Galina Kourlandskaya Intergovernmental Fiscal Regulation at the Subnational Level under the Intergovernmental Fiscal Relations Reform Moscow, World Bank Institute March 25, 2005

Тел.: (095) Key Objectives of Intergovernmental Fiscal Regulation  Promote development of the tax base and increase tax collection  Ensure equalization of financial capacity of local governments in addressing local issues  To help reach priority objectives of regional policy

Тел.: (095) Financial Assistance As a Tool to Implement Fiscal Policy  Promote development of the tax base and increase tax collection tax sharing ratios  Ensure equalization of financial capacity of local governments in addressing local issues  grants from funds:  Regional Fund of Financial Support to Settlements (Regional FFSS),  Regional Fund of Financial Support to Municipal Districts (City Districts)( FFSMD/CD)  District Fund of Financial Support to Settlements (District FFSS)  Reaching priority objectives of regional policy subsidies from funds:  Municipal Development Fund  Social Expenditures Co-Financing Fund  The Fund for Municipal Finance Reform

Тел.: (095) Equalization of Fiscal Capacity

Тел.: (095) A New Approach to Local Budgets Equalization  Assignment of single tax shares with respect to regulating taxes (except personal income tax) for indefinite period  Rating of municipalities based on per capita income  Provision of transfers to “the poorest” (departure from the notion of “estimated fiscal gap”)  The principle of maintaining municipal rating before and after transfers  Negative transfer  Legislating the transfer allocation approach

Тел.: (095) Financial Assistance Allocation: The Federal Policy  Regional inequality in fiscal capacity before assignment of single tax shares – 108 times  Assignment of federal tax shares (personal income tax, tax on property sales revenue, excise taxes) to regions increases this difference to 133 times  Allocations from the Fund for Financial Support of Regions (equalization) makes it possible to:  Reduce the gap to 12 times  Bring fiscal capacity of the poorest constituent of the Russian Federation to 70% of the national average  The size of Financial Support Fund is 10% of the federal budget expenditures

Тел.: (095) Revenue Components in Subnational Budgets (as a percentage of the GDP) Other transfers Subventions Grants Regulating taxes Own tax revenue

Тел.: (095) Revenue Components in Subnational Budgets (as a percentage of the GDP) Other transfers Subventions Grants Regulating taxes Own tax revenue

Тел.: (095) A New Approach in Identification of Those in Need of Financial Assistance

Тел.: (095) г. Intergovernmental Fiscal Regulation in Khanty-Mansi Autonomous District (2003) Before equalization After equalization

Тел.: (095) Intergovernmental Fiscal Regulation in Ivanovo Oblast (2003) Before Equalization After Equalization

Тел.: (095) Economic Growth – Induced Equalization  The following capitals of constituents of the Russian Federation proved to be the poorest in their respective regions after intergovernmental fiscal regulation in 2002: KhavarovskElista MagadanMaikop KyzylPetrozavodsk KemerovoKostroma Abakan Yoshkar-Ola Chelyabinsk Dudinka and others

Тел.: (095) Traditional Approach to Allocating Financial Assistance to Local Budgets (covering the “estimated gap”) Assessment of Each Local Budget’s Capacity and Needs by : MunicipalityRegion Revenues Expenditures Financial Assistance Financial Assist.

Тел.: (095) Rating of Municipalities Based on Their Fiscal Capacity

Тел.: (095) Fiscal Capacity Equalization: Proportionate Pull

Тел.: (095) Fiscal Capacity Equalization: Full Equalization of the Poorest

Тел.: (095) Negative Transfers

Тел.: (095) Difference in Tax Base of Local Governments in Some Regions of the Russian Federation (times, 2002) Before equalization After equalization

Тел.: (095) ,5 1 1,5 2 2,5 3 3,5 4 4, Население, чел. Бюджетная обеспеченность, тыс. руб/чел. Negative Transfer

Тел.: (095) Negative Transfer  A trade-off between interests of local and regional governments  A trade-off between “rich” and “poor” local governments  Under the requirement of single shares in regulating taxes – a possibility to assign them at a higher level of government  An alternative to differentiated tax shares  Institutionalization of differentiated tax shares

Тел.: (095) The “Wealth” Criterion With the Negative Transfer = 2  The negative transfer option is available only to few constituents of the Russian Federation  The majority of constituents of the Russian Federation loose major sources of equalization for the poorest municipalities  The subjects of the Russian Federation have no interest in assigning significant shares of regulating taxes to municipalities  The share of tax revenues in local budgets shrinks dramatically to give way for cash transfers

Тел.: (095)  The mentioned constrains are mitigated significantly  The majority of constituents of the Russian Federation retain the possibility to ensure a higher (as compared to the pre-reform level) fiscal capacity of “rich” municipalities with a guarantee to pull the “poorest” to the level of 70% of regional average fiscal capacity The “Wealth” Criterion With the Negative Transfer = 1.3

Тел.: (095) Fiscal Capacity Instead of Revenues and Expenditures

Тел.: (095) Fiscal Capacity: an assessment of tax capacity of a municipality taking into account «differences in the composition of population, socio-economic, climatic, geographical and other objective factors and conditions affecting the cost of providing budget services (amount of payments) per resident» (a new language of the Budget Code). The legislation provides rather strict requirements with respect to the calculation of the tax capacity and TBE indicator

Тел.: (095) Issues in Assessing Tax Capacity Lack of necessary statistics and tax data for municipalities  The tax authorities do not provide for reporting forms that could help to trace territorial links of tax liabilities (previously – form 1НН)  The tax service does not provide reporting forms by base and accruals of the personal income tax  Statistics segregated by settlement are not available Splitting units for the purposes of budget planning (at the settlement level) increases the chance for errors in calculations

Тел.: (095) Issues in Assessing Objective Expenditure Needs  Cost estimates of a “budget services basket” are not available  Data segregated by settlement are not available  There is no correlation between the size of expenditures and parameters set forth by the Budget Code (a need for a transition period)

Тел.: (095) To implement the reform along the lines of the new legislation, appropriate format of tax reporting as well as data collection at the settlement level must be ensured Questions:  How soon would this happen?  How much would it cost?  Who will be paying?  How justified would be the costs?

Тел.: (095) A General Mechanism of Intergovernmental Fiscal Regulation in Russian Regions SettlementsCDMD Regional FFSMD/CD Regional FFSS District FFSSs (Negative transfer ) Grants Municipal Development Fund Fund for Municipal Finance Reform Social Expenditures Co-Financing Fund Other funds (not exceeding 10% of the total amount)

Тел.: (095) «Degrees of Freedom» Available to the Subjects of the Russian Federation in Developing An Intergovernmental Fiscal Regulation Policy  Developing a concept for intergovernmental fiscal relations regulation as well as allocation of resources among different formats of financial assistance  Establishing additional tax shares  Setting parameters of the “negative transfer”  Allocation pattern for the 10% of personal income tax revenues  Determining the size of per capita grant for specific municipalities  Delegation of the regional FFSS’s authority to districts  Designing an equalization methodology for MD and CD  Designing an equalization methodology using district FFSSs  Designing a methodology of allocating other funds