Revenue Assignment Strengthening Fiscal Framework for Local Government Reform FDI Workshop, January 21, 2003 Gábor Péteri, OSI/LGI

2 Public functions 1. Economic stability 2. Income redistribution 3. Resource allocation: providing and financing public services

3 Principles of revenue assignment 1. Significant (broad, buoyant) 2. Stability 3. Predictability 4. Accountability 5. No tax exporting 6. Political culture

4 Methods of tax assignment 1. Local tax: base, rate, administration 2. Surcharges: local rate setting joint base and administration 3. Sharing: formula-driven predictable local discretion indirect local influence

5 Local taxes in % of GDP Federal states Unitary countries Income, profit tax Wage tax0.3- Property tax Consumption tax Sales tax Other Total Source: OECD Revenue Statistics, , OECD, 1997

6 Criteria for tax assignment Corporate income tax:  Exporting tax burden  Cyclical changes  High administrative costs Personal income tax:  Benefit principle  No income redistribution (flat rate)  Centralized administration Workplace/residence

7 Criteria for tax assignment (2) Value added tax: Small number of companies Border adjustment Protectionism Sharing formula (+) Excise tax: Motor vehicle: progressive, connected to local expenditures Alcohol, tobacco

8 Criteria for tax assignment (3) Property tax: Immobile tax base Ad valorem: progressive Tax administration is expensive Traditions Natural resources: Unequal access Unstable Political separatism

9 Local shares of taxes: countries focused on income and profit CountryIncome & ProfitsProperty Sweden99.6 Finland Denmark Norway Switzerland Germany Belgium72.6 EU average

10 Local shares of taxes: countries focused on property CountryIncome & Profits Property United States75.4 United Kingdom76.7 Canada New Zealand92.9 Australia99.5

11 User charges Local political decision (non-budget) Beneficiary can be identified Full cost pricing Social consequences

12 Borrowing, debt financing Underutilized Control over local borrowing (level, bankruptcy procedure) Repayment: revenue making investments general taxes

13 A typology of local revenues Type of institutions Local ax revenues Local non-tax revenues Budgetary Local business tax, communal tax, land tax, building tax Fees, building fines, school revenues from meals Non-budget Earmarked tax revenues dedicated to local funds Rent, user charges, revenues from asset sale

14 Transfers and grants Objectives: 1. vertical equalization 2. horizontal equalization Types of grants: 1. Current and capital 2. Specific/Conditional grants 3. General purpose 4. Matching

15 Methods of grant allocation 1. Control on expenditures and revenues Decision on appropriations (Ei estimate ) Individual revenue assessment (Ri planned ) Negotiation and bargaining on transfers (Ti = Ei estimate -Ri planned )

16 Methods of grant allocation (2) 2. Control over the transfers Local authority to generate revenues (R) Normative grants (G normative ) Autonomous decision on expenditure levels (E=R+ G normative )

17 Methods of grant allocation (3) 3. Expenditure and revenue capacity based Accepted expenditure levels (E stadardized ) Required revenues (R required ) Calculated grant: (G calculated =E accepted -R required )

18 Methods of grant allocation (4) ModelsExpendituresRevenuesTransfers Control over E&R Ei estimates Ri planned Ei estimates -Ri planned = Ti Control over transfers E=R+G normative RG normative E&R capacity Ei standardized Ri required G calculated = Ei standard - Ri required