- New tax assignments, again in the direction of strengthening the provinces’ tax bases (e.g., permitting provincial sales tax with a rate cap, taxes on exploitation of natural resources within the province, etc.) while retaining the robust tax bases especially for cities.

In contrast to revenue reforms, refinements in the expenditure assignments are possible largely through administrative measures within each devolved sector. Although the LGC contains a legal loophole that has allowed national government agencies (NGAs) to continue their direct involvement in devolved service delivery, the national government could, if it so wishes, voluntarily shift its roles from direct service delivery to more policy-making and supervisory roles envisioned in the spirit of the LGC. An exception is if the Filipinos want to devolve education as part of the new decentralization framework since education is not included among the sectors formally devolved to LGUs in the LGC. But even without formal devolution, the Department of Education has been able to pursue, albeit slowly, transfers of greater resources to schools as a key element of its sector decentralization strategy. The LGC also provided the LGUs with the ability to levy a special tax earmarked to education and as a result, many LGUs actually spend more on education than on some of the devolved sector responsibilities already. Therefore, an immediate issue in the education sector with respect to center-local relations is better coordination in investments and service delivery between the national government and the LGUs rather than formal devolution of the sector responsibilities. There is much that can be accomplished within the existing legal framework.

This suggests that progress on the revenue side will require legislative measures whereas reasonable progress on the expenditure side, especially if pursued on a sector-by-sector approach, will not. The latter then becomes largely a question of the incentives among the LGUs and the relevant national government agencies to coordinate with each other. In some sectors (e.g., agriculture), there may also be a need to revisit the whole policy framework that governs the government’s approach to service delivery before tweaking the distribution of roles and resources across levels of government and in some cases this may require a sectoral legal reform. The prospect of expenditure-side reforms through administrative measures would also depend on whether or not higher-tier entities, be they NGAs or provinces, have the ability to induce voluntary cooperation of the LGUs to achieve more rational distribution of expenditure responsibilities vertically across levels of government and horizontally among LGUs at the same level.

This paper mainly focuses on assessing the political feasibility of a legislative reform on the revenue side of the decentralization framework, with particular focus on the reform of the inter-governmental fiscal transfers, Internal Revenue Allotments (IRA). LGUs’ incentives to provide public services are analyzed in a separate paper based on an original survey of LGUs and households in a single province (Khemani 2011).

# **Political Economy of Fiscal Decentralization Reforms: Three Analytical Perspectives**

The fiscal reforms needed to address the imbalances in the current system of decentralization involve redistributing financial resources from the central government to LGUs and from some LGUs to others. We would never expect the first set of reforms to be approved by central government officials unless 4