1. Subnational Revenues & Intergovernmental Relations Decentralization and Intergovernmental Fiscal Reform
March 24-26, Robert Ebel World Bank Institute
4/28/2019

2. 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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3. 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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4. 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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5. 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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6. 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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7. 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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8. 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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9. 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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10. Implications of the Principle:
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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11. Accountability Favors
And What Ranks Poorly
Local personal income
User Charges
General Business taxes
(GR, VAT, Company Profits
Visitor (e.g., tourist) taxes
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12. Accountability Benefits 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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13. Benefits Received Favors
And What Ranks Poorly
Whenever possible charge
Visitor Taxes
Business Taxes
Non resident based personal income tax
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14. Accountability Benefits – Received Neutrality (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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15. Accountability Benefits – Received Neutrality
Non-distortion Favors
And what ranks poorly
Local real estate tax generally
Land value tax plus charges
User charges
Resident based PIT
Sumptuary taxes
Some general business taxes
Taxation of “bads”
Poll taxes
Non-resident based PIT
Gross receipts taxes
Severance taxes (keep in mind rate matters)
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16. Accountability Benefits – Received Neutrality Taxpayer 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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17. … and Measurement Local Taxes That Work And Those That Fail
Accountability Benefits – Received Neutrality (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
Local Taxes That Work
And Those That Fail
Resident Personal Income Tax
Ad valorem property taxes
Poll Taxes
Area based property taxes
Gross Receipts taxes
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18. Regional (Place) and Efficiency Local tax bases
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity Regional (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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19. Place Equity Favors And What Ranks Poorly
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity
Implications cont’d
Regulation and intergovernmental revenue sharing comes into play; intergovernmental structure and nation building
What about multinational natural resources? (common property problem)
Place Equity Favors
And What Ranks Poorly
Central taxation of natural resources; multi or supranational
Local severance taxes
Wealth taxes may fit here
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20. Reliability, Stability, Buoyancy/Elasticity
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity Regional Equity Stability & 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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21. Stable Revenue Bases Buoyant Revenue Bases
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity Regional Equity Stability, Buoyancy
Stable Revenue Bases
Buoyant Revenue Bases
Ad Valorem Property tax (distinguish between land and improvement components)
Area based property tax
Proportional Rate PIT
VAT
Some excises
PIT
Corporate Profits Tax (CIT)
Gross Receipts
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22. Administration and Compliance Taxes and tax systems should be
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity Regional Equity Stability, 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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23. Implications cont’d What Works And What Ranks Poorly
Accountability Benefits – Received Neutrality (Non-Distortion) Taxpayer Equity Regional Equity Stability Administration & Compliance
Implications cont’d
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
What Works
And What Ranks Poorly
Piggyback PIT
Excise and retail sales taxes
Turnover taxes
Wage tax
Some user charges
Multi-rate taxes
Lots of exemptions, deductions, incentive packages to businesses
Property tax
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24. 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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25. Key Messages The Nature of “Own” Revenues The Assignment Question
Then the Fiscal Architecture
Which Revenue Source and Why
Balancing the Policy tradeoffs
Administration
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