Source: Calculated by the authors based on Ministry of Finance data. Note: Apart from the sales tax (abolished in 2010) and the fee for development of territories (reported in earmarked charges), all other local taxes are reported in the “other” category. Since the abolishment of a number of subnational taxes, including the retail sales tax, the list of local taxes contain only five items (see Table 1). Even before that, local taxes contributed less than 10 percent of subnational government revenues (see Figure 1) Table 1. Local taxes Tax name Who can introduce Who defines the base Who sets the rate Who receives the revenues Tax on services Oblast government National legislation (gross revenue) Oblast government within national limit (5%) Local governments Dog tag tax Oblast government National legislation (number of dogs over 3 month old) National government sets adjustment for dog size (x0.5-1.5) Local governments Fee for development of territories Oblast government National legislation (total profits for enterprises, income for individual entrepreneurs) Oblast government within national limit (3%) Local governments Resort fees City/rayon governments National legislation (resort treatment price) City/rayon governments within national limit (3%) Local governments Fee for flora harvesting Oblast government National legislation (harvest value based on the gate price) Oblast government within national limit (5%) Primary level government Source: Tax Code (Sections I and VI) Transfers
Rearranging the last expression gives (RCi – Tui +Tei )/( EIi • Pi ) = К• (RC/ P) (I2) From this latter expression it becomes clear that the proposed allocation mechanism brings the per capita level of potential revenues adjusted for expenditure needs to the same level equal to the fraction К of the region-average revenue capacity. To show the difference the proposed mechanism makes compared to the standard definition of the fiscal gap, ENi * – RCi, let’s rewrite equation (I2) in an equivalent form by substituting (ENi/ Pi )/ (EN/ P) for EIi and rearranging terms: Ti = Tei – Tui = К• (RC/ P)• ( EIi • Pi ) – RCi= =К• (RC/ P)• ( [(ENi/ Pi )/ (EN/ P)] • Pi ) – RCi= =К• (RC/ EN )• ENi – RCi (I3) From (I3) it is clear that in the proposed formula the availability of funds only affects the sensitivity of the grant amount with respect to expenditure needs, while disparities in revenue capacities translate one-to-one into the differences in the grant amount. To further illustrate this point, let us consider a given pool of funds (Pool) and determine the extent of equalization under the proposed and the standard definitions of the fiscal gap. Under the proposed approach, Pool = Σi Ti = Σi К• (RC/ EN )• (ENi) – Σi RCi = К• (RC/ EN )• (Σi ENi) – Σi RCi = RC • К – RC. Therefore, К= (Pool +RC)/RC. Substituting the latter into (I3) yields, Ti = [(Pool +RC)/RC]• (RC/ EN )• (ENi) – RCi =[(Pool +RC)/EN]• ENi – RCi It is clear that a larger pool makes the transfer size more sensitive to differences in the expenditure needs but does not affect the sensitivity of the grant amount with respect to disparities in revenue capacity. The only case when this mechanism would treat revenue and expenditures equally is when (Pool +RC)/EN = 1, that is when Pool = EN– RC.
Table V-2. A list of indicators to calculate expenditure needs for an administrative and territorial unit of the basic level Section Type Designation of sections, subsections and types Indicator for calculation of expenditures per capita 01 General public activities Total for subsections 01 01 04 Local government and self-government bodies activities Number of employees of local government and self-government body 01 01 07 State archives Number of resident population 01 10 Other general public activities Ditto 03 Judicial system, law enforcement and state security Ditto 04 National economy Total for subsections 04 01 General economic affairs Number of resident population 04 02 Agriculture and fishing Ditto 04 04 Industry, construction and architecture Ditto 04 05 Transport Ditto 04 08 Fuel and energy Ditto 04 10 Other national economy activities Ditto 05 Environmental protection Ditto 06 Housing and utilities and housing construction Total for subsections 06 01 Housing construction Number of resident population 06 02 Housing and utilities Ditto 06 03 Municipal improvements Ditto 06 05 Other housing and utilities activities Ditto 07 Healthcare Ditto 08 Physical culture, sports, culture and mass media Ditto 09 Education Total for subsections 09 01 Pre-school education Number of children attending establishments providing pre-school education 09 02 General secondary education Number of students attending establishments providing general secondary education 09 03 Vocational education Number of students attending establishments providing vocational education 09 04 Specialized secondary education Number of students attending establishments providing specialized secondary education 09 06 Retraining and improving qualification of personnel Number of resident population 09 07 Out-of-school education and training Number of students attending establishments providing general secondary education 09 09 Other education activities Number of resident population 10 Social policy Total for subsections 10 01 Social protection Number of resident population 10 03 Allowances to families raising children Number of resident population
10 04 Youth policy Number of population from 15 to 29 years of age 10 06 Assistance in housing provision Number of citizens listed as citizens in need of improved housing conditions 10 08 Other social policy activities Number of resident population Table V-3. A list of indicators to calculate expenditure needs for an administrative and territorial unit of the primary level Section Type Designation of sections, subsections and types Indicator for calculation of expenditures per capita 01 General public activities Total for subsections 01 01 04 Local government and self-government bodies activities Number of employees of local government and self-government body 01 10 Other general public activities Number of resident population 06 03 Settlement improvements Number of resident population