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.