Perbandingan Local Tax Berbagai Negara
Perbandingan Local Tax Berbagai Negara
Perbandingan Local Tax Berbagai Negara
New Zealand, and the United Kingdom). By get less than 10 percent of their tax revenue
contrast, local governments in ten countries from the property tax.
Federal:
Australia 0.0 0.0 100.0 0.0 1.0 3.0
Austria 55.3 29.7 9.9 5.1 4.4 10.1
Belgium 86.5 13.2 0.0 0.3 2.1 4.7
Canada 0.0 1.9 91.3 6.8 2.9 8.1
Germany 78.0 6.0 15.8 0.2 2.6 7.5
Mexico 0.0 2.6 86.7 10.8 0.1 0.8
Switzerland 84.4 0.3 15.3 0.0 5.0 14.0
United States 6.5 21.8 71.8 0.0 3.5 11.5
Unitary:
Czech Republic 90.8 4.2 4.6 0.4 4.8 12.4
Denmark 93.4 0.1 6.5 0.0 15.9 32.9
Finland 95.4 0.0 4.4 0.1 9.9 21.2
France 0.0 11.5 48.2 40.4 4.4 9.7
Greece 0.0 46.3 0.0 53.8 0.4 1.0
Hungary 0.8 76.2 22.5 0.4 2.0 5.2
Iceland 78.0 7.6 14.3 0.0 8.3 22.4
Ireland 0.0 0.0 100.0 0.0 0.6 1.8
Italy 12.2 8.6 18.6 60.6 4.8 11.4
Japan 47.4 20.7 30.9 1.0 7.0 25.6
Korea 16.6 26.5 53.3 3.6 3.9 15.1
Luxembourg 92.9 1.3 5.6 0.3 2.4 5.9
Netherlands 0.0 44.0 56.0 0.0 1.4 3.4
New Zealand 0.0 9.7 90.3 0.0 1.8 5.8
Norway 89.9 2.2 7.9 0.0 6.5 16.3
Poland 78.4 1.8 19.8 0.0 5.7 16.3
Portugal 21.6 33.7 44.5 0.2 2.3 6.3
Slovak Republic 59.9 11.8 28.2 0.1 1.5 4.0
Spain 25.2 36.1 37.3 1.4 5.9 16.9
Sweden 100.0 0.0 0.0 0.0 16.0 29.8
Turkey 24.7 31.5 6.5 37.3 4.3 13.0
United Kingdom 0.0 0.0 99.5 0.5 1.5 4.1
Unitary:
Czech Republic 2 5 3 90
Denmark 96 4
Finland 89 11
Hungary 30 70
Iceland 8 92
Japan 94 6
Mexico 74 26
Netherlands 100
New Zealand 98 2
Norway 5 1 94
Poland 45 1 54
Portugal 49 14 37
Spain 33 51 16
Sweden 4 96
United Kingdom 100
Source: OECD (1999) Taxing Powers of State and Local Government, (OECD: Paris), Table 1.
organizations, and so on. Under the Constitution, value", or "fair value". In practice, these terms
provincial and federal owned properties are also refer to market value. To avoid unintended
exempt from property taxation. For federal and variation in provincial assessment practices and
provincial properties including colleges, to achieve intended variation, every province has
universities and public hospitals, grants-in-lieu of established a central assessment authority and has
taxes (based on number of students or number of moved recently to more updated and frequent
beds) are paid to the municipality. As well, reassessments.
provincial legislation/regulations require special
treatment for other types of property – Although municipal governments are
agricultural land and managed forest properties responsible for setting their general property tax
receive favourable property tax treatment in rate without restriction, provincial rules and
every province. Favourable treatment takes the regulations control the rate structure across all
form of exemptions, lower property tax rates, or properties. For example, some provinces permit
assessment on the basis of the land’s current use municipalities to apply a single general tax rate to
rather than its market value. all classes of property; others permit the
application of different rates to different property
For all taxable properties, every province classes with lower rates assigned to residential
has legislation that calls for the assessment of and farm properties and higher rates to
real property at some value. In some provinces, commercial and industrial properties. In one
this is called "real and true value", "current province (Prince Edward Island), property tax
rates are lower for residents of the province than Ohio and Iowa.7 In terms of revenue importance
for non-residents of the province. for municipalities, income tax revenues generate
well over 20 percent of local tax revenue in Ohio
In summary, municipal governments are free and Pennsylvania and about 30
to set their general tax rate. Their tax base and percent in Maryland. In some cities, this revenue
rate structure (across property types), however, source is so important that it accounts for more
are frequently controlled or restricted by than 50% of city own source revenues.8
provincial legislation, rules and regulations.
Also, in the U.S., local governments in
United States: In some states in the U.S., thirty-one states and the District of Columbia
there is considerable variation in a municipality’s levy general sales taxes. Across these states, a
access to local taxation. For example, in some relatively low rate of 0.25 percent is imposed in a
states, municipalities are permitted to use an number of transit districts to subsidize public
income tax, a sales tax, and a property tax. In transportation. In other states, the rates may be as
other states, municipalities may be restricted to high as five percent with revenues not earmarked
the property tax only; in still others, they have for specific expenditures.9 In some states, such as
access to the property tax and a municipal sales Virginnia and California, the local sales tax is
tax. Regardless of the tax or taxes permitted, state universal. In others, it is used by some
approval or permission has either been legislated municipalities and not others. Regardless of the
or granted. locality there are two common features. First,
virtually, all general sales taxes are ad valorem
The United States experience with a (fixed percent of selling price) rather than per
municipal income tax may be of relevance unit taxes; and second, the tax is levied on retail
because of the variation in the way in which it is purchasers.10
applied. Table 3 records 1999 personal income
tax rates in cities over 125,000 people. Taxes are All municipalities impose a property tax,
generally imposed as a flat rate ranging from a with two minor exceptions. These are in
low of one percent to a high of almost five Oklahoma where cities use the property tax to
percent on residents. In some cities, a lower rate secure bonds and not to fund services and the
is applied to commuters. In some states, the tax is City of Springfield, Ohio where a local income
divided between the jurisdiction where the person tax is used instead of the property tax. Issues
resides and where the person works. In total, around setting local property tax rates,
approximately 3,800 local governments currently determining the tax base, and state restrictions on
levy local income taxes in the United States. local taxation authority are similar to those
Although, local governments in Pennsylvania described for Canada.
(one state out of 50 states) account for 2,800 of
the total, localities in fifteen other states also rely All local taxes in the United States are
on this tax.6 Further, local income taxation is permissive taxes. As noted, the property tax is
primarily a municipal tax, but in some states used almost everywhere. Nearly all cities impose
(Indianna and Maryland, for example), it is a a sales tax if given the authority, but this is not
county tax. As well school districts rely on
7
income tax revenues in Pennsylvania, For a discussion of local income tax structures and
issues in the United States, see Robert L. Bland
(1989), A Revenue Guide for Local Government
6 (Washington, D.C.: International City
James D. Rodgers and Judy A. Temple (1996),
Management Association), at 89-101.
