Local taxation? What a crap idea!

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  • Guy
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Re: Local taxation? What a crap idea!

Hmmm, good points Florian. Let me clarify terminology: I won't respond on content yet, I'll leave that till later.

By "local taxation" I'm referring to taxes, not tariffs. As you no doubt know, the general distinction between taxes and tariffs is as follows: a tax is an obligatory payment, not directly related to a service received by you; a tariff is (generally) non-obligatory, and it is in direct proportion to the value of the services received. [Though of course we have to nuance this a bit. First, tariffs as charged may include rich-to-poor redistributive components, and those components can be considered essentially as taxes. Second, taxes may not have a direct tariff-like relationship to the service received, but politicians/technocrats may decide that this is how they should be spent.]

So local taxes for urban sanitation could include any of the following a) a sanitation tax raised by the municipality; b) a sanitation tax collected through water bills (= sanitation surcharge), and then disbursed either by the muncipality or directly be the utility; c) a sanitation tax component raised by some other means, e.g. as a component of property tax; d) general non-earmarked local taxes which are then allocated to sanitation. [And of course municipalities have other sources of revenue, apart from local taxes, including commercial revenues e.g. from land rental, and transfers from central government.]

I hope that adequately clarifies what I mean when I say "local taxes", if not let me know.

Cheers! - JoeGuy
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  • Florian
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Re: Local taxation? What a crap idea!

I really appreciate that discussions on finance are initated here recently! And the little provocative way to trigger discussion on a not so easy topic is a nice idea, curious to see how it works.

Now to your post. Actually I'm not so clear what exactly you are talking about when saying "local taxation". Is it local taxes raised by the municipal government, or tariffs collected from municipal service providers? I assume you mean the first one, but your point 3 sounds quite as you mean tariffs, where users should pay for the service they get.

If we talk about taxes, then I think it really depends on the administrative and fiscal systems in place in the countries, and these can be very different. In centralised systems, basically all tax revenue goes to the central budget, and is then transferred down to local entities. In more decentralised systems, local governments have more autonomy in raising their own taxes and deciding on how to spend them. While I'm convinced that decentralised systems, in particular the ones with fiscal decentralisation, have many advantages, I also think centralised systems can work equally well. Or the other round, all the problems you mention in your posts, e.g. corruption risks or political difficulties for prioritising spending for the poor, could apply equally in central or decentralised tax and governance systems.

As so often, I think the real question shouldn't be what is the right system (e.g. local vs. central), but it should be about how things are done.

But then, I'm not sure if this was actually the point of your post? ;)

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  • Guy
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Local taxation? What a crap idea!

Following on from Catarina’s excellent introduction to public finance at the national level, I’ve been asked to start a discussion around public finance for sanitation at the LOCAL level. Specifically, I’ve been asked to talk about the importance of local taxation for urban sanitation.

What I want to do is encourage debate: hear about YOUR experience and YOUR opinions. So I’ve decided to go about this in an unusual way. Rather than argue my own position in favour of local public finance, I’ve decided to argue the CONTRARY position. In this anti-public-finance manifestation, you can call me Joe! Here goes…

1) Local taxation in cities in Africa and South Asia generates only very small amounts of money. The amounts of money raised are simply not enough to resolve the capital investment needs of sanitation: that’s going to need central government money and donor money. Municipal revenues are very small, and allocations to sanitations are tiny.a There are rare exceptions like Lagos State, whose tax revenues rose from $190m in 1999 to over $1billion+ in 2011.b But that’s just an oil-rich exception: most low-income cities just don’t have sufficient tax bases.

2) Municipal authorities in low-income cities are typically bloated bureaucracies with significant corruption problems. Even if we can support them to raise more money, they don’t have the capacity to spend that money effectively. Much of it will be siphoned off into projects that benefit the elites, not the poor. See for example the excellent report by Boex & Edwards.c

3) Theory suggests that local taxation shouldn’t be redistributive. Rather, local taxes should be levied in direct proportion to the benefit that each taxpayer receives from local services.c So local taxation is not a good model for urban sanitation, which requires some sort of cross-subsidy to meet the needs of the poor. Transfers from central government are more suited to this sort of redistributive social goal.

4) Influencing municipal taxation is just too challenging. Increasing municipal taxation, and ensuring that revenues raised are spent progressively (i.e. on providing basic services for the poor, as opposed to pretty streetlights for the rich), is enormously complicated. The rich want to hold on to their money, politicians want to spend money in ways that make them look good: political economies are complex and resilient to change. At the same time, increasing municipal taxation may often require high-level national legislation, or even constitutional change. How can donors and donor-funded agencies hope to achieve change in the face of these daunting challenges? We should be focusing our attention on things we can actually change, like sanitation technology and small enterprise solutions. We’re not going to accelerate historyd and change the entire political economies of developing nations!

I could go on, but that’s enough for a short post I think. In summary: local taxes are a dead-end, let’s focus on more important stuff! It’d be great to get your views… you can agree with me (Joe) or you can agree with me (Guy). Either way I win, right?

It’d also be great to hear about examples of local tax revenue generation for sanitation. Do you know of interesting cases?


a “Municipal finance for sanitation in African cities” Norman G & Trémolet S, 2015
www.publicfinanceforwash.com/resources/finance-brief-3
b “Governing Lagos: Unlocking the Politics of Reform” de Gramont D, 2015
carnegieendowment.org/2015/01/12/governi...g-politics-of-reform
c “Triggering Increased City-Level Public Finance for Pro-Poor Sanitation Improvements” Boex J & Edwards B, 2015
www.urban.org/research/publication/trigg...itation-improvements
d “Universal water and sanitation: how did the rich countries do it?” Norman G & Bisaga I, 2015
www.publicfinanceforwash.com/resources/f...rich-countries-do-it
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