Environmental Engineering Reference
In-Depth Information
ciency and transparency in the distribution of national
funds to subnational governments, the allocation of intergovernmental transfers is
often based on formulae that take into account indicators of population needs and of
local
To increase equity, ef
fiscal capacity. Population is usually the main variable used to capture local
needs for public goods. Additional frequently used indicators are population den-
sity, age structure of the population, area of the jurisdiction, and the incidence of
poverty or diseases. The
fiscal capacity of subnational governments, that is, their
ability to raise revenues from own sources, is evaluated through macro measures of
the jurisdiction (e.g. gross domestic product or income) or tax measures. This latter
approach is more frequently used because subnational data on the tax-system is
usually more accurate and timely than the macro indicators. In this case, transfers
are used to equalize the tax base across jurisdictions using the national mean or
median as reference. Richer jurisdictions are asked to contribute with funds to help
poorer jurisdictions.
Even when intergovernmental transfers are established by formulae, they are
subject to political pressures, which may prevent the achievement of the normative
objective explained above. Extensive literature on the political economy of inter-
governmental transfers has highlighted several issues that need to be taken into
account. First, transfers can be used opportunistically before elections to increase
the likelihood of victory of incumbent governments. Second, they may be subject to
manipulation in order to favour the incumbent government
'
s electorate in the
allocation of funds (Cox and McCubbins
1986
; Lindbeck and Weibull
1987
)or
localities with many swing voters that are easier to in
uence (Dixit and Londregan
1996
). For empirical studies analyzing developing countries, see Case (
2001
),
Khemani (
2007
) and Allers and Ishemoi (
2011
).
5 Subnational Government
'
s Fiscal Autonomy
As discussed above,
fiscal transfers from upper levels of government, foreign
governments and international organizations represent an important source of
revenue for subnational governments, particularly in developing countries. In some
of these countries, tax decentralization has not kept pace with political and
expenditure decentralization, decreasing local of
cials
'
accountability to citizens.
When local public goods and services are
s
own revenues, citizens have a better perception of their costs, which enhances
ef
financed by subnational government
'
ciency, accountability and good governance. Besides transfers, state and local
governments receive revenues from borrowing and from a variety of taxes, charges
and user fees.
OECD countries rely mainly on taxes on income, pro
ts and capital gains. These
taxes can be used strategically by subnational governments to attract populations
and businesses. In non-OECD countries, taxes on goods and services tend to be
more important. They are particularly relevant in India, Thailand and Brazil. These
taxes are easier to administer and govern than property taxes but, when applied to
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