GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 7Proposal for a new local government taxation system in a federal NepalFrom the revenue side of the public economy, oiscal autonomy (and responsibility) is greatest when the subnational government chooses what taxes it will levy, deoines the bases it will use, sets the rate and preference structure for those bases, and administers the taxes that have been adopted (Mikesell 2003).Figure 3 on page 7 summarises the optimal design of three major types of income for local government bodies if the three guiding principles of congruence, equivalence and connectivity would be applied to the three main sources of income of local governments:• User charges (usually for utilities) and fees (usually for administrative services)• Local taxes• Grants.Figure 3: Revenue types and design criteriaSourceFees and user chargesLocal taxesGrantsBasisLocal services where the individual consumption is measurable and politic-­ally desired (such as water, electricity, solid waste collection, etc.).Local fees and user charges should be designed that the services provided can be founded (full cost recovery).Local services, where the individual consumption is either not measurable, or not desirable.Local taxes, however, should follow the principle of equivalence. Therefore, the principle of equivalence is extended to local groups beneoitting from loc-­al services such as house-­‐ and land owners, businesses, or citizens.In an ideal world, grants do fuloil two functions only: The serve to guarantee a minimum oinancial basis of local bodies (oiscal function) and to internalise external spatial effects. after Friedrich 2005Based on this optimal design, the following sub-­‐sections deal with• An optimal set of local government taxes (section 2.2.1 on page 9f.),• A reasonable sharing of taxes between levels of government (section 2.2.2 on page 9f.),• An optimal set of local government taxes (section 2.2.3 on page 10f.).2.2.1 An optimal set of local government taxesProperty taxes are regarded often as an “optimal” local tax, especially when taking into account Anglo-­‐Saxon literature. However, this type of tax affect only a specioic group of the local citizenry and not ne-­cessarily the whole community. This tax is an example of a group-­‐related equivalence, whereby the as-­sumption is made that property owner beneoit in general from local government decision-­‐making and service delivery beyond user-­‐charge based service delivery. Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de