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# Box 8: REVENUE SHARING BY FORMULA

A redistributlon of fiscal participatlons by formula, (as opposed to a stralght proportional devolution of the contributlon made by each jurisdictlon to the tax-pool) reflects the Intent of directing more resources to the areas of greatest need or lesser fiscal capacity. Formulae are meant to avold the Issues of vertical and horizontal equity ralsed by more discretionary systems of redistribution, which are subject to polltical manipulatlon. However the basic Ingredlients of the formula Itself may have differentlal Impacts.

|**FItUA**INGREDIIENTS:|**POSITIVE**_IWACTS_|**NEGATIVE**<br>IWMACTS|
|---|---|---|
|**Equal**Shuares divides<br>the tax pool<br>In equal parts (only apparently<br>equitable).|rural areas, Irrespective<br>of lower<br>tax contributions,|urban areas, Irrespective<br>of greater<br>tax contrlbutions.|
|Area: assumes that larger<br>jurisdictions<br>have greater<br>Infrastructure<br>and services costs.|extensive jurisdictions<br>may be<br>underpopulated,<br>underdeveloped<br>(e.g.,<br>peiripheral<br>areas).|smaller jurisdictions<br>may be highly<br>urbanized (e.g., core cities, capital<br>districts).|
|Tatal FPpulation: overhead service<br>financing.|re populous Jurlsdlctiono<br>(urban<br>-. s)|less populous jurisdictlons<br>(rural or<br>sparsely settled).|
|Urbam Pbpulation: focus on cities<br>service needs|more urbanized are-s|rural areas|
|Last Population<br>CensuS: legally<br>reliable but often obsolete.|stagnant, declining<br>areas|dynamic growth communitles|
|o0mgWaphic Grkwth Rbht:<br>controversial,<br>subject to estimates.|fastest growing areas/cities<br>|outmigration<br>areas, slow growth<br>cities|
|Need Yardsticks:<br>some Indicators<br>may<br>rwtflect<br>an urban or rural bias.|<br>communities<br>with greater gaps<br>(housing,<br>utillity<br>connections,<br>education,<br>health).|more endowed areas (generally<br>the<br>more urbanized ones).|
|**Fiscal**Fkwform.nee:<br>measures past<br>expenditure<br>agalnst need.|more enterprising,<br>wea.thler<br>jurisdlctlons,|underdeveloped<br>areas with poor<br>expenditure<br>record.|
|amexm PerCalta: accounts for<br>demographic<br>size, not for skewed<br>Income distribution,<br>low monetization<br>of economies.|poorest jurisdictlons<br>measurements<br>often unreliable.<br>|wealthier<br>jurisdictions.|
|Total_Reverme_Collectud:<br>neglects<br>de mographic size, avallability<br>of tax<br>handles.|more Industrlalized<br>urbanized areas,<br>able to Impose/collect<br>taxes and<br>charges.|less developed,<br>rural areas<br>collecting little revenues.|
|ftr**Cqpita**Rftvwx<br>:<br>accountsfor<br>demographic sizenot for Income<br>distribution,|tax-efficient<br>urban areas,but large<br>Informal sector,urban poverty pose<br>limits.|least tax efficlent areas, especially<br>rural.|
|FiscalCqDsciIL:<br>pro-rated to<br>potential revenue yield at average<br>collection<br>rates.|jurlsdiclIons<br>with relatively<br>low<br>capacIty (problems<br>with chosen<br>Indicators)|aress with above-average capacity<br>(I..oblems<br>with Indicators).|
|Fiscal Evqwt: localcollectlon<br>vs.<br>capacity<br>(metching grants).|preserves fiscal motivation<br>of<br>performing<br>communities.|stimulates Incremental<br>effortsIn<br>non-performing<br>communities.|