International Experience and Lessons on Municipal Finance ... · Federal OECD Countries, 2007 Taxes...
Transcript of International Experience and Lessons on Municipal Finance ... · Federal OECD Countries, 2007 Taxes...
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OECD Experience on Municipal
Finance under Federalism:
Implications for India
Enid Slack Institute on Municipal Finance and GovernanceMunk School for Global AffairsUniversity of Toronto
International Roundtable on India Municipal Finance StudyKorea Institute of Public Finance, Seoul, KoreaMay 31 to June 3, 2010
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Outline of Presentation
Municipal finance in federal countries in the
OECD:
Local government expenditures
Local government revenues
Local government taxes
Implications for local governments in India
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Local Government Expenditures, Selected
OECD Federal Countries
Local government
expenditures as % of
GDP, 2007
Australia 2.3
Austria 7.4
Belgium 6.9
Canada 7.2
Germany 7.2
Spain 6.4
Switzerland 9.7Source: International Monetary Fund, Government Finance Statistics, Yearbook,
2008, Table 7 and OECD, Revenue Statistics 1965-2008, 2009, Table 36
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Local Government Expenditures, Selected
OECD Federal CountriesLocal government
expenditures as % of total
government
expenditures, 2007
Australia 5.7
Austria 13.6
Belgium 11.2
Canada 15.6
Germany 14.8
Spain 13.6
Switzerland 22.0Note: Information for Belgium and Switzerland is for 2006
Source: International Monetary Fund, Government Finance Statistics Yearbook, 2008, Table 7 4
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0%
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Distribution of Local Government Expenditures, Selected Federal Countries, 2007
General Public Services
Public Order, Safety, Defense
Economic Affairs
Environmental Protection
Housing & Community Amenities
Health
Recreation, Culture & Religion
Education
Social protection
Source: International Monetary Fund, Government Finance Statistics, Yearbook, 2008, Table 7.
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Local Spending Responsibilities
Diversity in OECD practices on expenditure
assignments
Property-oriented services are provided at
the local level in most countries
Public order and safety
Environment (water, sewers, garbage
Economic affairs (transportation)
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Local Spending Responsibilities
More variation in people-oriented services
No local role in education in Australia but major
role in the rest of the OECD
No role in health in Australia; major role in
Switzerland; minor role in the rest of the OECD
High proportion of expenditures on social
protection in Germany, Belgium, Switzerland
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0%
20%
40%
60%
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100%
Sources of Local Government Revenues, Selected Federal OECD Countries, 2007
Tax revenue
Sales of goods and services
Grants
Other revenue
Local Government Revenues
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Source: OECD, Revenue Statistics 1965-2008, 2009, Tables 139-198 and
OECD, Revenue Statistics 1965-2006, 2007, Tables 141, 157, 165.
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Local Government Tax Revenues,
Selected Federal OECD Countries
Local government tax
revenues as % of GDP, 2007
Australia 0.9
Austria 4.0
Belgium 2.3
Canada 2.9
Germany 3.0
Spain 3.1
Switzerland 4.8Source: OECD Revenue Statistics 1965-2008, 2009, Tables 139-168 and OECD Revenue Statistics
1965-2006, 2007, Table 157
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Distribution of Local Government Tax Revenues, Federal OECD Countries, 2007
Taxes on income, profits and capital gains
Taxes on payroll and workforce
Real property taxes
Other property-related taxes
Taxes on goods and services
Other taxes
Source: OECD, Revenue Statistics 1965-2008, 2009, Tables 139-168 and OECD,
Revenue Statistics 1965-2006, 2007, Table 157
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Local Government Revenues
Diversity in the amount of revenues under
local control
Local governments rely on intergovernmental
transfers for a significant percent of revenues
(less so in Australia because state
government delivers many local services)
Variation in the number of local taxes
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Local Government Tax Revenues
More than 80% of tax revenues from
personal and corporate income taxes in
Belgium, Germany, Switzerland
More than 80% of tax revenues from property
taxes in Australia, Canada, US
Sales taxes are levied mainly by cities in the
US
Mix of taxes in Austria and Spain (40% of
local tax revenues from sales tax in Spain
and almost 30% in Austria)
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Local Government Taxes
No country raises more than 10% of total taxes from property tax
Income-tax reliant countries (e.g. Belgium,
Germany, Switzerland) tend to spend more
