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Intergovernmental Transfers: Theory and Practice

Intergovernmental Transfers: Theory and Practice. Roy Bahl Dean, Andrew Young School of Policy Studies Georgia State University The World Bank May 8-10, 2006. Basic Approaches To Decentralization. Revenue-Sharing Model (Weak Decentralization) Grants Shared Taxes “Minor” Local Taxes

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Intergovernmental Transfers: Theory and Practice

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  1. Intergovernmental Transfers:Theory and Practice Roy Bahl Dean, Andrew Young School of Policy Studies Georgia State University The World Bank May 8-10, 2006 Intergovernmental Transfers

  2. Basic Approaches To Decentralization • Revenue-Sharing Model (Weak Decentralization) • Grants • Shared Taxes • “Minor” Local Taxes • Revenue Assignment Model (Strong Decentralization) • Grants • Shared Taxes • Significant Local Taxes (Autonomy) • Loans • User Charges Intergovernmental Transfers

  3. Rule’s (Cont’d) 8. Grants and shared taxes must play an important role in almost any decentralized fiscal system in a developing or transition country. Transfers may be designed as more centralized or more decentralized. Intergovernmental Transfers

  4. How Can Intergovernmental Transfers be Decentralizing? • Revenue Adequacy • Certainty • Unconditional Intergovernmental Transfers

  5. How Can Intergovernmental Transfers be Centralizing • No transparency in vertical sharing • Ad hoc distributions • Uncertainty and year-to-year changes • Strict Conditions Intergovernmental Transfers

  6. Justifications for Intergovernmental Transfers • Close the “fiscal gap” • Equalize fiscal capacity and need • Adjust for spillovers • Political reasons Intergovernmental Transfers

  7. Equalizing Fiscal Capacity What Do We Equalize? • Revenue Capacity • Expenditure Needs • Needs-Capacity Gap Intergovernmental Transfers

  8. Calculating a Needs-Resource Gap:The Needs Needs-resources gap (G) might be defined more precisely as (1) where where = the amount of expenditure needed to provide a minimum acceptable level of (assigned) services in local government i. =the revenue that would be raised from own sources at “normal” effort in local government i. The vertical share (VS) is equal to VS = (2) Where α is the percent of the needs-resources gap that the central government proposes to cover with the transfer, and CR is the total amount of revenue (or tax revenue) raised by the central (or state) government. Intergovernmental Transfers

  9. Adjusting for Spillovers • Importance of spillovers • Alternatives to transfers • Getting public sector “prices” right • Varying price with capacity Intergovernmental Transfers

  10. How To Design A Grant System Intergovernmental Transfers

  11. How Should The Grant System Be Structured? Alternative Form of Intergovernmental Grant Programs Method of determining the total divisible pool Intergovernmental Transfers

  12. Natural Resource Revenue Sharing: The Case for More Centralization • The Stability Argument • The Disparities Argument • The Local Capacity Argument • The National Treasure Argument Intergovernmental Transfers

  13. Natural Resource Revenue Sharing: The Case for More Decentralization • The Cost Reimbursement Argument • The Heritage Argument • The Conflict Resolution Argument Intergovernmental Transfers

  14. Intergovernmental Grants: How Not To Do It! • Deficit Grants • Complicated Formulae • No Transparency • No Continuity • Base It On The Amount Spent • No Evaluation Intergovernmental Transfers

  15. Intergovernmental Grant Lessons • Desired outcomes should drive design • One grant/transfer instrument cannot accomplish multiple objectives. • Expect changes in formula over time • Is “distributable pool” a discretionary element in the central budget or an entitlement of local government? Intergovernmental Transfers

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