Galina Kourlandskaya

Galina Kourlandskaya

Intergovernmental Fiscal Regulation at the Subnational Level under

the Intergovernmental Fiscal Relations Reform

Moscow,World Bank Institute

March 25, 2005

www.fpcenter.ru Тел.: (095) 777-65-822

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


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


Equalization of Fiscal Capacity


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


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


0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

20,00%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Год

Собственные доходы Регулирующие налоги ФФПР ФК Прочая финансовая помощь

Revenue Components in Subnational Budgets

(as a percentage of the GDP)

Other transfers

Subventions

Grants

Regulating taxes

Own tax revenue


0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Собственные доходы Регулирующие налоги Дотации Субвенции Прочая финансовая помощь

Revenue Components in Subnational Budgets

(as a percentage of the GDP)

Other transfers

Subventions

Grants

Regulating taxes

Own tax revenue


A New Approach in Identification of Those

in Need of Financial Assistance


2000 г.

0

10

20

30

40

50

60

70

0 200000 400000 600000 800000 1000000 1200000 1400000 1600000

Население * ИБР, чел.

Бю

джет

ная

обес

пече

ннос

ть, т

ыс.

руб

/чел

.

Ханты-Мансийский АО 2003

итоговая (вкл. целевые средства)

Intergovernmental Fiscal Regulation in Khanty-Mansi Autonomous District (2003)

Before equalization

After equalization


0

1

2

3

4

5

6

7

8

0 200000 400000 600000 800000 1000000 1200000 1400000

Население * ИБР, чел.

Бю

джет

ная

обес

пече

ннос

ть, т

ыс.

руб

/чел

.

Ивановская область 2003

итоговая (вкл. целевые средства)

Intergovernmental Fiscal Regulation in Ivanovo Oblast (2003)

Before Equalization

After Equalization


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:

Khavarovsk ElistaMagadan MaikopKyzyl PetrozavodskKemerovo KostromaAbakan Yoshkar-OlaChelyabinsk Dudinka

and others


Traditional Approach to Allocating Financial Assistance to Local Budgets (covering the “estimated gap”)

Assessment of Each Local Budget’s Capacity and Needs by :

Municipality RegionRevenues

Expenditures

Financial Assistance

Financial Assist.


Rating of Municipalities Based on Their Fiscal Capacity

0

1

2

3

4

5

6

7

8

0 200000 400000 600000 800000 1000000

Население, чел.

Бю

дж

етн

ая

об

есп

ечен

но

сть

, ты

с. р

уб

/чел

.


Fiscal Capacity Equalization: Proportionate Pull

0

1

2

3

4

5

6

7

8

0 200000 400000 600000 800000 1000000


Бю

джет

ная

обе

спеч

енн

ость

, ты

с. р

уб/ч

ел.


Fiscal Capacity Equalization: Full Equalization of the Poorest

0

1

2

3

4

5

6

7

8

0 200000 400000 600000 800000 1000000


Бю

джет

ная

обе

спеч

енн

ость

, ты

с. р

уб/ч

ел.


Negative Transfers


0

10

20

30

40

50

60

70

80

90

Ка

ба

рд

ин

о-Б

ал

кар

ска

я Р

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Ка

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сть

Difference in Tax Base of Local Governments in Some Regions of the Russian Federation (times, 2002)

Before equalization

After equalization


0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

0 200000 400000 600000 800000 1000000 1200000Население, чел.

Бю

джет

ная

обе

спеч

енн

ость

, ты

с. р

уб/ч

ел.

Negative Transfer


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


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


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


Fiscal Capacity Instead of

Revenues and Expenditures


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


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


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)


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?


A General Mechanism of Intergovernmental Fiscal Regulation in Russian Regions

Settlements CD MD

Regional FFSMD/CD

Regional FFSS

DistrictFFSSs

(Negative transfer )

(Negative transfer)

GrantsGrantsGrants

Municipal Development

Fund

Fund for Municipal Finance Reform

Social Expenditures Co-Financing

Fund

Other funds (not exceeding 10% of the total amount)


«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

Galina Kourlandskaya

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