Regions need more money to abolish 'nuisance' taxes

Tony Hotland, The Jakarta Post, Jakarta

The government must quickly seek solutions to the problems caused by the implementation of local autonomy, must of which are caused by the reluctance of the central government to delegate its powers to the regions, a number of experts have said.

Speaking during a seminar on local autonomy here on Wednesday, economist Robert A. Simanjuntak said that the central government should give more powers to local administrations as regards particular revenue sources in return for local governments eliminating the rampant "nuisance" taxes that have been introduced and that create such high costs for the business sector.

"The government could, for example, confer the power to levy land and building taxes on local administrations. If this were done, they wouldn't be so dependent on financial transfers from the central government, and they could compete with each other to attract investors," he said.

The lack of local revenue sources has long been the justification advanced by local administrations for their issuing of a host of dubious regulations imposing frequently bizarre taxes and fees, which only serve to further damage the already poor investment climate.

"There have been more than 3,000 local regulations issued over the past three years, 94 percent of which are related to taxes or levies," Robert said.

Currently, financial transfers from the central government accounted for between 70 percent and 90 percent of local budgets.

"Almost everywhere in the world, land and building taxes are local taxes. By giving the authority over these taxes to local administrations, they would then have the option of either maintaining or lowering the taxes in order to lure investors into their jurisdictions to boost growth there," he said.

Fellow economist Bambang Brodjonegoro concurred, adding that the option could help balance the fiscal position as between the central and the local administrations.

Bambang also said that to make things even fairer, the government should put the money earmarked for projects to be carried out by state institutions or ministries into specific allocation grants (DAK) instead.

"This would be the best thing as most of these monies eventually go toward projects in the regions. In addition to that, the central government would have less duties to perform, and could focus more on its supervisory functions," said Bambang.

The decentralization program was launched in 2001 with the enactment of Law No. 22 on local autonomy. This law, its ancillary regulations and Law No. 25/2001 on fiscal balance are currently being amended by the government.

The seminar also called for the development of a specific allocation grant (DAK) system that emphasized the importance of support for national priorities, which would also result in benefits to the regions. Among the priorities should be health, education and infrastructure.

Faisal Basri, who was also among the speakers during the seminar, said the adverse impacts caused by the decentralization process should never be used as a justification by the central government to restore its overbearing powers in all sectors.

"Another way to help balance the fiscal position is by letting administrations borrow or issue bonds. The government fears the possibility of default. But of course, it can regulate what requirements must be meet or how much may be issued in bonds," said Faisal.

He said that the government could even ask the administrations to set aside a certain amount of proceeds as insurance should default occur.