which changing the conditions of local public finances can empower citizens and local governments. The general policy prescription would be to **_strengthen local public finances_ ,** - **_primarily by increasing the local governments’ own source revenues and capital budgets,_ and** **_by lowering the citizen’s costs of participation._** The validity of this prescription however, hinge upon a number of considerations that deserve further examination and empirical evidence.

**_(1) Revenues:_** The single most important policy recommendation to enhance the capacity of citizens to make effective choices is to increase local government’s own-source revenues. However, there is a number of considerations associated with this. First, local governments in developing countries are often incapable or unwilling to make a substantive increase in their own-source revenues. The reasons for this range from low institutional capacities and high political costs to weak tax bases (Box 6), and need addressing if local revenues are to be used as a means of enhancing empowerment.

# **_Box 6. Problems with local revenues in India_**

The States of Kerala and Karnataka in India gave _Gram Panchayats_ independent revenue raising powers, but this power has not been effectively used in either state. Thus, in both states, own-source revenues are negligible –less than one percent of Gross State Domestic Product. A number of reasons have been suggested for this weak revenue performance: • an unwillingness by local officials to enforce tax laws • the limited capacity of local government officials to effectively administer a revenue system • weak administration procedures, i.e., tax rolls are not maintained, assessments are not done in a scientific way nor updated, collection procedures are not efficient • the property tax base is not defined in a way that promotes increases in property values for purposes of taxation • there is a need for more productive bases to tax • taxpayers see little benefit from paying taxes to local governments • local officials have little incentives to raise additional taxes; they face little reward if they do and little penalty if they do not (relatively few _Gram Panchayats_ have opted to levy the highest property tax rate allowed) <u>Source: The World Bank 2004a.</u> Second, although public finance theorists have made a very strong argument that local government's increases in own-source revenue enhance local accountability, it is still uncertain what the quantum of such increase should be. Theory seems to suggest a linear relationship between own-source revenues and accountability, so the higher the proportion of own-source revenue, the higher the level/strength of local accountability. However, this may not be the case because there is a limit on how much local governments are willing to raise in revenue and how much citizens are willing to pay for public services. Analyses need to explore how much citizens – of different income levels and in different country contexts – are willing to pay for different levels of coverage and quality of services, and what political costs local governments are willing to bear for increasing revenues. An optimal level of own-source revenues could be set according to these two factors and anything above or below that level would reflect a sub-optimal relationship between citizens and government.

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