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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. OUTLINE. Introduction Fiscal Capacity Revenue Raising Ability - PowerPoint PPT Presentation
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EQUALIZATION ACROSS SUBNATIONAL GOVERNMENTS: FISCAL CAPACITY
Serdar YilmazWorld Bank Institute
New Tools in Decentralization and Intergovernmental Fiscal Reform
PREM Learning WeekDecentralization TG Sponsored Events
OUTLINE
I. IntroductionII. Fiscal Capacity III. Revenue Raising AbilityIV. Expenditure NeedsV. Example
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.
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
Revenue-Raising Ability
Macroeconomic Approach—single aggregate variable such as per capita income
Microeconomic Approach—actual revenue system such representative tax system
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
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
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.).
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.
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
Republic of Tazmanya
Revenue Assignment 20 Different taxes Seven main categories of revenue sources :1. General sales and gross receipts taxes2. Personal income tax3. Corporation net income and net worth tax4. Property tax5. Selective sales and gross receipts taxes6. License taxes7. All other taxes
Representative Tax System
Representative Tax Rate For General Sales and Gross Receipts TaxRepresentative Tax Rate = 2,206,101,240/ 35,346,200,000= 6.24%
Province Tax Base Revenue
Alab 2,282,300,000 136,538,600
Colo 2,398,400,000 127,214,900
Dela 538,900,000 29,521,600
Geor 4,535,100,000 224,698,340
Inda 3,727,800,000 227,819,300
Mai 989,600,000 68,526,600
Mic 6,404,000,000 549,657,800
Newshire 13,368,600,000 708,965,700
Oreo 1,891,800,000 102,568,700
Verma 509,700,000 30,589,700
TOTAL 35,346,200,000 2,206,101,240
Representative Tax System
Tax Capacity For General Sales and Gross Receipts Tax
Province Tax Base RTS Rate Tax Capacity
Alab 2,282,300,000 0.0624 142,447,699
Colo 2,398,400,000 0.0624 149,693,976
Dela 538,900,000 0.0624 33,634,958
Geor 4,535,100,000 0.0624 283,054,182
Inda 3,727,800,000 0.0624 151,528,951
Mai 989,600,000 0.0624 61,764,993
Mic 6,404,000,000 0.0624 399,699,893
Newshire 13,368,600,000
0.0624 834,389,129
Oreo 1,891,800,000 0.0624 118,074,993
Verma 509,700,000 0.0624 31,812,466
TOTAL 35,346,200,000
0.0624 2,206,101,240
Representative Tax System
Tax Capacity and Effort For General Sales and Gross Receipts Tax
Province Per Capita Revenue
Per Capita Tax Capacity
Tax Effort Index
Tax Capacity Index
Alab 33.28 34.72 96 82
Colo 38.55 45.36 85 107
Dela 44.73 50.96 88 120
Geor 35.45 44.65 79 106
Inda 40.98 27.26 150 64
Mai 40.17 36.20 111 86
Mic 59.49 43.26 138 102
Newshire 39.59 46.59 85 110
Oreo 37.06 42.66 87 101
Verma 54.82 57.01 96 135
TOTAL 42.31 42.31 100 100
Representative Tax System
Tax Capacity and Effort For All Taxes
Province Per Capita Regional Income
Ranking
Per Capita Tax Revenue
Ranking
Tax Effort Index
Tax Capacity Index
Alab 13,910 6 9,337 4 96 115
Colo 20,443 3 5,959 9 64 109
Dela 30,316 1 5,458 10 47 136
Geor 16,437 5 12,045 1 107 132
Inda 11,277 9 9,724 3 125 92
Mai 16,580 2 8,487 2 112 89
Mic 12,305 7 8,956 7 100 105
Newshire
11,254 10 6,976 6 103 80
Oreo 19,378 4 9,296 5 91 120
Verma 11,330 8 6,181 8 62 116
Expenditure Needs
Expenditure Assignment1. Elementary and secondary
education2. Higher education3. Public welfare4. Healthcare5. Highways6. Police and corrections
Representative Expenditure System
1. 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.
2. 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.
3. Public Welfare: The workload measure is the population living in households with incomes below the poverty line.
4. Healthcare: The measure is the sum of the equally weighted percentage distribution of infant mortality and elderly population (55 and older)
Representative Expenditure System
5. 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.
