Own source revenues of local governments: international practices Olaf Merk (OECD, Regional Development Division) Fiscal Management of Local Administrations-Conference, 15 September 2010, Ankara

Purpose of the presentation a)Assessment of importance of local own revenue (theory) b)Assessment of systems in OECD countries (practice) c)Lessons for Turkey (orally)

Structure of presentation 1.Size of own resources of local governments 2.Taxing power of local governments 3.Composition local tax revenues 4.Tax competition between local governments 5.Fees and charges

1. Size of own resources: theory Own resources for local government increase efficiency, responsiveness to local preferences and transparency Most important is the capacity of local government to change revenue size at the margin. After a certain size, more is not necessarily better. Optimal size also depends on local circumstances and character of sub-national expenditures (e.g. social security). Large own revenue shares might lead to large differences in public service delivery and thus increase the need for fiscal equalisation.

1. Size of own resources: international practice Large variety among OECD countries

1. Size of own resources: international practice Size own revenues related to size sub-national expenditures

1. Size of own resources: international practice Share own local resources relatively stable over time

2. Taxing power: theory Sub-national taxing power is an essential element of decentralisation: who sets rate and base? Sub-national autonomy balanced by nationally imposed limits and constraints. Limits less needed when there is well-functioning local democracy, great transparency (in case of immobile tax base) or substantive tax competition (in case of mobile tax bases). Cyclical revenue assignments may require fiscal rules to damp pro-cyclical fiscal policy responses.

2. Taxing power: international practice OECD taxonomy of sub-national taxing power

2. Taxing power: international practice

Taxonomy in a simplified form

2. Taxing power: international practice Taxing power and size of local tax revenues are related

3. Tax composition: theory More mobile tax bases are less suitable as local tax base; they can distort the allocation of labour, capital and businesses and lead to wasteful competition. Most mobile tax bases are capital income and footlose entrepreneurs and firms. Workers are less mobile and property relatively immobile. Taxes on goods can stimulate crossborder shopping. Need for broad tax bases. Reliance on narrow tax bases may push up tax rates too high in comparison with other tax bases.

3. Tax composition: international practice Local tax sources differ from those at central level

3. Tax composition: international practice Property tax is the most common local tax source

4. Tax competition: theory Tax competition amongst local governments can be wasteful, due to externalities. At the same time, competition is a core argument for fiscal federalism. There are countries where tax competition has had positive effects (Switzerland). Even if agents are immobile and preferences not heterogenous, there can be competition (yardstick competition).

4. Tax competition: international practice Tax competition in selected OECD countries

5. Fees and charges: theory User fees cover all individual payments to public service providers in return for services provided. Can be beneficial for containing excessive demand and fostering supply of public services. Ideal for funding local services where specific beneficiaries can be identified and non-payers excluded, such as public transport and waste collection. Proper pricing can help contain environmental degradation.

5. Fees and charges: international practice Fees relatively marginal in many OECD cities