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

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Introduction Fiscal Capacity Revenue Raising Ability Expenditure Needs 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   1.

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Revenue Assignment 20 Different taxes Seven main categories of revenue sources : General sales and gross receipts taxes Personal income tax Corporation net income and net worth tax Property tax Selective sales and gross receipts taxes License taxes All other taxes

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%

Province

Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma TOTAL

Tax Base

2,282,300,000 2,398,400,000 538,900,000 4,535,100,000 3,727,800,000 989,600,000 6,404,000,000 13,368,600,000 1,891,800,000 509,700,000 35,346,200,000

Revenue

136,538,600 127,214,900 29,521,600 224,698,340 227,819,300 68,526,600 549,657,800 708,965,700 102,568,700 30,589,700 2,206,101,240

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

Province

Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma TOTAL

Tax Base

2,282,300,000 2,398,400,000 538,900,000 4,535,100,000 3,727,800,000 989,600,000 6,404,000,000 13,368,600,000 1,891,800,000 509,700,000 35,346,200,000

RTS Rate

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

0.0624

Tax Capacity

142,447,699 149,693,976 33,634,958 283,054,182 151,528,951 61,764,993 399,699,893 834,389,129 118,074,993 31,812,466 2,206,101,240

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

Province

Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma TOTAL

Per Capita Revenue

33.28

38.55

44.73

35.45

40.98

40.17

59.49

39.59

37.06

54.82

42.31

Per Capita Tax Capacity

34.72

45.36

50.96

44.65

27.26

36.20

43.26

46.59

42.66

57.01

42.31

Tax Effort Index

96 85 88 79 150 111 138 85 87 96 100

Tax Capacity Index

82 107 120 106 64 86 102 110 101 135 100

Representative Tax System Tax Capacity and Effort For All Taxes

Province

Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma

Per Capita Regional Income

13,910 20,443 30,316 16,437 11,277 16,580 12,305 11,254 19,378 11,330

Ranking 9 2 7 10 4 6 3 1 5 8 Per Capita Tax Revenue

9,337 5,959 5,458 12,045 9,724 8,487 8,956 6,976 9,296 6,181

Ranking 4 9 10 1 3 2 7 6 5 8 Tax Effort Index

96 64 47 107 125 112 100 103 91 62

Tax Capacity Index

115 109 136 132 92 89 105 80 120 116

Expenditure Needs 1.

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Expenditure Assignment Elementary and secondary education Higher education Public welfare Healthcare Highways Police and corrections

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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)

Representative Expenditure System 5.

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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.

Representative Expenditure System Estimation of Workload Measure for Elementary and Secondary Education Province Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma Total School Age Population Net of Private Enrollment Elementary Weight 0.5

452,346 Secondary Weight 0.35

345,444 346,455 66,699 699,778 541,485 102,942 268,964 64,011 636,225 470,472 88,275 924,495 1,698,713 263,620 48,495 5,145,028 847,402 1,600,949 256,609 46,674 4,625,025 Population (Under 18 living in poverty) Weight 0.15

112,478 109,634 29,760 152,789 139,762 33,976 61,647 267,349 76,349 9,763 993,507 Number 363,950 283,810 60,217 595,486 456,372 87,464 768,085 1,449,791 233,076 42,048 4,340,299 Workload Measure 0.08

0.07

0.01

0.14

0.11

0.02

0.18

0.33

0.05

0.01

1.00

Representative Expenditure System Estimation Of Representative Expenditures for Elementary and Secondary Education II / IV Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma Total I.

Direct Expenditures 12,521,568,974 7,256,876,117 1,424,697,873 29,397,842,156 17,806,434,563 5,412,497,368 21,734,658,110 41,176,137,932 7,564,984,615 1,067,849,238 145,363,546,946 II.

Per Capita Direct Expenditure 3,052 2,199 2,159 4,638 3,203 3,173 2,352 2,299 2,733 1,914 2,788 III.

Representative Expenditures 12,189,270,805 9,505,250,712 2,016,775,339 19,943,781,671 15,284,628,018 2,929,297,493 25,724,403,190 48,555,818,805 7,806,071,183 1,408,249,731 145,363,546,946 IV.

Per Capita Representative Expenditures 2,971 2,880 3,056 3,146 2,750 1,717 2,784 2,711 2,820 2,524 2,788 103 76 71 147 116 185 84 85 97 76 100

Fiscal Gap Province All Taxes Tax Capacity Total Representative Expenditures Fiscal Gap Alab Colo Dela Geor Inda Mai 43,383,855,256 12,914,523,245 49,420,434,341 12,150,534,192 -6,036,579,085 763,989,053 Mic 82,508,431,116 67,720,807,945 14,787,623,171 Newshire 121,170,568,431 146,146,890,940 -24,976,322,510 Oreo Verma 40,052,917,815 30,691,483,726 7,634,246,628 71,202,296,438 28,237,497,044 5,524,700,134 36,980,969,421 32,886,165,195 3,071,948,394 -2,194,681,470 7,816,692,797 -182,446,169 57,853,795,851 13,348,500,587 25,178,564,951 7,165,664,198 3,058,932,093 -1,640,964,064 Per Capita Fiscal Gap 749 -665 -276 2,106 -1,086 448 1,600 -1,395 1,105 -2,941

Analysis of Different Distribution Options Province Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma Population Per Capita Regional Income Per Capita Regional Income (FF) Per Capita Tax Capacity Per Capita Tax Capacity (FF) 672 672 672 672 672 672 672 672 672 672 911 771 2,599 499 830 1,839 457 258 970 8,226 1,610 0 0 0 0 0 888 501 0 15,966 792 1,033 4,155 445 731 2,456 384 262 1,123 5,741 1,979 6,648 0 0 0 0 0 709 0 0

Analysis of Different Distribution Options Province Alab Colo Dela Geor Inda Mai Mic Newshire Oreo Verma Tax Effort Index 0 0 0 1,083 1,434 4,206 695 368 0 0 Per Capita Direct Expenditures 0 3,385 0 0 0 0 0 461 2,622 14,952 Per Capita Representative Expenditures Fiscal Gap 1,087 1,495 8,882 713 792 0 0 0 1,627 11,391 0 665 276 0 1,086 0 0 1,395 0 2,941