Intergovernmental Transfers Professor Roy Bahl Georgia State University (rbahl@gsu.edu)

Definitions Why Use Transfers How To Design A Transfer System The Political Economy

Definitions Intergovernmental transfers Local taxes Grants Subsidies Shared taxes Local taxes Piggyback local taxes

Definitions: Types of Intergovernmental Transfers Unconditional or general Conditional or specific (for capital and/or operating expenditures) Non-matching Matching Open-ended Close-ended Direct cost reimbursement

Intergovernmental Transfers? Why Have Intergovernmental Transfers?

Justifications for Intergovernmental Transfers Close the “fiscal gap” Equalize fiscal capacity and need Adjust for spillovers Increase effectiveness of central expenditures Political reasons

How To Close A Fiscal Gap More Transfers More Local Raised Revenue Local Expenditure Efficiency Re-Assign Expenditure / Responsibility

Equalization The objective of an equalization transfer should be to protect (or guarantee?) some basic level of services

What Do We Equalize? Fiscal Capacity Expenditure Needs Capacity – Needs Gap

The Special Case of Natural Resources Revenue Sharing

Natural Resource Revenue Sharing: The Case for More Centralization The Stability Argument The Disparities Argument The Local Capacity Argument The National Treasure Argument

Natural Resource Revenue Sharing: The Case for More Decentralization The Cost Reimbursement Argument The Heritage Argument The Conflict Resolution Argument

Design Issues For Intergovernmental Transfers

How Can Intergovernmental Transfers be Decentralizing? Revenue Adequacy Certainty Unconditional

How Can Intergovernmental Transfers be Centralizing? No Transparency In Vertical Sharing Ad Hoc Distributions Uncertainty and Year-To-Year Changes Strict Conditions

Alternative Forms of Intergovernmental Transfers

Goals of Central Government Control Local Finances Equalize Services and Fiscal Capabilities among Localities Stimulate Expenditures for a Particular Function or Overall Tax Effort Increase Local Tax Effort Minimize Administrative Costs

Goals of Local Government Maintain Control over Local Finances Plan Efficient Budget Increase Adequacy of Local Revenue Flow Minimize Administrative Costs

Intergovernmental Grant Lessons Desired outcomes should drive design One grant/transfer instrument cannot accomplish multiple objectives Expect changes over time Is “distributable pool” a discretionary element in the central budget or an entitlement of local government?

Intergovernmental Grants: How Not To Do It! Deficit Grants Complicated Formulae No Transparency No Continuity Base it on The Amount Spent No Evaluation

The Special Problem of Transition The Need for a Phase-In Plan Separating the Pieces The Learning Curve for Local Governments Hold Harmless Provisions Education Implementation Planning Central Leadership

The Political Economy of Transfers President Parliament Ministry of Finance MOHA Line Ministries Urban Local Government Rural Local Government