“Sales Taxes, Income Taxes, and Other
8
Nonproperty Tax Revenues”, in J. Richard Rodgers and Temple (1996), supra footnote 5, at
Aronson and Eli Schwartz, eds., Management 242-245.
Policies in Local Government Finance, Fourth 9
Ibid, at 232-234.
Edition (Washington, D.C.: International City
10
Management Association), 229-258, at 242-243. Bland (1989), supra footnote 6, at 51-67.
true for the income tax. For example, all cities in Ohio, Kentucky, and Michigan. Yonkers and
Georgia and Michigan have the option to use an New York City’s income tax is piggybacked onto
income tax, but only about 20 cities in Michigan the state income tax. For income and sales taxes,
have adopted it. Georgia is a different case. The the state frequently regulates the tax rate or range
state law says that a city can impose an income of tax rates that can be used.
tax only if a majority of the registered voters (not
the actual voters) approve it. With voter turnout Nordic countries: The best known examples
generally less than 50 percent, approval is of local income taxes are in these countries
unlikely to be forthcoming. (Sweden, Norway, Finland, Denmark) where it is
the only local tax of any significance (Table 1).
Property taxes are administered and Local income taxes are basically levied at a flat,
collected at either the county level (most locally established rate on the same tax base as
common) or by cities. Local governments are the national income tax and collected by the
free to set their tax rates but the tax base is central government. The progressive part of the
essentially controlled by state policy (legislation) rate structure is the central income tax. After the
and practice (similar to Canada). Most sales taxes local income tax is collected by the central
are piggybacked onto the state tax with the state government, these revenues are then remitted to
collecting the revenue and remitting it to the each local jurisdiction.
originating municipality. Income taxes are
collected by the municipality in Pennsylvania,
What is the role for local taxes? fee or tax per unit of output equals the extra cost
To answer the first question, let us turn to of the last unit consumed. This is the well-known
the constitutional place of local governments in marginal cost pricing principle. The price or fee,
most countries, especially in federal by definition, indicates what consumers are
jurisdictions.13 Local governments are generally willing to pay for this good and marginal cost, by
‘creatures of the state’. Because of this, it is definition, measures the cost of resources used up
appropriate to examine their fiscal roles and in producing that unit. Perhaps this could be
responsibilities within the principal-agent illustrated by reference to a simple example.
model14 of state-local fiscal arrangements. In this Suppose the extra (marginal) cost of producing
model, local governments are the agents while the last litre of water is 10 cents and customers
the state is the principal. The latter has the power are willing to pay 15 cents for it. This is not an
to alter jurisdictional boundaries, to change efficient level of output because the value that
revenue and expenditure responsibilities of the customers place on this litre is greater than the
agent, and to change intergovernmental fiscal cost of producing it. In other words society is the
arrangements to overcome differing objectives beneficiary of a net gain of 5 cents for this unit.
between the principal and the agent. Within this Collectively, society would be better off if water
context, the role of the agent is to provide and consumption increased as long as the price paid
fund services that benefit local constituents; for each additional unit exceeded the cost of
hence, financing of each service is best addressed producing that unit; that is, for each of these
on the basis of benefits received from local units, marginal benefit would exceed marginal
services. cost - a net gain. If, on the other hand, the
marginal cost of producing the last litre is 10
In principle cents and customers are only willing to pay 5
The underlying principle of the benefits cents for it, this is not an efficient level of output
received model of local finance is straight- either. The benefit that customers get from this
forward: those who benefit from local public unit is less than the cost of the resources used up
services should pay for them. Economic in producing it and society is worse off – worse
(allocative) efficiency15 is achieved when the user off by 5 cents for this unit. As long as the extra
cost of producing the unit is less than its price,
13
Harry Kitchen (2001), “Models of Decision- society is devoting too many resources to its
Making and Collaboration (for Local Government) production. It follows, then, that resource
in Federal Systems”, Mimeograph. efficiency is achieved where marginal cost equals
14
For a discussion in the provincial-municipal price because this is the point where society
context, see Richard M. Bird and Duan-jie Chen secures the greatest net gain from the
(1998), “Federal Finance and Fiscal Federalism: consumption of this service.
The Two Worlds of Canadian Public Finance”,
Canadian Public Administration, 1 (Spring): 50- The preceding paragraph makes it clear that
74. the main economic reason for imposing correctly
15
Economic efficiency is more than technical designed fees or taxes on recipients (individuals
efficiency- the latter is a necessary but not or businesses) of local government services is to
sufficient condition for economic efficiency. provide local government with incentives for
Technical efficiency exists when a producing unit using its resources in the most efficient manner
(firm, government, commission) operates in a way possible. The goal of maximizing efficiency in a
such that it is not possible to secure any additional local government’s provision of services is not an
output given the available inputs (labour, material objective dreamed up by some economist. It is
and capital) and level of technology. In other
simply common sense. Surely any society should
words, technical efficiency is achieved when the
output per unit of input is maximized or the cost
per unit of output is minimized. This, it should be
production of a specific good or service. Finally,
noted, is not concerned with whether one good or
as the level of technology advances, a technically
service generates more or fewer net benefits than
efficient production process leads to increased
another good or service. It simply concentrates on
output with the same inputs.
the efficient employment of inputs in the
Grants from senior levels of government Here, there is a strong defense for using
also have a role in funding local services. property taxes.25 First, the tax base is largely
Specifically, conditional grants should be used
23
for partial or full funding of services generating Charles, E. McClure Jr. (2001), “The Tax
spillovers and for services in which the state has Assignment Problem: Ruminations on How
an interest (to ensure uniform or minimum Theory and Practice Depend on History.” National
standards, for example). Unconditional grants Tax Journal, Vol. LIV, No. 2, 339-363.
play a role in filling the fiscal gap (mismatch in 24
Bird (2001), supra footnote 2; Richard Bird
local own source revenues and expenditure (1999), “Rethinking Tax Assignment: The Need
responsibilities) and in supporting municipalities for Better Subnational Taxes”, draft paper, Fiscal
in their attempts to provide comparable levels of Affairs Department, (Washington: International
service for comparable tax rates (equalization).22 Monetary Fund); Wallace E. Oates (1998),
“Federalism and Government Finance”, in Wallace
21 E. Oates (ed.), The Economics of Fiscal
Under this view, user fees or charges are retained
Federalism and Local Finance (Cheltenham, UK:
for funding those services whose costs and benefits
An Elgar Reference Collection).
can be assigned to specific properties or
25
individuals (water and sewers, and a portion of A discussion in support of property tax funding for
transit and recreation, for example). For an local public services that provide benefits of a
excellent discussion of the benefit model of local collective nature to the local community is found
finance, see Richard M. Bird, “Threading the in John Bossons, Harry Kitchen, and Enid Slack
Fiscal Labyrinth: Some Issues in Fiscal (1993), "Local Government Finance: Principles
Decentralization” (1993), vol. XLVI, no. 2, and Issues", an unpublished paper for the Ontario
National Tax Journal, 207-227. Fair Tax Commission, Toronto; Almos Tassonyi
22 (1993), “The Benefits Rationale and the Services
Robin W. Boadway and Paul A.R. Hobson (1993),
Provided by Local Governments”, an unpublished
Intergovernmental Fiscal Relations in Canada
paper for the Ontario Fair Tax Commission,
(Toronto: Canadian Tax Foundation), chapter 3.
