouring into London, where debts are highest, even though it is the richest part of the country.
In parts of the West Midlands, up to £19 of the rent collected from each property is transferred outside the region every week - money that could be used to improve public services in the region.
One Midland council pays more than a third of the money it collects from council tenants to the Government.
The scale of the problem was revealed in a report published today by the Audit Commission, Britain's official public spending watchdog, which called for the system to be reviewed.
Councils with lower costs are forced to pay some of the rent they receive into a national fund, so it can be distributed to those where costs are higher.
In practice, this means the money goes to housing departments in London which face massive interest payments.
Authorities in the West Midlands owe an average of £10,000 for each of their properties while in London, the average debt is £60,000 per property.
London receives a subsidy of £15 for every council house every week - paid for by authorities with less debt.
Some authorities benefit more than others. Brent receives £44 a week per property from other authorities, while Hackney receives £43.
But the West Midlands as a whole is forced to pay £3 per week for each of the 247,000 council houses in the region.
Most of this money goes to London, with a small amount going to the North-west.
There are wide variations within the region and Bridgnorth District Council suffers the most. It is forced to pay £19 per week for every council house it owns.
Warwick District Council pays £18, North Warwickshire Borough Council also pays £18 and North Shropshire District Council pays £16.
Birmingham is the only West Midland council to benefit from the policy, and receives a subsidy of £3 per council house. Even Sandwell, one of the poorest authorities in the country, is forced to pay out £3 per property.
James Strachan, Chairman of the Audit Commission, said: "We believe government needs to review how council housing is financed.
"Rather than trying to sustain a complex system of cross-subsidy, we recommend that government should consider allowing those councils that can finance themselves to do just that and to focus on how to meet the massive capital demands facing some urban councils which are still failing to meet the needs of their communities."
Alan Martin, Director of Resources at Bridgnorth Council, said: "We collect rent of £6.5 million from our tenants, and from that we make a payment of £2.3 million to the Government.
"Our payment is so high because as a council, we have no debt at all."
Philip Dunne (Con), MP for the Shropshire constituency of Ludlow, said: "I was staggered to learn about this. This flawed formula must be reviewed and reversed."