Revenue Assignment

Strengthening Fiscal Framework for Local Government Reform

FDI Workshop, January 21, 2003Gábor Péteri, OSI/LGI

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Public functions

1. Economic stability2. Income redistribution3. Resource allocation:

providing and financing public services

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Principles of revenue assignment

1. Significant (broad, buoyant)2. Stability3. Predictability4. Accountability5. No tax exporting6. Political culture

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Methods of tax assignment

1. Local tax: base, rate, administration 2. Surcharges:

local rate settingjoint base and

administration 3. Sharing: formula-driven

predictable local discretionindirect local influence

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Local taxes in % of GDP Federal states Unitary countries

 Income, profit tax 4.5 3.3 Wage tax 0.3 - Property tax 1.8 0.9 Consumption tax 1.5 0.2 Sales tax 0.7 0.1 Other 0.8 0.4 Total 9.6 4.9 Source: OECD Revenue Statistics, 1965-1996, OECD, 1997

  

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Criteria for tax assignment

Corporate income tax:    Exporting tax burden    Cyclical changes    High administrative costsPersonal income tax:    Benefit principle    No income redistribution (flat rate)    Centralized administration

Workplace/residence

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Criteria for tax assignment (2)

Value added tax:Small number of companiesBorder adjustmentProtectionismSharing formula (+)

Excise tax:Motor vehicle: progressive, connected to local expendituresAlcohol, tobacco

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Criteria for tax assignment (3)

Property tax:Immobile tax baseAd valorem: progressiveTax administration is expensiveTraditions

Natural resources:Unequal accessUnstable

Political separatism

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Local shares of taxes: countries focused on income and profit

Country Income & Profits Property

Sweden 99.6

Finland 95.2 4.7

Denmark 92.1 7.8

Norway 87.9 8.8

Switzerland 86.9 12.7

Germany 81.8 17.8

Belgium 72.6 

EU average 59.9 35.1

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Local shares of taxes: countries focused on property

Country Income & Profits Property

United States 75.4

United Kingdom 76.7

Canada 5.7 85.1

New Zealand 92.9

Australia 99.5

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User charges

Local political decision (non-budget)Beneficiary can be identifiedFull cost pricingSocial consequences

  

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Borrowing, debt financing

Underutilized Control over local borrowing (level, bankruptcy procedure) Repayment:

revenue making investmentsgeneral taxes

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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

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Transfers and grantsObjectives:

1. vertical equalization2. horizontal equalization

Types of grants:1. Current and capital2. Specific/Conditional grants3. General purpose4. Matching

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Methods of grant allocation1. Control on expenditures and

revenues

Decision on appropriations (Eiestimate)

Individual revenue assessment (Riplanned)

Negotiation and bargaining on transfers(Ti = Eiestimate -Riplanned)

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Methods of grant allocation (2)

2. Control over the transfers

Local authority to generate revenues (R)

Normative grants (Gnormative)

Autonomous decision on expenditure levels

(E=R+ Gnormative)

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Methods of grant allocation (3)

3. Expenditure and revenue capacity based

Accepted expenditure levels (Estadardized)

Required revenues (Rrequired)

Calculated grant:

(Gcalculated=Eaccepted-Rrequired)

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Methods of grant allocation (4)

Models Expenditures Revenues Transfers

Control over E&R

Eiestimates RiplannedEiestimates-Riplanned=

Ti

Control over transfers

E=R+Gnormative R Gnormative

E&R capacity

Eistandardized RirequiredGcalculated=

Eistandard- Rirequired