Toronto; Paul A.R. Hobson (1997), “Efficiency,
immobile and therefore, relatively efficient use it in isolated hamlets or communities where
because distortions in economic behaviour are there is no clearly functional market for property
minimized.26 Second, it is effective in funding, values because the government owns most of the
partially at least, those services whose collective housing and rents it to occupants.30
benefits accrue to the local community; hence, it
satisfies the benefits received criteria. Third, Other taxes have also been defended at the
given that no single tax or two taxes are deemed local level, even though they are generally less
to be entirely fair and distortion free, there is effective at satisfying the criteria for a good local
considerable merit in a state or national tax tax. These include an income tax on individuals,
system that employs a mix of taxes including a some type of consumption based tax that could
local property tax. include a general sales tax, a hotel and motel
occupancy tax, an automobile fuel tax, and a
The property tax that is most frequently local automobile registration tax. The only local
defended, because it is used in this way in most tax currently used, by itself, in place of the
developed countries, is one that is based on property tax is a local income tax. Support for it
market values. But this need not be the case. It is is generally based on the following arguments.
just as defensible to support a local property tax
that is based on unit-value or area assessment. First, it is more progressive than the
Here, the tax base consists of a combination of property tax in its distributional impact on local
building area and lot area. For each property, taxpayers. Second, its use would permit local
assessed value is the sum of lot area times an governments to cast a wider net in capturing
assessment rate per square metre plus the revenues from those who benefit from municipal
building area times an assessment rate per square services - residents, commuters and visitors. As
metre of building area.27 noted above, a key tenet of the benefits model of
Unit value has been used in Israel and in local government finance is that those who enjoy
Rotterdam. It is also used in some economies in the benefits of local services should pay for them.
transition28 (Poland and Ukraine, for example) Recent U.S. evidence suggests that the cost of
where the absence of developed property or real inner city services used by people who live in the
estate markets makes it difficult to determine suburbs and commute to work (in the city centre)
market value.29 Similarly, it may make sense to exceeds, sometimes substantially, the taxes they
pay for inner city services.31 For these services,
an income tax and even a sales taxes could be
Equity and Accountability Issues in Local more effective at linking the costs and benefits of
Taxation” in Urban Governance and Finance: A services than the property tax. Third, it is more
Question of Who does What, edited by Paul A.R.
revenue elastic than the property tax – a useful
Hobson and France St-Hilaire (Montreal: The
Institute for Research on Public Policy), 113-131
at 117-118; and see Harry M. Kitchen (2002),
Youngman and Jane Malme (2000), An
Municipal Revenue and Expenditure Issues in
International Survey of Taxes on Land and
Canada (Toronto: Canadian Tax Foundation),
Buildings (Netherlands: Kluwer Law and Taxation
chapters 3 to 5.
Publishers), p. 18.
26
McClure (2001), supra footnote 22. 30
Harry Kitchen and Enid Slack (Dec. 18, 2001),
27
Harry Kitchen (August 1989), "Alternative “Providing Public Services in Remote Areas”, a
Methods of Taxation and Assessment", a report paper prepared for the World Bank Institute,
prepared for the Task Force on Reassessment in Washington, D.C., p. 9.
Metropolitan Toronto (mimeograph, Toronto), part 31
Howard Chernick and Olesya Tkacheva (August 5,
VII.
2002), “The Commuter Tax and the Fiscal Cost of
28
Jane Malme and Joan Youngman (2001), The Commuters in New York City” State Tax Notes,
Development of Property Taxation in Economies Vol. 25, No. 6, August 5, 2002, at 451-456; and
in Transition, (Lincoln Institute of Land Policy). Howard Chernick, “The Effect of Commuters on
29 the Fiscal Costs of the District of Columbia”
Estonia, Poland, Czech Republic, Slovakia,
(December 2002), mimeograph, 36 pages.
Russia, and Armenia, for example. See Joan
feature for local governments faced with Fourth, access to other tax sources may
increasing cost of local services. Fourth, it may permit local governments to avoid large property
be administratively easier for local governments tax increases. Politically, this can be attractive
in some countries to piggyback onto the state given the extent to which increases in property
income tax than it would be to set up a new taxes are highly visible and often unpopular with
locally administered property tax system. local taxpayers.
Many local governments in the countries In general, arguments for more than one tax
summarized in this paper (Tables 1 and 2) at the local level are particularly strong for large
currently rely on more than one local tax. In cities and city-regions, particularly when tax
addition to the comments in the preceding rates are set locally. Large cities and city-regions
paragraph, there are solid arguments for a mix of would be able to collect considerable revenues
local taxes.32 First, any single tax like the from these sources.
property tax is almost certain to create local
distortions, some of which could be offset by Are there other theories of local taxation?
other taxes. For example, the property tax may As noted in this section, the benefits based
discourage investment in housing. A personal model of local taxation is an appropriate model
income tax, on the other hand, may encourage for addressing local tax issues. Are there other
investment in owner-occupied housing because theories of local taxation that might be
the imputed income of owner-occupied housing appropriate? In general, the answer is no.
is not taxed. By relying on a number of different
tax sources, there is the possibility that the Discussion of taxation based on ability to
distortions in one tax could be counteracted by pay criteria – an alternative to benefits received
the distortions in other taxes. taxation - is commonly used for evaluating
national, state, region, or provincial tax policy
Second, additional tax sources would make where these more senior levels of government
the overall local tax structure more flexible, thus have access to a wide range of tax instruments
permitting local governments to choose taxes that and where they are responsible for funding
fit local conditions and circumstances. For services that are more income redistributional in
example, sales taxes might be chosen in nature. Ability to pay as a base for local taxation
situations where the benefits of services are is not thought to be appropriate for at least two
enjoyed by commuters and visitors. Property reasons. First, the constitutional role of local
taxes might be chosen where there is a need for a government in every developed country makes
stable revenue source. them creatures of the province, state, canton, or
laender with their flexibility and choice of tax
Third, additional tax sources could increase instruments severely restricted and controlled.33
the revenue elasticity of the local tax base and Second, services provided by municipal
allow it to adapt more easily to rising costs and governments or that ought to be provided by
service demands. The property tax is not an municipal governments are those that are most
elastic source of revenue because it does not efficiently and equitably funded from benefits
increase very quickly in times of economic based taxes (see section D.1 below) at the local
growth (or decrease very quickly in time of level.
