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.
Third, to avoid letting any portion of the redistribution fund become the exclusive preserve of the Cabinet, I suggest cancelling the special 6 percent special tax redistribution fund and changing the entire sum into a normal tax redistribution fund. In the event of local governments encountering urgent needs or major incidents, the central government should respond by raising additional resources.
Fourth, in accordance with the principle of local autonomy, I recommend amending Paragraph Two of Article 12, exempting cities and counties from appropriating 20 percent of the land value increment tax for the central government's tax redistribution fund. Instead, it should be classified for use in balancing the finances at the township level.
If we are to reach a comprehensive solution to the basic problem of local finances, the following measures should also accompany the legal amendments.
First, the Legislative Yuan should be requested to pass general principles for local tax laws as soon as possible to provide all levels of local government with a legal basis for seeking development in accordance with their own unique features. It should only require legislation by a local council to begin collecting independent taxes. To achieve the goal of local autonomy, the necessary financial resources can also be obtained through surtaxes.
Second, urban areas should levy an urban development tax to obtain the financial resources for urban development.
Third, the land and housing tax system should be changed by improving house-price evaluations, increasing the government-assessed land prices and the weighted ratio of such prices to market prices. Structural adjustments should also be made in the real-estate tax system. The housing tax and the land value tax should be combined into one real-estate tax, and the land value tax should be raised. The land value increment tax should be lowered and further integrated into the income tax to ensure that property taxes will play a more important role in local government finances.
Fourth, unless local governments can develop their own additional revenue streams, they must estimate the resources available to them before implementing policy. A system should be established to evaluate the effectiveness of local public expenditure. The evaluation results, together with the extent of the effort made by local governments in raising tax revenues, should be considered as a basis for the allocation of central government subsidies and the tax redistribution fund.
Fifth, vertical inter-governmental financial disparities should be reduced either by raising the portion of taxes to be collected by local governments or by increasing the redistribution fund, and by adopting incentives for local governments to seek their own financial resources to solve the long-term problem of local governments relying excessively on subsidies from higher levels of government.
Sixth, the tax redistribution fund and unplanned subsidy funds, which are similar in nature, should be combined. Additional criteria, such as weighted average income levels should be added to those already in place for determining how subsidies should be allotted. These should include financial ability, financial effort, the discrepancy between standard demand and standard financial revenue, business revenue, population and land area. Only by changing the formula by which subsidies are allotted can we avoid the constant problem of the rich remaining rich and the poor remaining poor after subsidies have been distributed.
What's more, there is no place for the pride and prejudices that the central government exhibits if local governments are to view higher levels of government with respect. A meeting should be convened in the near future to amend the Law Governing the Allocation of Government Revenues and Expenditures once again. A rational, professional approach should be taken to create a reasonable, effective and functional law as well as a system of subsidies that gives greater incentives to local governments to generate their own revenues.
Chen Ting-an is a member of the Examination Yuan.
Translated by Ethan Harkness
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