The KMT-proposed amendments to the Law Governing the Allocation of Government Revenues and Expenditures (財劃法) have been overturned, but that does not solve the two basic problems of local governments' fiscal deficits and disparities in resources. The ruling and opposition parties will have to face the problem of amending the law once again.
When they reconsider the law, they should think clearly about the following issues.
First, the functions of the central government and of each layer of local government need to be defined. Additionally, whether or not Taiwan's administrative system is a unitary system needs to be established.
Second, in accordance with the idea that it is local governments who best understand the demands and preferences of local populations, there is already an international trend toward devolving power from central to local governments.
Third, the special municipalities of Taipei and Kaohsiung have a status equivalent to that of a province. They should function and be organized in a different way from the other cities and counties.
Fourth, the real meaning of "enlarging the pie" is not to increase the size of the tax redistribution fund (統籌分配稅款). Rather, it is about increasing the size of the entire "fiscal pie." Otherwise, the government is simply playing a zero-sum game.
Fifth, establishing a formulaic and transparent system for general subsidies (granted by the central government to local governments) is not the same as completely rationalizing vertical inter-governmental relations. Nor is it an appropriate solution to the problem of dividing tax revenue between the central and local governments. Moreover, it does not in itself do anything to even out horizontal inter-governmental financial discrepancies. The effectiveness of such a system in promoting local financial autonomy will probably be very limited.
Regarding further amendments to the Law Governing the Allocation of Government Revenues and Expenditures, I have the following suggestions.
First, the most recent amendments (which have been overturned) would principally have appropriated 30 percent of income tax and commodity tax revenues as well as half of the business tax (after deducting prize money awarded in the uniform invoice lottery) to increase the tax redistribution fund. Thus the financial autonomy of local governments would have been increased.
Since the function of income tax includes redistributing income, the revenues from such a tax are not necessarily a suitable source of funding for local governments. In addition, the commodity tax may be merged with the business tax in the future. I would therefore recommend that the tax redistribution fund be increased by amending Article Eight of the law to maintain the original appropriation of 10 percent of income and commodity tax revenues, while increasing appropriations from the business tax, instead of raising appropriations from the income and commodity taxes.
Second, to keep the original promise made by the Ministry of Finance that the tax revenues allotted to the two special municipalities of Taipei and Kaohsiung would not be influenced by the reclassification of the business tax as a national tax, and to avoid ossification of the tax redistribution system, I would recommend nullifying Article 16-1 in which fixed percentages of 15.5 percent and 10 percent are allotted to Taipei and Kaohsiung respectively. Elsewhere in this article, it should be stipulated that allotments will be maintained at levels no lower than 1999 standards, and as tax revenues grow, appropriate adjustments should be made.