economic slowdown). Other tax sources (such as
sales and income taxes) are more elastic sources Issues in Local Taxation
of revenue and would allow municipalities to Recent trends, in most countries over the
benefit from economic success and to share in past decade, have displayed the following
economic failure. pattern. Senior levels of government, almost
everywhere, have devolved additional spending
responsibilities onto local governments while
32
Rodgers and Temple (1996), supra footnote 5, at
229. 33
Kitchen (2001), supra footnote 12.
simultaneously reducing grant funding for these If the benefits of a particular service accrue
governments.34 To offset this, municipalities have almost exclusively to local residents, then the
increased their reliance on own source revenues - local government should be responsible for
user fees, permits, charges and whatever local setting policy, acting as service manager and
taxation powers they have. At the same time, the financing the service. If spillovers arise, there is a
growing importance of globalization has role for transferring responsibility for the service
increased the importance of international cities. to a higher level of government to ensure the
Cities are the major incubators of economic provision of the appropriate quantity and quality
prosperity and the quality of urban life has of service. If the spillovers are province-wide or
become a prime determinant of location decisions state-wide, then the responsibility should be at
made by firms and investors. International cities the provincial or state level. If the spillovers are
do not speak through their state or central not province-wide but affect an area larger than
governments; rather they speak for themselves. the municipality, there may be a case for
In this context, there has been increasing establishing a district, regional or metropolitan
pressure, in some countries, to give cities access governing structure in order to internalise these
to additional taxes and greater autonomy in externalities.
making their own fiscal decisions.
Redistribution of Income: In general, the
These trends or patterns raise a number of central or state level of government should pay
fiscal issues that are important for local for programs whose primary purpose is the
governments in any country. These will be redistribution of income.35 The reasons for this
discussed within the benefits based taxation are twofold: first, the more senior levels of
model and will draw upon practices in a number government have access to a broader mix of
of countries. Some of the discussion may repeat taxes, some of which are more closely related to
what has been mentioned above but only where ability to pay: the income tax, for example.
the repetition is intended to help in emphasizing a Second, specific income redistribution programs
point or points. are more effective if administered across larger
geographical areas, where there is a greater
What public services should local taxes fund? opportunity to redistribute income from rich to
Within the benefits based model of poor. This does not, however, suggest that these
financing public services, local taxes should fund services need to be delivered by federal or
those services that benefit local provincial governments. Their delivery might be
residents/taxpayers. In general, this means that more appropriate if handled locally where
local governments should fund a service unless it administrators are familiar with local
generates ‘spillovers’ or involves a redistribution circumstances and in a better position to
of government. accommodate specific circumstances. Also, local
delivery might be preferred if it generates cost
Spillovers: This occurs when the provision savings although a potential downside of this
of a specific service in a municipality affects may be a loss in accountability that often surfaces
residents of other municipalities. Spillovers when one level of government spends the money
(externalities) may consist of two types. Positive that is raised by another level of government.
spillovers occur if residents of neighbouring
municipalities receive a given service free of Local Preferences: For those services where
charge or for a user fee or tax that is less than the spillovers are not prevalent and income
service’s cost. Negative spillovers occur when redistribution is not an objective, a strong case
residents of neighbouring municipalities incur
costs for services from which they derive no 35
benefit or over which they have no control. While some elements of income distribution are
inherent in most public services, income
distribution services here include welfare
payments, children’s aid, social housing and
34
Ibid. income transfer, to name the most obvious.
exists for local responsibility (sometimes, criterion, the preponderance of state standards or
referred to as satisfying the subsidiarity regulations suggest that it should be responsible
principle). A major advantage of this is that local for almost all services currently provided by local
preferences can be reflected in service levels and government. As long as there is a local
quality – an important consideration in securing government, this should not happen.
efficient and accountable local government. In
addition, if each municipality is responsible for a Economies of scale is likewise dismissed as
given service, a competitive environment will a criterion, primarily because it is generally
arise, in the sense that neighbouring associated with service production and delivery
municipalities will be able to benchmark the cost and not decision-making and funding
of providing the service with each other; the responsibility. Distinguishing between decision-
result will be stronger incentives for efficient and making and funding from actual production and
effective service provision. The same argument delivery is important. The latter may be handled
may be made for permitting neighbourhoods in a number of ways – by the governing unit
within municipalities to have different service itself, by contracting out to the private sector, or
levels; that is why some large cities have a by buying from another governing unit.
number of separate tax areas where different Decision-making and funding responsibility is
levels of taxation fund different levels of different. It must be left with the local
service.36 government which, in turn, must have the
appropriate funding tools for financing local
Other considerations: In addition to decisions.
spillovers and redistribution, some observers cite
the supposed advantages of uniform state-wide or Although these principles are easily
country-wide standards and economies of scale described, the actual task of assigning policy
as reasons for assigning the responsibility for setting responsibility and funding to either the
particular services to senior governments rather state or municipality on the basis of these criteria
than local governments. Senior government is not as clear-cut as it may appear. Some
responsibility is required, the argument goes, to individuals might perceive significant spillovers
achieve a minimum uniform standard across the in certain services while others do not. Some
state or country. State or central government might view some services as being entirely
responsibility is also appropriate if state-wide or driven by local preferences while others might
country-wide service delivery results in not. The allocation of service responsibility to a
economies of scale. particular level of government, then, partially
reflects the views of the individual(s)
Neither of these arguments for assigning determining the allocation. In spite of the
expenditure responsibility and hence, funding difficulties in assigning unequivocal
these services from locally generated revenues is responsibility for services such as land
accepted here. State or provincial governments in ambulance, police, public transit, to name three,
most countries already set standards for many there are many on which most analysts, policy
locally provided and locally funded services makers, municipal officials and local citizens
including safety standards for building codes, could likely agree. In particular, these include
police and fire protection; planning and zoning state or provincial responsibility for all income
regulations; environmental controls and redistributional services such as social services,
requirements for water supply, sewage treatment care for the aged and day nurseries, and social
and solid waste; quality standards for roads; and housing. As well, there is general agreement that
so on. If uniformity in service standards were a the local sector should be responsible for local
streets and roads, water, sewer and solid waste,
36
public parks and recreation, sidewalks and street
The City of Halifax in Nova Scotia, Canada has lighting, fire protection and so on. In general,
over 60 sub areas where tax differentials fund
application of these principles in assigning
similar services of differing levels - see the Annual
Budget of the City of Halifax.
