The Barnett formula has been used to distribute funding since the 1970s
The Barnett formula covering government funding across the UK, is unfair to England, says a think tank.
IPPR North says it is becoming a "source of tension" - especially between England and Scotland.
It says, measured against economic performance and poverty, Scotland gets more funding than its needs suggest, while England gets less.
The Scottish government says the only alternative is full fiscal autonomy and control of its own resources, like oil.
The Barnett formula has been used to share out central government funding since the 1970s, but even Lord Barnett, after whom it was named, says it should be scrapped because he believes it is unfair.
The report by IPPR North says the government spent £4,523 per head in England in 2007/08, compared with £5,050 in Wales, £5,676 in Scotland and £5,684 in Northern Ireland.
It says spending in Northern Ireland and Scotland was about 21% and in Wales 8% higher than the UK average, while in England it is 3% lower.
And it says there were great variations within England, with the East of England getting 18% below the UK average with just £3,820 a head, while London got £5,985 - 28% above average.
The report says the formula is "no longer appropriate" as devolved administrations get little control over their funding grants and recommended more income tax powers for Scotland and, eventually, the Northern Ireland Assembly.
It also says a proportion of VAT revenues should be assigned to the devolved administrations and a central grant should be based on needs-assessment.
Tax-raising powers would not be possible for the Welsh Assembly unless it was given primary legislative powers at some point in the future, it said.
Senior research fellow Guy Lodge said the Barnett formula was no longer "fit for purpose" and should be replaced.
"It does not result in a fair distribution of spending, and is becoming an increasing source of tension between the nations of the UK," he said.
"There is currently popular support for the continuation of the union in all parts of the country, but failure to act now and address devolved funding could see this tension grow."
But the Scottish government argues that the flow of resources is from Scotland to the London Treasury, not the other way round.
"It is abundantly clear that the motivation of both Labour and the Tories on this issue is slashing Scottish spending," said Scotland's First Minister Alex Salmond.
"As the offshore oil windfall soars, city accountants Grant Thornton estimate that Scotland is currently subsidising the UK Exchequer to the tune of £4.4bn."
A Treasury spokesman said there were "no plans" to change the Barnett formula adding: "It is a fair allocation which reflects population shares in the different nations of the United Kingdom."