1. Intergovernmental Transfers: Theory and Practice Roy Bahl Dean, and Professor of Economics Georgia State University
Decentralization and Intergovernmental
Fiscal Reform
Sponsored by the Decentralization Thematic Group, PRMPS and WBI
Washington, DC
29-31 March 2004

2. Basic Approaches to Decentralization
Revenue-Sharing Model (Weak Decentralization)
Grants
Shared Taxes
“Minor” Local Taxes
Revenue Assignment Model (Strong Decentralization)
Significant Local Taxes (Autonomy)
Loans
User Charges

3. Rules
8. Grants and shared taxes must play an important role in almost any decentralized fiscal system in a developing or transition country. Transfers may be designed as more centralized or more decentralized.

4. Justifications for Intergovernmental Transfers
Close the “fiscal gap”
Equalize fiscal capacity and need
Adjust for spillovers
Increase effectiveness of central expenditures
Political reasons

5. Closing the Fiscal Gap Cause of “Fiscal Gap”
Assigned more expenditures to local governments than revenues or too few revenues
Local governments have “gone crazy” and are spending beyond their means
Local governments are not making use of the revenue sources available to them
Means to Close the Gap
Change the revenue or expenditure mix among levels of government
Introduce controls or restraints on local governments
Enhance local fiscal effort

6. Equalizing Fiscal Capacity
Equalize the position of governments, not people
Allocate unconditional grants: give funds to government and let them spend as they choose
Allocate conditional transfers: allocate funds for specified purpose
Avoid “gap filling”

7. Adjusting for Spillovers
Importance of spillovers
Alternatives to transfers
Getting public sector “prices” right
Varying price with capacity

8. What is an Intergovernmental Transfer?
Grants
Shared Taxes

9. How Can Intergovernmental Transfers be Decentralizing
Revenue adequacy
Certainty
Unconditional

10. How Can Intergovernmental Transfers be Centralizing
No transparency in vertical sharing
Ad hoc distributions
Uncertainty and year-to-year changes
Strict Conditions

11. How Should The Grant System Be Structured?
Alternative Form of Intergovernmental Grant Programs
Method of determining the total divisible pool
Method of allocating
The divisible pool
Among eligible units
Specified share of National or state Government tax
Ad Hoc Decision
Reimbursement Approved Expenditures
Origin of collection to tax A NA
Formula B F
Total or partial reimbursement of costs C G K
Ad Hoc D H

12. Appropriateness of Various Types of Grants
Objective of National Government
Maintain control over local finances
Stimulate expenditures for a particular function/overall tax effort
Equalize services and fiscal capabilities among localities
Increase local tax effort

13. Appropriateness of Various Types of Grants
Objective of Local Government
Maintain control over local finances
Plan efficient budget
Increase adequacy of local revenues
Joint Objective
Minimize administrative costs

14. Natural Resource Revenue Sharing: The Case for More Centralization
The Stability Argument
The Disparities Argument
The Local Capacity Argument
The National Treasure Argument

15. Natural Resource Revenue Sharing: The Case for More Decentralization
The Cost Reimbursement Argument
The Heritage Argument
The Conflict Resolution Argument

16. Revenue Sharing in Transition Countries
Very Centralized
Piggybacking
Backdoor Approaches

17. Intergovernmental Grants: How Not To Do It!
Deficit Grants
Complicated Formulae
No Transparency
No Continuity
Base It On The Amount Spent
No Evaluation

18. Intergovernmental Grant Lessons
Desired outcomes should drive design
One grant/transfer instrument cannot accomplish multiple objectives.
Expect changes in formula over time
Is “distributable pool” a discretionary element in the central budget or an entitlement of local government?