service responsibility generally results in a
provincial/municipal allocation of major services supplement to the property tax. If sales or income
that is similar to that in Table 4. Given that local taxes fall on local residents, their incidence may
governments ought to be responsible for services be more progressive than the property tax
that benefit local residents either directly or (injecting some elements of ability to pay into the
collectively, it follows that they ought to have local tax system). In addition, their use would
access to revenue sources permitting them to permit local governments to collect revenue from
cover costs. Some of these revenue issues are commuters and visitors. They are more revenue
discussed next. elastic than the property tax and will almost
certainly be easier to administer if they are
Is one tax preferred over other taxes? piggybacked onto the state tax with tax rates set
The information in Table 1 illustrated the locally. A major problem with these taxes is that
different taxes on which local governments rely they may be exported which has the potential to
to finance local government services in a number reduce local accountability and lead to
of countries. Clearly, as discussed above, there is inefficiencies in the allocation of local resources.
no obvious tax that stands out as the best or ideal
tax in every instance. The property tax has often In summary, there is no single local tax that
been defended as the best local tax because its is unequivocally preferred over other taxes.
base is immobile; the residential portion cannot Where the local public sector is well developed
be exported; it permits local governments to tax and plays an important role in financing a
those residents who benefit collectively from number of expenditure responsibilities, there are
local services; 37 and its high visibility helps to solid arguments for giving local government
ensure that local governments work in an access to a range of taxes. Where the local public
accountable, transparent, and efficient manner. sector is less well developed and expenditure
Critics of the property tax have argued that it is responsibilities minimal, access to one local tax
difficult to administer,38 especially if the tax base may be sufficient. In deciding which tax or taxes
is property value and a proper functioning real are appropriate for local governments, a number
estate market does not exist.39 As well, it is a of factors come into play, not the least of which
poor tax when it comes to taxing commuters and is the local government’s ability or capacity to
visitors, and it is not revenue elastic. In some administer local taxes, the kinds of public
countries where property taxes have been the services funded by local taxes, and the tax culture
backbone of local finance, there is increasing of a country (are taxpayers inclined to support
concern as to whether or not it can continue as taxes on the basis of benefits received or are they
the only major tax available to local governments more inclined to support taxes based on ability to
if the latter are to be fiscally sustainable. pay).
Local income and sales taxes are also used Who should set local tax rates?
in a number of countries. While neither of these International experience tells us that local
adhere to the benefits based model of local governments are more responsible, efficient and
taxation as closely as the property tax, they may accountable if they are required to fund their
be designed to capture benefits in a more round expenditures from locally generated revenues.
about way and both can be useful components of This includes setting local tax rates. Additional
a local tax system – either alone or as a autonomy could also be achieved if local
governments were free to establish and determine
37 their local tax base, however, high administrative
User charges should be used for those services that
benefit to specific individuals. costs of doing so generally argue against it. For
38
See the property tax paper by Harry kitchen in this
income and consumption based taxes, it is far
series of papers. less expensive to piggyback onto an existing state
39
One way around this would be to ignore market
value and to tax the square metre of land and
buildings. One could even have a different tax per
metre for buildings and for land.
tax with local governments setting the local tax needs to rest with the taxing jurisdiction that sets
rate. For property taxation where a senior level of the tax rate.
government is not involved, local administration
will be necessary. Should local tax rates be uniform or
differentiated across a municipality?
For single tier local governments, local tax Given that local governments should be
rates should be set by the governing council of responsible for setting their own tax rates, there
the jurisdiction responsible for spending the is the question of whether or not these rates
money. For two-tier local governments where the should be uniform throughout the entire
lower tier is responsible for a range of services jurisdiction or whether they should be
and the upper tier (that encompasses a number of differentiated across property types and
lower tiers) is responsible for services that spill geographical areas within the jurisdiction.
over the lower tier boundaries,40 the lower tier Whether a tax should be differentiated or not may
should set its own tax rates and the upper tier also depend on the type of tax or the way it is
should set its tax rates. This practice follows the administered.
principle that those who spend the money should
be responsible for raising it. Under benefits based taxation, individuals
and businesses that benefit from local public
The practice of having each tier of local services should pay for them. Where these
government in a two-tier structure set its own benefits vary by individual, by property type, or
property tax rate on the same property tax base is by area of the municipality, a case exists for
common in Canada. In some U.S. states, the charging differential taxes to the extent that it is
application of a local sales tax or income tax to possible.
the same tax base as used by the state is common
practice. These examples suggest that it is not For a local tax, such as the property tax,
uncommon for different levels of government to differential tax rates are justified on a number of
impose different tax rates on the same tax base. grounds.42 First, they are fair on the basis of
Nor does it follow that the level of government benefits received as long as the tax rate is set to
that sets the tax rate need collect the tax revenue. capture the cost of municipal services used up by
Returning to the Canadian experience, let us different property types or property location.
consider the province of Ontario. Here, all Second, they are efficient if they reflect
regional and county governments (upper tier) set differences in the cost (production,
their own taxes independently of the tax rates set environmental and social) of delivering services
by the local municipalities (lower tier). The local to different property types. In other words, if
municipalities then send out combined tax bills some properties or property types are more
and collect both upper and lower tier taxes. This expensive to service, a case can be made for
practice has been around for years and has been differential property tax rates. Failure to correlate
fiercely defended in the presence of a number of benefits from local government services, as they
proposals to migrate billing and collection to the are reflected in effective property tax rates, with
upper tier where cost savings could be achieved the extra cost of services consumed (or an
because of distinct economies of scale that are approximation of it) leads to a redistribution of
present in this operation.41 Billing and collection income that is not neutral. If the effective tax rate
is an administrative function and has nothing to exceeds the extra cost of delivering the service,
do with policy setting or decision-making; hence, incentives exist for people or businesses to
there is no reason why billing and collection relocate to lower taxed areas unless they are
willing to accept lower property values. Third,
40
See Enid Slack’s paper in this series of papers. variable tax rates have a further advantage in that
41
W. Douglas Armstrong and Harry Kitchen (May,
42
1997), Peterborough County/City Municipal Enid Slack (2002), “Property Tax Reform in
Review: Final Report, (Peterborough: Joint Ontario: What Have We Learned?” Canadian Tax
Restructuring Steering committee), pp. 125-127. Journal, Vol. 50, No. 2, 576-585.
they could be used to distort decisions employer also knows the residence of all
deliberately to achieve certain municipal land use employees and could apply the rates accordingly.
objectives. For example, if higher tax rates slow
development and lower tax rates speed up For consumption-based taxes, however,
development, a deliberate policy to develop differentiated tax rates are not administratively
certain neighbourhoods instead of others might possible. A local sales, fuel or hotel and motel
be achieved through different tax rates for occupancy tax, for example, is collected by the
different locations. vendor. The vendor could not be expected to
charge different rates to different customers on
Variable property tax rates have recently the basis of residency or some other
grown in popularity in some jurisdictions; for characteristic of the customer.
