**_Tax Administration_** .  Both state and federal government would benefit from improved collaboration on tax administration, particularly with the new tax authorities being given (and considered) for the states.  For both the sales tax and the tax on small contributors, the federal tax agency (SAT) should collect and provide to the states information on the taxable transactions in each state—that is, final sales and income reported in the federal small-payers regime (REPECO).  For the sales tax, SAT would need to require firms to report sales, divided between sales to firms registered in the VAT system (non-final sales, subject only to the VAT) and other sales subject to the VAT and the sales tax.  Nation-wide firms would need to keep track of the sales in each state and report that information to the SAT, which would share it with the corresponding states.  On the other side of the information coordination process, the states would need to share back with SAT the information they gather in collecting the sales tax and their tax on firms in the REPECO regime.

Beyond this minimum level of assistance to the states, the federal government could actually collect the tax on behalf of the states, initially for free for all states and then for a small fee to cover costs and only for the states with less institutional capacity who chose to continue delegating their collection. In return, the states should (and would have natural incentives to) help enforce these taxes with inspections and audits. Chiapas, for instance, is already doing a street by street inventory of small business that they plan to use to help collect the income tax on small payers. States would also share with the federal government the information that they collect on each firm under these taxes, including the outcome of audits. The fundamental synergy would be the federal government helping states to collect from the big firms and the states helping the federal government to collect from the small firms.

**_Guarantees and Flexibility for Transfers_** .  Since the states want more security about the size of transfers and the federal government wants to keep some flexibility in transfers to adjust to changing economic conditions, there needs to be a more transparent institution for meeting both desires.  The participaciones are already theoretically fair in their adjustment to tax revenue changes, but the basic data on state-by-state tax collections needs to be published so that the process is more transparent.  The government recently made the effects of oil price changes symmetrical, which would seem to take care of a distortion remaining in the revenue sharing system by giving states a full share of the upside of oil price fluctuations as well as the down side.  With aportaciones and the PAFEF, the executive and congress (representing state interests) will need to formulate and institutionalize an agreement that establishes an affordable level of aportaciones plus PAFEF (based on a unbiased best estimate of revenue) with a rule by which these transfers to states would share in some but perhaps not all of the fluctuations in federal revenues during the year.<sup>12</sup>

**_Aportaciones and accountability_** .  The devolution of new responsibilities to the states and municipalities in the early 1990s came with new transfers, the _aportaciones_ , which were earmarked for those sectors, especially education and health at the state level.  As discussed above, the states believe that they lack adequate authority to manage the programs, while the federal government sees a lack of accountability for performance.  Increasing both the authority

> 12  Agreeing on a macroeconomic forecast and the likelihood of deviations from it would be easier an less political if the Congress had more of its own capacity for economic analysis.  Perhaps something like the beginning of a Congressional Budget Office could be established, attached to the Comisión de Hacienda y Crédito Público de la Cámara de Diputados.  For a general discussion of the issue of how to safely accommodate the states desire for revenue security, see Gonzalez, Rosenblatt, and Webb, 2002.

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