Sub National Government Revenues

Question 1

Subsidiarity

Answer 1

The principle that the provision of government-supplied services should be at the lowest level of government consistent with allocative efficiency: the geographic area that internalises (no spill-overs of beneftis or costs into other geographic areas) the benefits and costs of that provision.

Local services: street lighting, refuse removal

Regional: rural-urban roads, airports

National: high-speed rail, environemtnal policy

Question 2

Revenue/tax assignment

Answer 2

The most suitalbe taxes for sub-national governments should satisfy the following conditions:

• local governments can decide whether to levy the tax or not
• they can also determine the precise base of the tax
• they can decide the tax rate
• in the case of direct taxes, they assess the tax imposed on any particular taxpayer
• they keep all the revenue they collect

Question 3

Desirable characteristics of the local tax base (1)

Answer 3

• They should minimise the distortion in resource allocation.
• The chosen tax base(s) should, ideally, be broad enough to provide sufficient revenues to finance local spending without unduly high tax rates. In order to minimise the excess burden of such taxes, revenue should grow in line with any increase in local service provision costs, so the tax base should be able to cover future budgetary needs. In other words, a local tax should be elastic, with respect both to the tax base and in relation to income growth, so that small changes in the tax rate result in considerable changes in revenues and increased incomes also result in considerable additional revenues.

Question 4

Desirable characteristics of the local tax base (2)

Answer 4

• Another desirable characteristic of local taxes is a reasonably even tax base throughout the country; this will reduce intergovernmental transfers to compensate for variations in tax capacity among SNGs; it is also an argument which suggests that taxes on natural
  resources, because of their uneven geographical spread, are best suited to national taxation.
• In addition, the tax should be changeable to allow SNGs to vary the tax in line with local preferences, and its yield has to be substantial if SNGs are to play a significant role (James and Nobes, 2014).

Question 5

Desirable characteristics of the local tax base (3)

Answer 5

• The influence of vertical tax competition (between SNGs) suggests that local taxes are best imposed on immobile factors, especially land and property, while taxes on mobile factors, especially corporate taxes, are best centralised. A progressive (as opposed to a proportional) local tax might offer encouragement for richer residents to migrate to lower tax SNGs (Sanford, 2000).
• They should show accountability; local taxes should be politically transparent and visible in order to ensure that the SNGs imposing such taxes are clearly accountable to their residents (Bird and Wilkie, 2013).
• A local tax should be economical to operate on a small scale and difficult to evade.
• A local tax should be perceptible – that is, taxpayers should know when they are paying a state or local tax (Sanford, 2000).

Question 6

Land and property taxes (1)

Answer 6

Land and property taxes are often advocated as good local taxes

Land is fixed in supply so taxing it cannot distort supply

Property taxes are leived on an immobile base, are difficultto avoid and there is a much clsoer connection between property taxes paid and benefits received.

They have low compliance costs and are relatively simple to collect, although they require assessmenet of property valaue and a record of ownership (land registry)

Account for 4.5% of revenues (average OECD) but much more important in UK (12%), US (16.6%) and Canada (11.6%)

Question 7

Land and property taxes (2)

Answer 7

Property taxes only account for 0.6% of revneue in developing countries.

They are under-used because of:

• poor tax administration (need to invest in ownership and valuation)
• would be paid mainly by political elites and their supporters
• SNG in developing countries have little authority and central governmetns may oppose independent revenue sources
• IMF, World Bank and aid agencies have not placed much emphasis on property taxes.

Could also have beneftis in terms of governance, if SNG have independent and relatively bouyant revenue streams.

Question 8

Tax sharing

Answer 8

Central government can share national revenues with SNGs through SNG surcharges on centrally adminsitered taxes (income taxes) or by allocating a share of nationally colelcted revenues (derivation method). If SNGs do not have the power to set the rate or define the base, this should be considered a transfer payment, not a local tax.

Tax sharing can addrss vertical imbalances (shortfalls between SNG spending and own revenues) and provides a greater level of certainty to their revenues. It may also simtuate some increase in SNG tax effort.

But revenue sharing breaks the link betwwen benefits and costs at the local level and reduces the accountabiltiy and efficiency of decentralisation.