example, municipal governments are now
permitted to use variable property tax rates in Should local tax rates be regulated?
three Canadian provinces - British Columbia, Regulation of local tax rates may depend on
Alberta, and Ontario. Variable tax rates may also the type of tax used and the role it plays within in
be achieved by applying the general property tax a country. If local governments use taxes that are
rate to one or more groups of properties (certain only in their domain (property tax, for instance)
neighbourhoods or downtown business area, for and if their tax rates are set to generate required
example) whose assessments have been increased revenues for funding local services, there are no
because these properties receive additional solid economic or political arguments for
municipal services. Special assessments and regulating the general tax rate. In democratically
special area financing are common in some elected local councils where all decision-making
municipalities; for example, the city of Halifax in responsibilities rest with local councils,
Canada has over 60 such areas with different citizens/taxpayers have the ultimate control or
rates. power over council’s tax decisions – the
opportunity to vote the politicians out at the next
Differentiated local income tax rates are not election.
common, but they do exist in a few cities in the
United States. Use of two different rates can be If, however, local governments share the tax
justified on benefit grounds. Those who work and base with a senior level of government, yet have
live in the same city benefit from city services the power to set their own rates (which they
and should pay for them. Those who work in one should, as was argued earlier), there may be a
city and live in another community still benefit case for regulation if the rate setting action of
from some of the former city’s services – local local government creates spillover or externality
roads and streets, sidewalks, police and fire problems for senior governments. For example, if
protection and so on. For this, they should also state or central and local governments have
pay a tax, although at a lower rate than the tax on access to the same income tax or sales tax system
residents. In cities where split rates are used, the and if the senior level of government lowers tax
practice is to impose a lower rate of income tax rates to achieve important state or national goals
on commuters (those who work in the taxing (to foster economic growth or to enhance
jurisdiction but live elsewhere) and a higher rate competitiveness, for example), they may wish to
on residents. Here, it should be noted that New regulate what local governments do to prevent
York City in 1999 dropped its income tax on the latter from increasing its tax rates to take up
commuters in spite of solid analytical and the vacated tax room. While regulation here
empirical support for continuing with it.43 The would be justified, significant funding problems
administration of split rate local income taxes is may still exist for local governments that need
fairly straight-forward. The employer withholds tax revenue to meet expenditure needs.
the tax and remits it to the government. The
A further externality argument for regulation
arises in instances where local governments tax
43
Chernick and Tkacheva, (2002), supra footnote 30.
businesses. If the local tax on business is set to
recover the cost of services used, it is efficient, differential tax rates - are almost always imposed
fair and accountable. The practice in many on non-residential properties when compared
countries, however, is for local taxation to with residential properties. This practice is
overtax business, thus creating potentially serious inefficient because property taxes from non-
economic problems for the entire state or residential properties are used to subsidize
country. To prevent harmful and serious services consumed by the residential sector.
consequences, there may be a case for some state Since service levels in any municipality are
regulation.44 This is discussed in more detail driven primarily by the demands of the
below under the taxation of businesses. residential sector (they vote), their subsidization
means that the residential tax rate will be less
Regulation has also been defended as a way than it would be in the absence of the subsidy and
of controlling local government service costs. an oversupply of municipal services could
Cost efficiency in service provision, however, is follow. Equity is not achieved either if those
more effectively achieved through the benefiting from the services are not paying full
introduction of competitive elements in the costs.
production and delivery of each public good and
service, not through regulating tax rates. This heavy taxation of the non-residential
sector has been addressed in two Canadian
Should local government tax business? studies that compared the property tax paid by
Depending on the country, local government non-residential properties with the cost of
taxation of businesses may include a property tax municipal services consumed by these properties.
on commercial and industrial properties, a tax on Both studies46 found that the residential sector
capital, a corporate income tax and a range of when compared with the non-residential sector is
other industry and commerce taxes.45 The the recipient of proportionately more benefits
strongest economic argument for local taxation of from local government services (social services,
commercial and industrial properties is to tax elementary and secondary education, libraries,
them in order to recover the cost of local public recreational facilities, etc.). When combined with
services that they use. Where specific higher effective property tax rates paid by the
beneficiaries of these services can be identified, non-residential sector, the studies concluded that
user charges are preferred. Where user charges the latter is over-taxed and the residential sector
are not possible because specific beneficiaries under-taxed. Beginning in 1995, this prompted
cannot be identified, some type of general tax the local council in the City of Vancouver to
levy may be appropriate. Under the benefits shift, over the ensuing five years, some of its tax
based model of local taxation, this approach fits burden from the commercial and industrial sector
with the model of a good local tax – immobile onto the residential sector. More recently, the
base and limited opportunity for exporting the tax provincial government in Ontario announced that
to other jurisdictions. tax increases beyond the range of fairness47
(established as a standard that is defined by
Local government taxation of non- taking the ratio of commercial/industrial taxes to
residential property is almost never efficient or single dwelling residential property taxes) must
fair. For example, in countries with a fully
developed property tax system, higher taxes - 46
either through assessment differentials or Harry M. Kitchen and Enid Slack (1993), Business
Property Taxation, Government and
Competitiveness Project Discussion Paper no. 93-
44
Richard M. Bird and Thomas A. Wilson, (June 24 (Kingston, Ont.: Queen’s University, School of
2003), “A Tax Strategy for Ontario”, a paper Policy Studies, 1993); and KPMG, “Study of
prepared for the Panel on the Role of Government Consumption of Tax Supported City Services”, a
in Ontario. report for the City of Vancouver, mimeograph,
45 1995.
Giancarlo Pola, ed. (1991), Local Business
47
Taxation: An International Overview (Milano: For a discussion of this, see Kitchen (2002), supra
Vita e Pensiero) footnote 24, at 108-109.
be imposed on the residential sector and not on While it is uniformly accepted that the cost
the commercial/industrial sector. of doing business is an important factor in
location decisions, there is less consensus on the
A more recent study in the United States role played by property taxes in this decision.
