Own source revenues of local governments: international practices

1. Own source revenues of local governments: international practices Olaf Merk (OECD, Regional Development Division) Fiscal Management of Local Administrations-Conference, 15 September 2010, Ankara

2. Purpose of the presentation • Assessment of importance of local own revenue (theory) • Assessment of systems in OECD countries (practice) • Lessons for Turkey (orally)

3. Structure of presentation • Size of own resources of local governments • Taxing power of local governments • Composition local tax revenues • Tax competition between local governments • Fees and charges

4. 1. Size of own resources: theory • Own resources for local government increase efficiency, responsiveness to local preferences and transparency • Most important is the capacity of local government to change revenue size at the margin. After a certain size, more is not necessarily better. • Optimal size also depends on local circumstances and character of sub-national expenditures (e.g. social security). • Large own revenue shares might lead to large differences in public service delivery and thus increase the need for fiscal equalisation.

5. 1. Size of own resources: international practice Large variety among OECD countries

6. 1. Size of own resources: international practice Size own revenues related to size sub-national expenditures

7. 1. Size of own resources: international practice Share own local resources relatively stable over time

8. 2. Taxing power: theory • Sub-national taxing power is an essential element of decentralisation: who sets rate and base? • Sub-national autonomy balanced by nationally imposed limits and constraints. • Limits less needed when there is well-functioning local democracy, great transparency (in case of immobile tax base) or substantive tax competition (in case of mobile tax bases). • Cyclical revenue assignments may require fiscal rules to damp pro-cyclical fiscal policy responses.

9. 2. Taxing power: international practice OECD taxonomy of sub-national taxing power

10. 2. Taxing power: international practice

11. 2. Taxing power: international practice Taxonomy in a simplified form

12. 2. Taxing power: international practice Taxing power and size of local tax revenues are related

13. 3. Tax composition: theory • More mobile tax bases are less suitable as local tax base; they can distort the allocation of labour, capital and businesses and lead to wasteful competition. • Most mobile tax bases are capital income and footlose entrepreneurs and firms. Workers are less mobile and property relatively immobile. Taxes on goods can stimulate crossborder shopping. • Need for broad tax bases. Reliance on narrow tax bases may push up tax rates too high in comparison with other tax bases.

14. 3. Tax composition: international practice Local tax sources differ from those at central level

15. 3. Tax composition: international practice Property tax is the most common local tax source

16. 4. Tax competition: theory • Tax competition amongst local governments can be wasteful, due to externalities. • At the same time, competition is a core argument for fiscal federalism. • There are countries where tax competition has had positive effects (Switzerland). • Even if agents are immobile and preferences not heterogenous, there can be competition (yardstick competition).

17. 4. Tax competition: international practice Tax competition in selected OECD countries

18. 5. Fees and charges: theory • User fees cover all individual payments to public service providers in return for services provided. • Can be beneficial for containing excessive demand and fostering supply of public services. • Ideal for funding local services where specific beneficiaries can be identified and non-payers excluded, such as public transport and waste collection. • Proper pricing can help contain environmental degradation.

19. 5. Fees and charges: international practice Fees relatively marginal in many OECD cities