Subnational Revenues

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Subnational Revenues Intergovernmental
RelationsDecentralization and Intergovernmental
Fiscal Reform
March 24-26, 2003 Robert EbelWorld Bank
Institutewww.Decentralization.org
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Organization of Remarks

• Issues in Sequence
• Assignment of Revenues Among Governments
• Policy Framework/Key Principles
• Fiscal Architecture
• What is a Local Tax?
• The Intergovernmental Menu
• Linking Criteria with Assignment
• Revenue Collection
• Key Messages

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Issues in Sequence

• Finance Follows Function Assign Expenditure
  Responsibility
• Determine Revenue Authority
• .And the Fiscal Architecture
• Own Revenue Responsibilities at the Margin
• Grants and Transfers
• Borrowing and Debt
• Monitoring and Reporting
• Size and Structure of Local Government

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Assignment of Revenues

• Determination of which revenue sources should be
  assigned to subnational governments and how they
  are to be assigned
• Includes taxes, other revenues, and
  intergovernmental aid
• Concurrent with expenditure assignment

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Policy Framework

• Fiscal equivalence Each government should
  finance its own expenditures out of its own
  revenues to the extent possible.
• Subsidiarity in taxation Assign to the lowest
  tier of government that can administer the tax
  and for which it is not inappropriate.
• Need for mix of local taxes.
• No one assignment fits all.
• As external factors change, so may policy

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Fiscal Architecture

• Recognizing the Architecture of the
  Demographic, Economic and Institutional Setting
• Matrix of Potential Revenue Sources (handout)
• Similar Expenditure Needs Exercise

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What is a Local Tax

• Who determines whether the tax is to be imposed?
• Who determines the nature of the tax base?
• Who determines the tax base to which the rate is
  applied?
• Who determines the tax rate applied to that base?
• Who collects the revenue and enforces the tax?
• Who receives the revenue?
• Measurement matters

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The Intergovernmental Menu Revenue Assignment

• Value Added Tax
• Foreign Trade Taxes
• Business Income Tax
• Individual Income Tax
• Excises
• Retail Sales Tax
• Motor Vehicles
• Property Tax
• User Charges
• Borrowing
• Commercial Ventures

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Criteria Scope for Local Taxation

• Accountability and Transparency
• Benefit/Tax-Price Link
• Neutrality (Non-distortion)
• Taxpayer Equity
• Regional (Place) Equity
• Reliability, Stability, Buoyancy/Elasticity
• Administration and Compliance

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• Accountability
• Local politicians should be responsive to the
  expressed preferences of the citizens. Voice and
  participation becomes important. Do Elections
  Matter? And, need they be local?
• Implications of the Principle
• Local officials should have the power to
  determine their own tax rates.
• What about tax base determination?
• And, who should administer the tax base?
• The burden of taxes should be borne by local
  citizens.
• The question of tax exporting.
• Information as key to accountability.

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AccountabilityBenefits Received

• Benefit/Tax-Price Link To the extent possible
  taxes should function
• as a price for the benefits of public services
  that accrue to the tax
• payer/citizen benefit areas (recall
  expenditure assignment) should be
• matched with financing areas.
• Implications
• Taxes play a role similar to the quid-pro-quo of
  a market transaction
• Adjust for local and regional variations in
  preferences for public goods(social welfare
  functions)
• Spillovers (back to expenditure assignment,
  again) may call for (i) sub-municipal government
  (e.g., s.d.) (ii) local cooperation (Tripoli,
  Bangkok, Budapest) (iii) middle-tier
  governments (iv) regional authorities.
• Efficiency meets equity (rather than conflict)

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AccountabilityBenefits ReceivedNeutrality
(Non-distortion)

• Non-Distortion Taxes should not unintentionally
  interfere with the
• private decisions of consumers, factor suppliers,
  and producers. That is
• they should be neutral
• Implications
• The heart of efficiency in taxation, that is as
  difficult to achieve as it is identify Fiscal
  Architecture . But the guideline matters very
  much
• Variability in rates should be allowed this
  does not call for uniform rates
• The key issue of price elasticity
• Immobile tax bases rank high footloose tax
  bases are a problem Interjurisdictional Tax
  Competition Good or Bad?
• Case for uniform tax bases and watch out for
  quality of administration

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AccountabilityBenefits ReceivedNeutrality
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AccountabilityBenefits ReceivedNeutralityTaxp
ayer Equity

• Taxpayer Equity This requires that the burden be
  measured vis-à-vis some
• agreed upon common denominator of economic
  ability to pay and/or benefits
• received. The equity index should be based on
  economic criteria
• A Quick Agreement on Terminology
• Vertical Equity For Persons (Differential
  treatment of unequals)
• Regressivity, progressivity, proportional
• A presumptoin for proporitonal taxes
• Should subnational units tax wealth
• Benefits taxes regardless of gressivity (?)
• Horizontal Equity (Equal Treatment of Equals)
• Individuals
• Businesses

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer Equity

• and Measurement
• Individuals Income and additions to wealth
  (broad vs. narrow income)
• Businesses
• Gross Product (if one can estimate it)
• The Key issue of multi-jurisdictional
  apportionment

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer EquityRegional (Place
) Considerations

• Regional (Place) and Efficiency Local tax bases
• that are unevenly distributed across
  jurisdictions are not suited for regional
• use if they entail large regional inequities.
• Implications
• This calls for good judgment much is pinned on
  what matters for social fairness and national
  cohesion (from geographic distribution of natural
  resources to option demand)
• This criterion may contradict the neutrality
  argument that views immobility of a tax base as
  efficiency enhancing
• But, it is not-inconsistent with the benefits
  received argument

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer Equity

• Implications contd
• Regulation and intergovernmental revenue sharing
  comes into play intergovernmental structure and
  nation building
• What about multinational natural resources?
  (common property problem)

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer EquityRegional
EquityStability Buoyancy

• Reliability, Stability, Buoyancy/Elasticity
• Question what should be the elasticity
• Automatic changes in Revenues
  Change in Yield
• Change in some economic base
• Implications
• The tradeoff is evident stability vs. buoyancy
• Not to be confused with adequacy
• Stability is conducive to competitiveness
  (private investment)
• This topic also goes to the intergovernmental
  grant pool

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer EquityRegional
EquityStability, Buoyancy
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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer EquityRegional
EquityStability, Buoyancy Administration
Compliance

• Administration and Compliance Taxes and tax
  systems should be
• transparently administered at low cost and
  without placing an undue
• burden on the taxpayer (business and individual)
• Implications
• Keep it simple especially locally
• What may be optimal to the economist may simply
  not work
• Citizens should have a tax system they can
  understand and control
• Achilles heel of subnational Credit-Invoice VAT
• Standardized Tax Bases
• Cash Flow accounting may be preferable to accruals

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AccountabilityBenefits ReceivedNeutrality
(Non-Distortion)Taxpayer EquityRegional
EquityStabilityAdministration Compliance

• Implications contd
• Easily identifiable (simple) tax bases (e.g.,
  turnover, head) may be in conflict with other
  criteria) but there are some consistencies as
  well
• Complexity may foster corruption

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Improving Revenue Collections

• Contracting out local tax administration
• The temptation of the octroi
• Why focus on property taxes?
• Improve collections of other taxes and fees
• Enhance user charges and cost recovery

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Key Messages

• The Nature of Own Revenues
• The Assignment Question
• Then the Fiscal Architecture
• Which Revenue Source and Why
• Balancing the Policy tradeoffs
• Administration