EQUALIZATION ACROSS SUBNATIONAL GOVERNMENTS: FISCAL CAPACITY

1
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

2
OUTLINE

1. Introduction
2. Fiscal Capacity
3. Revenue Raising Ability
4. Expenditure Needs
5. Example

3
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.

4
Fiscal Capacity

• Fiscal capacity is a measure of a governments
  ability to raise revenues for provision of
  services, relative to the costs of service
  responsibilities.
• Fiscal Capacity Revenue Raising Ability
  Expenditure Needs

5
Revenue-Raising Ability

• Macroeconomic Approachsingle aggregate variable
  such as per capita income
• Microeconomic Approachactual revenue system
  such representative tax system

6
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

7
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

8
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.).

9
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.

10
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

11
Republic of Tazmanya

• Revenue Assignment
• 20 Different taxes
• Seven main categories of revenue sources
• 1.       General sales and gross receipts taxes
• 2.       Personal income tax
• 3.       Corporation net income and net worth
  tax
• 4.       Property tax
• 5.       Selective sales and gross receipts
  taxes
• 6.       License taxes
• 7.       All other taxes

12
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 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
13
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
14
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
15
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
16
Expenditure Needs

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

17
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)

18
Representative Expenditure System

1. 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.
2. Police and Corrections The measure is the sum of
   the equally weighted percentage distribution of
   population age 20-24 and number of murders
   committed.
3. All Other Direct General Expenditures The
   measure is the sum of the equally weighted
   percentage distribution of population and per
   capita regional income.

19
Representative Expenditure System

• Estimation of Workload Measure for Elementary and
  Secondary Education

Province School Age Population Net of Private Enrollment School Age Population Net of Private Enrollment Population (Under 18 living in poverty) Weight 0.15 Number Workload Measure
Province Elementary Weight 0.5 Secondary Weight 0.35 Population (Under 18 living in poverty) Weight 0.15 Number Workload Measure
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
20
Representative Expenditure System

• Estimation Of Representative Expenditures for
  Elementary and Secondary Education

I. Direct Expenditures II. Per Capita Direct Expenditure 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
21
Fiscal Gap

Province All Taxes Tax 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 -24,976,322,510 -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
22
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
23
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