34 To the extent automotive taxation is intended to price either the utilization of publicly-provided services or externalities, taxing fuel is a crude instrument at best. Fuel taxes are related both to road usage and to such external effects of vehicles as accidents, pollution and congestion, but not in any precise way (Newbery 2005). Toll roads and an appropriate set of annual automobile (and driver) license fees may serve the benefit tax function much better. For example, fees might be based on such features as the age and engine size of vehicle (older and larger cars generally contribute more to pollution), the registered location of the vehicle (cars in cities add more to pollution and to congestion), driver records (20 percent of drivers are responsible for 80 percent of accidents), and axle-weight (heavier vehicles do exponentially more damage to roads and require roads that are more costly to build). If technology permits, even more refined pricing schemes could perhaps be applied, at least in the most heavily congested urban areas or perhaps at border crossings.<sup>71</sup> However, differentiation intended to approximate a benefit tax is seldom evident in developing countries. Where automotive taxation is differentiated the aim is often distributive in the form of imposing higher rates on higher-valued vehicles. ‘Luxury’ excises may indeed have a small distributive role to play in a national tax system, particularly as a signal that the rich are being singled out for taxation at least to some extent. However, such taxes are unlikely to make much sense at the subnational level and may, from an efficiency perspective, sometimes counter rather than facilitate the potential economic benefits that might be achieved from a good automotive tax system.

Nonetheless, although it is often designed and implemented poorly in many developing countries, subnational taxation of motor vehicles is fundamentally a good idea. Careful study of the appropriate design of any system of automobile taxation (national, regional, or local) is needed in any country as Smith (2006) demonstrates but it seems particularly important for developing countries to avoid repeating the mistakes of most developed countries (e.g. Hughes, 1987; Smith 1991) and to attempt to achieve both more revenue and better economic effects through a revised system of automotive taxation (Smith 2006). Subnational revenues could be still further boosted, if desired, by giving regional governments some access to the fuel tax by permitting them to impose (regionally variable) surcharges. Indeed, automotive (and fuel) taxation appears to be the only commonly available subnational revenue source likely to demonstrate more than unitary income-elasticity, thus matching this aspect of some of the key services (education, health) for which regional --and even in some countries local -- governments are increasingly responsible.

# **6.3. Personal Income Taxes**

If more subnational "own-source" revenue is desired, whether to expand the size of subnational activities or to make subnational governments more self-reliant, the experience of developed countries – from Canadian provinces to Scandinavian municipalities -- suggests there is much to be said in principle for supplementary ("piggybacked") subnational personal income taxes (PITs). Like the property tax, a subnational PIT would be visible and hence foster greater

> 71 See, for example, the interesting discussion of the imposition of weight-based taxes on trucking in India in http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTINFORMATIONANDCOMMUNICATIONANDT ECHNOLOGIES/EXTEGOVERNMENT/0,,contentMDK:20486012~isCURL:Y~menuPK:702592~pagePK:14895 6~piPK:216618~theSitePK:702586,00.html

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