EQUALIZATION ACROSS SUBNATIONAL GOVERNMENTS: FISCAL CAPACITY

1. EQUALIZATION ACROSS SUBNATIONAL GOVERNMENTS: FISCAL CAPACITY Serdar Yilmaz World Bank Institute New Tools in Decentralization and Intergovernmental Fiscal Reform PREM Learning Week Decentralization TG Sponsored Events

2. OUTLINE • Introduction • Fiscal Capacity • Revenue Raising Ability • Expenditure Needs • Example

3. Equalization Transfers Equalization transfers are designed to correct horizontal imbalances across subnational governments arising from: • Unequal distribution of revenue bases, natural resources, and wealth across subnational governments, • Variations in the socio-economic characteristics of population, and • Variation in the geography and climate across jurisdictions that lead to variations in economic opportunities at the subnational level.

4. Fiscal Capacity Fiscal capacity is a measure of a government’s ability to raise revenues for provision of services, relative to the costs of service responsibilities. Fiscal Capacity = Revenue Raising Ability – Expenditure Needs

5. Revenue-Raising Ability • Macroeconomic Approach—single aggregate variable such as per capita income • Microeconomic Approach—actual revenue system such representative tax system

6. Representative Tax System • Calculating the amount of revenues that each subnational government could derive from a standard tax system • The tax yield that would result from applying a representative set of tax rates to a representative set of tax base

7. Representative Tax System Components of RTS • Determining the Tax Source • Defining and Estimating the Tax Bases • Calculating the Representative Rate • Estimating Tax Capacity • Estimating Tax Effort

8. Expenditure Needs Factors responsible for the variation of costs among subnational governments: • The range and types of services subnational governments must provide (by law); • The prices of the inputs used to produce public services, such as wages and salaries, oil prices, etc; • Factors that determine the scope of the services provided, such as demographic structure of the population (number of school age children, etc.).

9. Representative Expenditure System • The representative expenditure system is the expenditure side of fiscal capacity measure. • The RES measures the relative public service need of subnational governments that is the expenditure-side analog of the RTS.

10. Republic of Tazmanya • Total population • Gross regional product • Geographic size • Population for different age cohorts (7-12); (13-19); (20-24); (25-30); (35-45); (Above 55) • Population living in poverty • Population under the age 18 living in poverty • Enrollment in private elementary and secondary schools • Number of murders • Infant mortality • General revenues of federal government

11. Republic of Tazmanya Revenue Assignment • 20 Different taxes • Seven main categories of revenue sources : 1.General sales and gross receipts taxes 2.Personal income tax 3.Corporation net income and net worth tax 4.Property tax 5.Selective sales and gross receipts taxes 6.License taxes 7.All other taxes

12. Representative Tax System Representative Tax Rate For General Sales and Gross Receipts Tax Representative Tax Rate = 2,206,101,240/ 35,346,200,000= 6.24%

13. Representative Tax System Tax Capacity For General Sales and Gross Receipts Tax

14. Representative Tax System Tax Capacity and Effort For General Sales and Gross Receipts Tax

15. Representative Tax System Tax Capacity and Effort For All Taxes

16. Expenditure Needs Expenditure Assignment • Elementary and secondary education • Higher education • Public welfare • Healthcare • Highways • Police and corrections

17. Representative Expenditure System • Elementary and Secondary Education: The workload measure is the weighted sum of three population groups: (i) children of elementary-school age (7-12) net of enrollment in private elementary; (ii) youth of secondary-school age (13-19) net of private secondary school enrollment; (iii) the population under 18 living in households with incomes below the poverty line. The weights are 0.5, 0.35, and 0.15, respectively. • Higher Education: The measure is the weighted sum of the population in the age groups 20-24, 25-30, and 35-45. The weights are 0.5, 0.35, and 0.15, respectively. • Public Welfare: The workload measure is the population living in households with incomes below the poverty line. • Healthcare: The measure is the sum of the equally weighted percentage distribution of infant mortality and elderly population (55 and older)

18. Representative Expenditure System • Highways: The workload measure is the weighted sum of three variables: (i) the number of registered private and commercial automobiles; (ii) the number of registered truck; and (ii) population density. The weights are 0.5, 0.4, and 0.1, respectively. • Police and Corrections: The measure is the sum of the equally weighted percentage distribution of population age 20-24 and number of murders committed. • All Other Direct General Expenditures: The measure is the sum of the equally weighted percentage distribution of population and per capita regional income.

19. Representative Expenditure System Estimation of Workload Measure for Elementary and Secondary Education

20. Representative Expenditure System Estimation Of Representative Expenditures for Elementary and Secondary Education

21. Fiscal Gap

22. Analysis of Different Distribution Options

23. Analysis of Different Distribution Options