Greater tax authority to provinces

Greater tax authority to provinces

By J. S. Uppal

YOGYAKARTA (JP): The finance minister has raised very
interesting proposals on the amendment to the regional tax laws
providing greater tax authority to provincial and central
governments in exercising control over the taxing powers of the
proposed autonomous regions.

According to the report, as published in this newspaper on
Oct. 13, while the amendment would allow the provincial regency
and mayoralty administration to issue their own rulings to
collect taxes and levies that meet certain criteria, the central
government would have the power to "overrule a ruling if it were
against the public interest or the more superior law."

Then the provincial governments would have powers to
redistribute tax revenues from one region to another with less
potential within the province. Elaborating the proposed
amendment, it is claimed that the proposed amendment would meet
the "principle of good tax policy".

While we do not have any more details of the proposed
amendment, there are several ambiguities and contradictions in
the proposals. First, it seems that while the regions (districts
and municipalities) have been granted wide powers to tax within
their jurisdictions, they will be constrained by the provincial
governments on the basis of "good tax policy", "meeting certain
criteria" and for "redistribution of revenues amongst districts".

No where can one find an interpretation on what is good tax
policy; what are the "certain criteria" that will determine the
revenue redistribution within regions. To me the existing
confusion on the question of inter-governmental finance has been
further confounded.

On the basis of the proposed amendment, regions will not know
what exactly are their taxing powers and the province will always
be wondering when and how should they interfere in their regions'
finances.

Then the central government will not know exactly when and how
to overrule the provinces and regions. The government has thus
not yet come up with clear cut ideas on some vital questions on
the distribution of fiscal resources within various jurisdictions
-- while the fiscal autonomy law is supposed to take effect in
little more than two months.

As the sun rises on January 1, 2001, all the district level
governments will celebrate their new autonomy, but they will be
confronted with confusion on the matter of their expenditure and
revenue powers.

This may make a big mess of the whole question of regional
autonomy.

Although Indonesia has passed several laws on regional
autonomy and it may be difficult to go back to make a fresh
start, it is important to be clear on the following aspects of a
sound principles on intergovernmental fiscal relations:

o What exactly is the pattern of intergovernmental fiscal
relations between the different jurisdictions?

o What exactly are the taxes and fees which different
jurisdictions can assess and on what basis will the central
government tax revenues (particularly income and value added
taxes) be shared with lower level governments?

o On what basis will the provinces equalize tax resources
among their regions?

After all, Indonesia is not the first country to decide on the
above questions. Like Indonesia, other countries also have great
diversities in resource distribution. There also exist separatist
tendencies in other federations.

We have different case studies of well functioning federations
with clearly defined principles of resource sharing and spending
powers in various jurisdictions.

There is the model of the United States of America, where
local governments have virtual fiscal autonomy in revenue and
spending. The distribution of federal revenues is well defined
and Federal funding procedures are clearly defined.

The states have definite formulas for revenue sharing and
equalization of expenditures on certain items like education. The
expenditure pattern of various levels is clearly delineated.

Then we have the case of India, where there is limited
autonomy for states and local governments. There is clear cut
distribution of taxes to be levied by different jurisdictions.
For distributing central income tax revenues, there is a clearly
defined set of criteria which is regularly reviewed by Finance
Commissions, appointed after a set number of years on the basis
of thorough review of the past years experience.

In the middle is the case of Canada, which is more like India
but with little less fiscal autonomy in the provinces.

What Indonesian policy makers need is to first decide which of
the above models to consider based on goals and objectives. Then,
following that model, the policy makers should clearly define the
distribution of revenue sources for different jurisdictions and
devise formulas to distribute central resources amongst lower
level jurisdictions, and formulate principles for equalization of
tax revenues amongst regions on the basis of fiscal needs and tax
efforts.

We should avoid using vague criteria of "pubic interest" "good
tax policy" and so on; they may sound good but have no
operational relevance for policy makers.

It is still not too late for our policy makers to put their
heads together and come up with answers to the above questions.
On this vital issue of fiscal autonomy, there should be national
consensus. All political parties should cooperate to avoid any
future chaos in the already sensitive atmosphere in the country
on the question of regional autonomy

Dr. J. S. Uppal is a professor of economics, State University
of New York at Albany, New York. Presently he is at the Gadjah
Mada University, Yogyakarta as a visiting professor.