Intergovernmental Transfers

Professor Roy BahlGeorgia State University

(rbahl@gsu.edu)

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Definitions Why Use Transfers How To Design A Transfer System The Political Economy

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Definitions

Intergovernmental transfers– Grants– Subsidies– Shared taxes

Local taxes Piggyback local taxes

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Definitions: Types of Intergovernmental Transfers

Unconditional or general Conditional or specific (for capital and/or

operating expenditures) – Non-matching– Matching

• Open-ended• Close-ended

Direct cost reimbursement

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Why Have

Intergovernmental Transfers?

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Close the “fiscal gap” Equalize fiscal capacity and need Adjust for spillovers Increase effectiveness of central

expenditures Political reasons

Justifications for Intergovernmental Transfers

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How To Close A Fiscal Gap

More Transfers More Local Raised Revenue Local Expenditure Efficiency Re-Assign Expenditure / Responsibility

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The objective of an equalization transfer should be to protect (or guarantee?) some basic level of services

Equalization

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What Do We Equalize?

Fiscal Capacity Expenditure Needs Capacity – Needs Gap

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The Special Case of Natural Resources Revenue Sharing

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The Stability Argument

The Disparities Argument

The Local Capacity Argument

The National Treasure Argument

Natural Resource Revenue Sharing: The Case for More

Centralization

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The Cost Reimbursement Argument

The Heritage Argument

The Conflict Resolution Argument

Natural Resource Revenue Sharing: The Case for More

Decentralization

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Design Issues For Intergovernmental Transfers

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Revenue Adequacy

Certainty

Unconditional

How Can Intergovernmental Transfers be Decentralizing?

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No Transparency In Vertical Sharing

Ad Hoc Distributions

Uncertainty and Year-To-Year Changes

Strict Conditions

How Can Intergovernmental Transfers be Centralizing?

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Alternative Forms of Intergovernmental Transfers

Method of determining total to be distributed

Method of allocating total among eligible units

Specified share of central tax

Ad hoc decision

Reimbursement of approved expenditures

Origin of collection of the tax

A ---- ---

Formula B F ---

Total/partial cost reimbursement

C G K

Ad hoc D H ---

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Goals of Central Government

Control Local Finances Equalize Services and Fiscal

Capabilities among Localities Stimulate Expenditures for a Particular

Function or Overall Tax Effort Increase Local Tax Effort Minimize Administrative Costs

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Goals of Local Government

Maintain Control over Local Finances Plan Efficient Budget Increase Adequacy of Local Revenue

Flow Minimize Administrative Costs

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Desired outcomes should drive design One grant/transfer instrument cannot

accomplish multiple objectives Expect changes over time Is “distributable pool” a discretionary

element in the central budget or an entitlement of local government?

Intergovernmental Grant Lessons

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Deficit Grants Complicated Formulae No Transparency No Continuity Base it on The Amount Spent No Evaluation

Intergovernmental Grants: How Not To Do It!

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The Need for a Phase-In Plan Separating the Pieces The Learning Curve for Local

Governments Hold Harmless Provisions Education Implementation Planning Central Leadership

The Special Problem of Transition

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The Political Economy of Transfers

President Parliament Ministry of Finance MOHA Line Ministries Urban Local Government Rural Local Government