Millions of pounds in landfill tax owed to the government has to be paid by the Environment Agency (EA) if it clears any of the thousands of illegal waste dumps across the country.

Of the £15m that taxpayers are paying for the clearance of the only site the agency has committed to clearing up – a vast illegal dump at Hoad’s Wood in Kent – £4m is landfill tax.

John Russell, a Liberal Democrat peer who helped push the agency to clean up Hoad’s Wood, described the situation as ludicrous.

“It is extremely unhelpful … to make the EA pay landfill tax on the illegal waste sites they are trying to clear up,” Russell said. “I strongly encourage the Treasury to take an urgent, fresh, cold hard look at these regulations.”

The cost of the landfill tax has been seen as another reason the EA has not taken action to clear even the most egregious dump sites across the country.

In Wigan, the local MP Josh Simons has been calling for the EA to clean up 25,000 tonnes of rubbish dumped by criminals in a residential street near a primary school for several months.

The agency is refusing to clear the waste at Bolton House Road, Bickershaw, despite the impact on young children and local residents. It has mounted a criminal investigation and sent formal notices to those with an interest in the land requiring that the waste be removed and threatening legal action if they fail to do so.

The illegal dump at Bolton House Road is partly on a field where children used to play sports, and it is causing an environmental hazard, with rat infestations, air pollution and a stench.

One parent who did not want to be named said: “My kids have to go to school every day with that stench and air pollution and they cannot play outside on the field any more. But there is no urgency to clean this up.”

The cleanup cost has been estimated at £4.5m, including the requirement to pay landfill tax on the rubbish.

Another resident said she felt they had been left to suffer in silence, particularly after politicians and the media focused on a mountain of rubbish recently discovered in Kidlington, Oxfordshire.

“Thousands of tonnes of illegally dumped waste have been left to rot here,” she said. “This is a lot of household waste, so you can imagine the issues it is causing; smells, flies, rats. We have had an infestation in our attic and walls, as have some of our neighbours. This is a serious environmental and public health failure.”

In July the dump caught fire and the blaze raged for nine days, forcing the school to close and residents to shut all windows and doors to avoid the toxic fumes.

Simons, the Labour MP for Makerfield, said he alerted the EA in January when rubbish first started being dumped at a rate of 20 truckloads a day but it did not intervene.

“The impact of this blatant criminality continues to be very severe on the community in Bickershaw,” he said. “From lost days of school when the pile caught fire to closed windows on blisteringly hot days, they shouldn’t have to put up with this.”

Organised crime groups are drawn to waste crime because of the millions they can make from a criminal enterprise that costs the taxpayer £1bn a year.

The gangs make millions by exploiting the landfill tax, which is £126 a tonne. Criminals can make £2,500 for each articulated lorryload of waste they dump by pocketing the landfill tax and diverting the waste to an illegal dump.

Russell said making the agency pay the tax showed a complete lack of joined-up government, which was letting criminals get away with their offences while ordinary people suffered.

“We have got a broken system and stuff is swept under the carpet and there is no accountability,” he said. He wants full transparency from the agency on the scale of organised criminals illegally dumping thousands of tonnes of waste.

“We cannot effectively fight that which we do not know. More than numbers, we require location, sizes, types of waste and what action is being taken to clear up these tremendous, huge waste piles,” Russell said.

An EA spokesperson said a criminal investigation was ongoing in Wigan and it was treating the dumping as a critical incident.

“[We are] using all the powers and the enforcement tools available to us to bring the perpetrators to justice and make them pay for this offence,” they said. “Our skilled officers are on site frequently and at the forefront or our minds is the impact this illegal waste is having on the local community.”

Wigan council said it was part of a multiagency partnership including the EA and Greater Manchester police to prevent any further criminal activity on site and to minimise the risks and the impact on neighbouring residents.

The council said: “We understand the impact this site is having on the local community and want the site cleared as a matter of urgency. Unfortunately, the legal and financial landscape for clearing illegal waste sites is complex.”