found similar results. Specifically, it was The evidence, most of which is drawn from the
estimated that the ‘business related’ share of U.S., suggests that property tax differentials are
combined state and local expenditures in the relatively unimportant in inter-municipal or inter-
United States is about 13 percent, although there regional location decisions but do play an
is considerable variation from state to state.48 important role in intra-municipal or intra-regional
These businesses, however, pay proportionately location decisions.50 In other words, property tax
more of the state and local taxes. differentials are unlikely to affect a firm’s
decision to locate in a specific city-region, but
Further concerns with this heavy of the non- once it has decided to go there, property taxes
residential sector arise because this tax represents may play a role in where it locates within that
a fixed charge that the firm must pay. This, by region. To this extent, higher effective tax rates
the way, is the same criticism that is directed at on commercial and industrial properties in one
capital taxes. Both taxes are fixed in the sense municipality within a region or area when
that they are unrelated to the value of municipal compared with neighbouring municipalities
services consumed or profits earned. As long as create an incentive for firms and businesses to
the tax rate is more than necessary to cover the locate in the lower taxed municipalities. In the
cost of the last unit of municipal services extreme, one might expect these property tax
consumed or if there are no economic rents for it differentials to produce a heavy (why not all)
to capture, resources will be allocated concentration of all firms and businesses in the
inefficiently. This over-taxation of the non- lower taxed jurisdictions. In other words,
residential sector may lead to less economic intramunicipal tax competition51 could be
activity, lower output, fewer jobs and a less potentially destructive if it led to a race to have
competitive business environment.49 the lowest tax rates. A recent study on
municipalities in British Columbia examined this
There is also an issue of whether taxes on issue and concluded that while there is some
non-residential properties play a role in location evidence that municipalities react to tax increases
decisions. Since firms and businesses generally of their neighbours, there is no widespread
locate where they can maximize profits, the destructive competition for capital.52 Similar
provision of fiscal inducements such as lower studies in the U.S., however, have concluded that
property taxes can influence a firm’s location property tax competition among neighbouring
decision in the same way as the reduction in municipalities is much more prevalent and wide
other production costs may play a role. The spread.53
impact of property tax differentials depends on a
number of factors including the size of the 50
Kitchen and Slack (1993), supra footnote 45.
differential between competing municipalities Similar comments were made by officials of the
and whether this differential is sufficient to offset Greater Toronto Marketing Agency in December
differentials in other costs or market factors. of 2000.
51
Tax competition is addressed in a paper by
48 Francois Vaillaincourt in this series of papers.
William H. Oakland and William A. Testa,
52
“Community Development-Fiscal Interactions: Craig Brett and Joris Pinkse (2000), “The
Theory and Evidence from the Chicago Area”, determinants of municipal tax rates in British
Working Paper Series No. 16 (Chicago, IL: Columbia”, Canadian Journal of Economics, vol.
Research Department: Federal Reserve Bank of 33, no. 3, 695-714.
Chicago. 53
Jan K. Brueckner and Luz A. Saavedra (2001),
49
Report of the Technical Committee on Business “Do Local Governments Engage in Strategic
Taxation (April 1998), (Ottawa: Department of Property-Tax Competition?” National Tax
Finance) at chapter 2. Journal, Vol. LIV, No. 2, 203-229.
In reality, the extent to which firms and residents, thus leading to an improved allocation
businesses respond to tax differentials depends of resources and an increase in local
on many factors. These include, for example, the accountability. Tax exporting refers to situations
importance of being in the core of the region or in which some portion of the burden of a tax is
area for business reasons; the opportunity to shift borne by non-residents either through changes in
the tax differential on to consumers (of the final relative commodity prices or in a change in the
service or product), employees and owners; and net return to foreign owned factors of production
the enhanced amenities that may be offered by a (inputs in the production process). For example,
‘downtown location.’ if higher effective tax rates on commercial and
industrial properties lead to relatively higher
In a U.S. study of individual office buildings prices charged on the sale of that community's
in downtown Chicago, it was found that 45 exports (to other communities), the taxing
percent of property tax differentials were shifted jurisdiction will have effectively shifted part of
forward onto tenants as higher gross rents per its tax burden onto residents of other
square foot and 55 percent were borne by communities. If the non-residential tax in every
owners.54 Some firms are apparently willing to jurisdiction is exported to some extent, those
pay a premium to locate in the downtown core. jurisdictions exporting relatively more of the
This suggests that those firms benefit from non-residential property tax will be better off
‘economic rents’ created by that location; large than those jurisdictions exporting relatively less.
financial institutions, for example, may benefit In particular, if the burden of this tax is shifted
from a downtown location. Taxing these rents is from residents of high income jurisdictions to
efficient from an economics standpoint because it those of low income jurisdictions, the distribution
will not impact on the location decision. It is of income among jurisdictions is worsened.
difficult to know, however, the extent to which Furthermore, this may run counter to state
economic rents exist. In other words, it is equalization schemes that are aimed at
difficult to know at what rent (or property tax) redistributing resources (income) from relatively
level a firm will choose to move out of the high income jurisdictions to relatively low
downtown location. income jurisdictions.
There is at least one more positive effect that The limited evidence on tax exportation in
could arise from shifting the tax burden away Canada covers a sample of the larger
from the non-residential sector.55 Reducing the municipalities in the province of Ontario.57 The
property tax burden on this sector would reduce results suggest that the degree of exportation
the potential for exporting56 the tax to non- ranged from a low of 16% of the non-residential
tax burden to a high of 106%. More than this,
relatively rich municipalities had relatively high
54
McDonald, John F. (1993), “Incidence of the exporting rates whereas relatively poor
Property Tax on Commercial Real Estate: The municipalities had relatively low tax exporting
Case of Downtown Chicago, National Tax rates. Here, the practice of exporting the property
Journal, 109-120.
tax results in an implicit transfer from relatively
55
Sylvester Damus, Paul Hobson and Wayne Thirsk low income municipalities to relatively high
(1987), The Welfare Effects of the Property Tax in income municipalities.
an Open Economy, Discussion Paper No. 320
(Ottawa: Economic Council of Canada); and
Shantayanan Devarajan, Don Fullerton, and
Richard A. Musgrave (April 1980), "Estimating 57
For elaboration on this, see Wayne R. Thirsk,
the Distribution of Tax burdens: A Comparison of
(1982) "Political Sensitivity Versus Economic
Different Approaches," 13 Journal of Public
Sensibility: A Tale of Two Property Taxes," in
Economics, 155-82.
Wayne R. Thirsk and John Whalley, eds., Tax
56
Of course, the ability of a firm to export will Policy Options in the 1980s Canadian Tax Paper
depend on the elasticity of demand for the no. 66 (Toronto: Canadian Tax Foundation) 384-
exported product. 40.
