On the other hand, many local governments are using their new authority to issue a wide array of questionable taxes and levies that could have a negative impact on investment and economic growth. While the amended law contains language prohibiting taxes that are economically unsound, it is not clear whether the Ministry of Finance has the political will or the capacity to enforce the law. The government enacted Law No. 18 in 1997 in response to a spurt of uncontrolled local taxation that threatened to stifle internal commerce and price Indonesian exports out of the market. Jakarta established maximum rates for each kind of tax, and limited the total number of fees and levies to 30 for any single government. The amended law transfers the local government tax on surface and groundwater to the provincial level and expands the definition of motor vehicles to include motorized water transport.
Local governments acquire a new tax on parking services.
More importantly, the law allows sub-provincial governments to create new taxes and levies on top of those specified under the law, subject to central government approval. Jakarta still controls provincial tax rates, but district and city-level governments are free to set rates within broad limits. If it is implemented carefully, the law will help provinces develop good fiscal practices, which is a major goal of decentralization. The government s fiscal decentralization allocation formula does not link transferred revenues explicitly to new functions. It is therefore likely to leave some regions with large surpluses and leave others with insufficient funding to fulfill their new responsibilities under regional autonomy.