6. Police and Corrections: The measure is the sum of the equally weighted percentage distribution of population age 20-24 and number of murders committed.
7. All Other Direct General Expenditures: The measure is the sum of the equally weighted percentage distribution of population and per capita regional income.
Estimation of Workload Measure for Elementary and Secondary Education
Representative Expenditure System
Province School Age Population Net of Private Enrollment
Population (Under 18 living in poverty)Weight 0.15
Number Workload Measure
ElementaryWeight 0.5
SecondaryWeight 0.35
Alab 452,346 345,444 112,478 363,950 0.08
Colo 346,455 268,964 109,634 283,810 0.07
Dela 66,699 64,011 29,760 60,217 0.01
Geor 699,778 636,225 152,789 595,486 0.14
Inda 541,485 470,472 139,762 456,372 0.11
Mai 102,942 88,275 33,976 87,464 0.02
Mic 924,495 847,402 61,647 768,085 0.18
Newshire 1,698,713 1,600,949 267,349 1,449,791 0.33
Oreo 263,620 256,609 76,349 233,076 0.05
Verma 48,495 46,674 9,763 42,048 0.01
Total 5,145,028 4,625,025 993,507 4,340,299 1.00
Estimation Of Representative Expenditures for Elementary and Secondary Education
Representative Expenditure System
I.Direct
Expenditures
II.Per Capita
Direct Expenditur
e
III.Representative Expenditures
IV.Per Capita
Representative
Expenditures
II / IV
Alab 12,521,568,974
3,052 12,189,270,805 2,971 103
Colo 7,256,876,117 2,199 9,505,250,712 2,880 76
Dela 1,424,697,873 2,159 2,016,775,339 3,056 71
Geor 29,397,842,156
4,638 19,943,781,671 3,146 147
Inda 17,806,434,563
3,203 15,284,628,018 2,750 116
Mai 5,412,497,368 3,173 2,929,297,493 1,717 185
Mic 21,734,658,110
2,352 25,724,403,190 2,784 84
Newshire
41,176,137,932
2,299 48,555,818,805 2,711 85
Oreo 7,564,984,615 2,733 7,806,071,183 2,820 97
Verma 1,067,849,238 1,914 1,408,249,731 2,524 76
Total 145,363,546,946
2,788 145,363,546,946 2,788 100
Fiscal Gap
Province All TaxesTax Capacity
Total Representative Expenditures
Fiscal Gap Per Capita Fiscal Gap
Alab 40,052,917,815
36,980,969,421
3,071,948,394 749
Colo 30,691,483,726
32,886,165,195
-2,194,681,470
-665
Dela 7,634,246,628 7,816,692,797 -182,446,169 -276
Geor 71,202,296,438
57,853,795,851
13,348,500,587
2,106
Inda 43,383,855,256
49,420,434,341
-6,036,579,085
-1,086
Mai 12,914,523,245
12,150,534,192
763,989,053 448
Mic 82,508,431,116
67,720,807,945
14,787,623,171
1,600
Newshire
121,170,568,431
146,146,890,940
-24,976,322,51
0
-1,395
Oreo 28,237,497,044
25,178,564,951
3,058,932,093 1,105
Verma 5,524,700,134 7,165,664,198 -1,640,964,064
-2,941
Analysis of Different Distribution Options
Province Population
Per Capita Regional Income
Per Capita Regional
Income (FF)
Per Capita
Tax Capacity
Per Capita Tax Capacity
(FF)
Alab 672 911 0 792 0
Colo 672 771 0 1,033 0
Dela 672 2,599 0 4,155 0
Geor 672 499 0 445 0
Inda 672 830 1,610 731 1,979
Mai 672 1,839 0 2,456 6,648
Mic 672 457 888 384 0
Newshire
672 258 501 262 709
Oreo 672 970 0 1,123 0
Verma 672 8,226 15,966 5,741 0
Analysis of Different Distribution Options
Province Tax Effort Index
Per Capita Direct
Expenditures
Per Capita Representative Expenditures
Fiscal Gap
Alab 0 0 1,087 0
Colo 0 3,385 1,495 665
Dela 0 0 8,882 276
Geor 1,083 0 713 0
Inda 1,434 0 792 1,086
Mai 4,206 0 0 0
Mic 695 0 0 0
Newshire 368 461 0 1,395
Oreo 0 2,622 1,627 0
Verma 0 14,952 11,391 2,941