Furthermore, when the commercial/industrial What are the conditions for local government
sector exports its tax burden, municipal fiscal sustainability?
government accountability is weakened because Recent trends around the world to
the direct link between the government decentralize additional funding requirements
responsible for local services and the ultimate from central and state governments to local
person/agency/body paying the tax is missing. governments without corresponding grant
support has raised the question of whether the
Concern over the kinds of distortions created latter can be fiscally sustainable in the future.
by the non-residential property tax has prompted This new fiscal environment has emerged at the
at least one innovative suggestion for reform in same time as cities and urban centered regions
Canada.58 Specifically, it has been argued that have become increasingly important in the
revenues from a portion (the amount that exceeds competitive global economy. As mentioned
the funds necessary to cover the cost of local earlier, cities and large urban centres are the
services consumed) of the non-residential major incubators of economic prosperity60 and
property tax should be replaced with revenues the quality of urban life has become a prime
from a new provincial business value tax (BVT). determinant of location decisions. Growing and
The BVT would be a value-added tax59 and expanding businesses engaged in national and
would exist alongside the federal goods and international activities locate in cities and urban
service tax (GST). It would be levied on business centered regions where they have access to a
income; and it would fall on production and not highly qualified workforce (knowledge workers)
on consumption. Thus, it would be an origin as well as access to business services,
based, rather than destination based tax: it would transportation and communications networks.
tax exports and not imports. Municipalities Local governments, in providing goods and
would be able to set local rates that would be services and in financing them, can play an
‘piggybacked’ onto the provincial rate, although important role in attracting and retaining
the province might impose limits on local businesses. The provision of local public goods
surcharges to prevent location distortions. As a and services affects the quality of life and
value-added tax (essentially, a base that is sales influences where people live and invest and
less cost of goods purchased), a BVT would where businesses locate. The quality of the
eliminate a number of the distortions created by school system, cultural and recreational facilities,
the current taxation of non-residential property in physical infrastructure, social services and the
Canada. Comparable taxes are currently used in range of housing choices are important factors.
Germany and Japan. Italy has a structurally
similar tax that is used and administered by larger This growing importance of local
regions and metropolitan areas. government raises the question of whether they
have adequate fiscal tools or levers to fund
As for a local corporate income tax, there is necessary local services and facilities. To thrive
no sound economic justification. Capital is highly financially, local governments must have the
mobile and the tax is almost certain to be capacity to generate sufficient revenues to meet
exported, thus making it an unsatisfactory tax for their expenditure needs, obligations and
local governments. commitments. This is affected by at least three
things.
58
Richard M. Bird and Jack M. Mintz (2000), “ Tax 1. The cyclical sensitivity of local government
Assignment in Canada: A Modest proposal” in
funding responsibilities - do expenditure
Harvey Lazar, editor, Canada: the State of the
Federation 1999/2000, (Kingston: Queen’s
University, Institute of Intergovernmental 60
Michael Cohen (2001), “The Impact of the Global
Relations) at 261-292.
Economy on Cities”, in The Challenge of Urban
59
For an evaluation of value added taxes, see Government: Policies and Practices, edited by
Boadway and Kitchen (1999), supra footnote 18, Mila Freire and Richard Stren (Washington: World
chapter 5. Bank Institute), 5-17.
programs vary with the growth or slow down assign taxes to local government; the
in economic activity (social services, social constitutional and legislative requirements within
housing, for example)? which local governments operate; and a variety
of other factors.
2. The capacity of the local revenue base and
local taxes to keep pace with expenditure What we do know from international
responsibilities – is there enough revenue experience is that local governments carrying out
elasticity in the local tax base to permit their expenditure responsibilities are likely to be
revenues to rise and fall with expenditure more efficient, responsible, accountable and
requirements? transparent if they are required to raise the
revenue that they spend. As well, these criteria
3. The ability of local governments to control are more likely to be met if local governments
their own destiny – do local governments have the fiscal autonomy to determine both their
have sufficient control over their expenditure tax base and tax rates without limits on revenue
responsibilities and revenue sources to meet collected, tax base and tax rate. Fiscal autonomy
changing fiscal circumstances? is least when both the tax base and tax rate are set
or controlled by senior levels of government. Tax
The extent to which local governments and sharing arrangements between local and sate
cities, in particular, meet these conditions varies. government also lead to different levels of tax
In general, one can state that local governments autonomy. Here, the degree of autonomy will
should only be responsible for funding those depend on whether or not local government
services that benefit residents of their local consent is required before any change can be
jurisdiction. All income redistributional services, made in the tax sharing formula.
services that generate spillovers and those in
which there is a state or national interest should Based on the countries surveyed, most local
be funded by more senior levels of government. governments have some, if not considerable,
As well, local governments should have access to autonomy in setting local tax rates and almost no
revenue sources that are elastic enough to control over their tax base. Where local tax
provide them with the necessary revenues, sharing arrangements are in place, the tax split
without imposing undue tax burdens, to meet between state and local governments is generally
their local expenditure commitments. Finally, fixed in legislation or determined by the senior
they should have the power and freedom to meet level of government. Only in a handful of
the demands of their constituents without countries does the local sector have any say in
unnecessary tax restrictions and regulations. the tax split in the revenue sharing formula.
provide collective benefits to the local of the local tax base and allow it to adapt more
community. Local taxes are not used for services easily to rising costs and service demands.
that are income redistributional in nature, that
generate spillovers affecting neighbouring Over the past decade or so, local
communities, and that are designed to satisfy governments, virtually everywhere, have faced a
state or national goals or objectives. similar pattern – declining grants from senior
governments, devolution of additional funding
In response to the second question, the best responsibilities, and a limited tax base that may
taxes are those that are based on an immobile tax not be sufficient to meet future fiscal challenges
base and therefore, borne primarily by local and objectives. This, in turn, has raised a number
residents (not exported); that do not create of issues around local taxes. In particular, there is
problems with harmonization or harmful ongoing debate over local tax funding of public
competition between local governments or local services – what should local government be
governments and more senior levels of expected to fund from their limited tax base? Is
government; and are easy to administer locally. one tax preferred over another? Who should set
Here, there is a strong case for using a property local tax rates? Should these rates be uniform or
tax, especially one that includes variable tax rates differentiated across a taxing jurisdiction? Should
to capture differences in the cost of providing local tax rates be regulated? Should local
local public services to different locations within government tax businesses? Are local taxes
a taxing jurisdiction, different property types and currently sufficient to ensure local fiscal
any other property trait that affects local service sustainability?
costs.
While answers to the above questions are
Other taxes have also been defended at the long and, at times, convoluted, there is a general
local level, even though they are generally less consensus that local taxes should only fund those
effective at satisfying the criteria for a good local services that benefit the local community; that
tax. These include an income tax on individuals, there is no single tax that is ideal or preferred
some type of consumption based tax that could everywhere – indeed, a mix of taxes may be
include a general sales tax, a hotel and motel desirable; that the governing unit that spends tax
occupancy tax, and an automobile fuel tax. The dollars should be responsible for raising it
only one currently used alone in place of the including setting local tax rates; that differential
property tax is a local income tax. Support for it tax rates should be used to capture differences in
is generally based on the following arguments. It the cost of delivering local services; that local tax
is more progressive than the property tax in its rates, in general, should not be regulated; that
distributional impact on local taxpayers. Its use local governments should not overtax businesses
permits local governments to cast a wider net in as they do in virtually every country; and that
capturing revenues from those who benefit from senior governments must ensure that local
municipal services - residents, commuters and governments have the funding tools to ensure
visitors. It is more revenue elastic than the fiscal sustainability.
property tax.