on social protection
In almost all OECD countries, decisions on
what revenue instruments local governments
can use are decided by higher level of
government or national constitution
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Local Government Taxes
Access to taxes depends on:
types of expenditures that must be funded;
local government’s capacity to administer a tax;
willingness of a senior government to assign taxes to local government; and
constitutional and legislative requirements
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User Fees
User fees in every country but particularly
significant percent of revenues in Australia
and Switzerland
Charged for use of airports, transit, parking,
water, sewers, solid waste collection and
disposal, recreational facilities
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Intergovernmental Transfers: Types
General purpose (block) transfers
Vertical fiscal imbalance (fiscal gap)
Horizontal fiscal imbalance (equalization)
Specific purpose transfers
Matching to address spillovers (but matching rates
are generally higher than justified by spillovers in
most countries)
Non-matching to achieve minimum standards
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Intergovernmental Transfers
Federal grants generally have to go through
provincial/state governments (e.g. Canada,
Germany)
General purpose grants dominate in most OECD
countries (e.g. 70% of grants in Germany)
Specific purpose transfers prevalent in Canada
and US (e.g. 85% of grants in Canada)
Equalization transfers not common in the US;
comprehensive system of equalization transfers
in Germany
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Problems with Transfers
Soften the budget constraint (undermine
fiscal discipline)
Discourage municipalities from “getting the
prices right”
Distort local decisions
Reduce accountability
Fungibility
Not stable and predictable
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Local Borrowing
Most countries – significant help from higher
level governments in facilitating access to
credit markets for local governments
Requires well-functioning financial markets
and creditworthy local governments
US: tax-exempt bonds
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Local Borrowing
Agencies allow risk pooling, economies of
scale, and knowledge of local governments to
provide access to commercial credit on more
favourable terms
US: municipal bond banks (pool borrowing)
Canada: provincial finance corporations
Western Europe: autonomous agencies run
on commercial principles assist local
borrowing
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Implications for India from Federal
OECD Countries
Diversity in institutional arrangements
No consistent or uniform approach to local government taxation
Few countries rely on only one local tax; some rely on two taxes, and still others have three taxes
Generally, broader spending responsibilities come with greater diversity of taxes
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Implications for India from Federal
OECD Countries
Need for clarity of expenditure assignments
Finance follows function
As much as possible, each government
should finance expenditures out of own
revenues:
Local autonomy
Responsibility and accountability
Stability and predictability of revenues
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Implications for India from Federal
OECD Countries Residents should bear the cost of providing
services:
User fees to fund services where beneficiaries can be identified
Local taxes to fund services that provide collective benefits to the local community
Accountability to local residents is critical to
success of local governments
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Implications for India from Federal
OECD Countries Matching revenue tools to expenditure
responsibilities:
Private goods – user fees
Public goods – taxes on residents
Spillovers –intergovernmental transfers
Large capital investments - borrowing
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The Need for a Mix of Taxes
A mix of taxes is appropriate:
One tax may create distortions offset by a mix of taxes
Improves flexibility in adapting to local conditions and circumstances
Increases revenue elasticity
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Criteria for a Good Local Tax
Immobile tax base
Adequate, stable and predictable tax yield
Difficult to export
Visible and accountable
Fair
Minimize harmful inter-municipal competition
Easy to administer and collect
Not all criteria can be met at the same time
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Which Taxes?
Property tax – tax on immobile factors;
related to benefits from local services
Income tax – based on benefits for services
not capitalized into property values; buoyant
Payroll tax – easy to administer but barrier to
employment
General and selective sales taxes – tax
commuters and visitors; buoyant
Local business taxes – export tax burden;
costly to administer
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