There is a growing recognition that implementation strategies have received too limited attention in fiscal decentralisation. There has been too much attention to what should be done, and less focus on what can be done given the political, institu-tional, economic and financial constraints (Smoke 2013; Therkildsen 2000). The basic premise in much of the literature is that reform of the public sector is intrinsi-cally desirable, and resistance to change therefore based on dubious motives of self-interest among state elites (Therkildsen 2001: 40). However, as argued by Ther-kildsen, resistance to reforms cannot be explained only in terms of entrenched self-interest among those organisations, politicians and officials who stand to lose from such changes, as is often done in the literature. According to Therkildsen, re-sistance is not surprising since many opponents are simply not convinced of the appropriateness of ongoing reforms (ibid.).
In most African countries, creating a more effective, transparent and accountable tax system is part of the process of building a state able to promote growth, poverty reduction and social inclusion and to reduce aid-dependency more efficiently. Fiscal decentralisation offers opportunities in this process. Yet, despite major reforms of the central government tax system during the last two decades, local government tax systems remains largely neglected in many African countries. Generally, local revenue bases are distorting, costly to administer and exacerbate inequity. Limited co-ordination with respect to taxation is observed between various levels of govern-ment.In some countries, this has led to double taxation and inconsistencies be-tween local taxation and national development policies, such as job creation and private-sector development (Pimhidzai and Fox 2011).
An effective decentralisation framework must be based on clear rules. These rules apply to both tax legislation and tax administration. One of the main challenges is to build a coherent domestic revenue system which takes into account both local and central taxation. Fundamental issues to be addressed in the context of sub-national fiscal reforms are to redesign the current revenue structure and to strengthen finan-cial management. Tax legislation must be kept as simple as possible, as there is a risk of overburdening local governments and thereby make them ineffective and in-efficient. The reforms of the business licencing systems in some East African coun-tries show that such measures may contribute to enhancing taxpayers’ compliance and improving the accountability of public officials.
Better links between tax payments and public expenditure are essential to building effective and accountable states. Tax earmarking could therefore be a mechanism
to strengthen tax–expenditure linkages and to increase taxpayer compliance. Much of the public finance literature and many fiscal experts advise against earmarking, since it may reduce fiscal flexibility in the long term and also be abused for political purposes. Nevertheless, there may be a particularly strong case for using tax marking in developing countries. Importantly, in the face of political instability, ear-marking can stabilise funding for priority needs. Further, from a governance per-spective tax earmarking may be a useful strategy for building trust, achieving important revenue and spending objectives, improving monitoring and increasing public engagement. Recent experiences from Lagos, Nigeria, provide, as discussed above, evidence of the particular risks and benefits of tax earmarking.
While the current potential for most rural councils to raise substantial revenues of their own is limited, the potential for revenue enhancement in urban councils is bet-ter. In particular, there is a potential to increase the revenues from property taxation.
However, more realism is required when it comes to the implementation of a well-functioning property tax system. There is also room to increase the revenues from other types of taxes and non-tax revenue sources. In this regard, taxes on the consumption of utilities, fees and levies can have a high revenue potential for some local governments.
In most local government authorities in Anglophone Africa, local sources are gener-ally not sufficient to develop and supply adequate services for these fast-growing populations. The reality is that local government authorities in most countries will continue to be dependent on fiscal transfers from the central government for a long time. Only a few large urban governments located in rich areas are able to finance a substantial share of their total expenditure with their own revenue sources. Transfer systems based on revenue-sharing between the central and sub-national levels of government and grants from the central level should therefore be considered impor-tant components of fiscal decentralisation programmes. Sharing revenues with the central government may be a way to cover the imbalance between local authorities’
own revenues and their expenditure responsibilities. However, in order to be effec-tive, this type of transfer must be disconnected from discretionary decisions that create uncertainties for local governments regarding the amounts being transferred and/or the timing of the transfers.
Note
1 Other revenue sources also exist at sub-national levels, including foreign aid, self-help projects, constituency development funds and social action funds. In some countries municipalities are given the right to borrow to finance investments in local capital infrastructure.
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