Local and Regional Revenues: Realities and Prospects

The traditional theory of fiscal federalism prescribes a very limited tax base for subnational governments. The only good local taxes are said to be those that are easy to administer locally, are imposed solely (or mainly) on local residents, and do not raise problems of harmonization or competition between subnational – local or regional governments or between subnational and national governments. The only major revenue source that usually passes these stringent tests is the property tax, with perhaps a secondary role for taxes on vehicles and user charges and fees. Since central governments are in any case generally reluctant to provide subnational governments access to more lucrative sales or income taxes, it is not surprising that this conclusion has become conventional wisdom. Subnational governments almost everywhere are thus urged to make more use of property taxes and user charges, and are criticized when they do not do so enthusiastically.