Strengthening the Revenue Side
Countries are undertaking decentralization reforms to strengthen governance accountability and improve efficiency in public service delivery. One key requisite for success is to ensure adequacy of resources to fund expenditure responsibilities being allocated to local governments. Although central transfers and shared taxes tend to dominate, local own revenues, are equally critical for enhancing governance accountability and local autonomy, while providing an important source of additional funding (at the margin) for local budgets. Theory and international practice suggests that most tax bases are naturally allocated to the central government, with local governments (LGs) largely being assigned benefit-based user charges and taxes on less mobile bases (eg, property taxes) and selective excises. Countries typically follow various strategies and combinations of shared taxes, local surcharge (piggy-back) taxes and local own revenues to provide the needed autonomy, discretion and accountability for successful decentralization. However, even the structure of these various taxes has major implications for the level of central and local autonomy and control, dependent on which government level has the authority to define and chose the tax rates and the tax base, and to influence the realization of these policy choices through tax administration. Local own revenue mobilization can be influenced through tax policy and tax administration. Tax policy determines the potential of collectable revenues, while the effectiveness of tax administration ultimately realizes the actual revenue mobilization. In general, local own revenues can be administered under either a local administration approach or a joint administration approach. Under a joint administration approach, countries allocate certain administrative functions to different levels of government or to 3rd party agencies, taking into account of economies of scale, capacity constraints, and equity considerations. For example, many countries allocate property tax cadastre and valuation functions to a higher level government and collection and enforcement functions to the local government level in order to better ensure sustainable local revenue collections at minimal administration and compliance costs. This paper focuses on the theory and practice of allocating revenues across levels of government, and the administration of local revenues, with particular attention on the property tax as the primary source of potential and sustainable LG revenues. The paper is divided into five sections. Following the introduction, section 2 outlines the theory and practice of revenue allocation across government levels and examines various ways of structuring revenues to support local autonomy and fiscal decentralization. Section 3 focuses on the Indonesian reform experience in structuring its local own revenue system. Section 4 examines the property tax devolution process in Indonesia under Law No. 28 (2009). Section 5 concludes with recommendations for the way forward.
