Mikesell, John - Developing Options For The Administration of Local Taxes: An International Review - 2007

Developing Options for the Administration of
Local Taxes: An International Review*

JOHN L. MIKESELL
Do decentralization arguments extend to administration of subnational taxes?

While centralized administration promises quality service at reasonable cost,
it may dull accountability and slow the revenue flow. Also, central
administration may devote less attention to collecting these taxes than for its
own. Self-administration brings administration closer to taxpayers and assures
representation of jurisdictional interests in revenue apportionment disputes.
However, subnational governments may lack technical capacity. That is the
dilemma: while the central administration may be indifferent to rigorous
collection of subnational taxes, subnational governments may lack capacity for
self-administration. In practice, nations use many different alternatives for
administering subnational taxes.
INTRODUCTION
Decentralization has been a major thrust of governmental reform, motivated by the

belief that bringing decisions closer to the people will improve government efficiency,
effectiveness, and responsiveness. There is a sense that local governments around the
world are maturing and can make a real contribution to standards of living. The focus
has been on public service provision and, to a lesser extent, on revenue raising authority.
As the final declaration of the Fifth Global Forum on Re-inventing Government states:
‘‘Decentralization of the administrative, financial, and political aspects of government is
critical for the process of reform. It requires a legal framework that entails transfer of
authority and resources to local governments and instituting checks and balances
*
This article stems from work done for a presentation at the World Bank Workshop ‘‘Innovations in Local
Revenue Mobilization,’’ Washington, DC, June 24, 2003.
John L. Mikesell is Professor of Public Finance and Policy Analysis and Director of the Master of Public
Affairs Program, School of Public and Environmental Affairs, Indiana University, Bloomington, IN 47405-
1701. He serves as Editor-in-Chief of Public Budgeting & Finance and has written widely on sales and
property taxation and tax administration. He holds a BA from Wabash College and MA and PhD from the
University of Illinois, all in economics.
Mikesell / Developing Options for the Administration of Local Taxes 41

between central and local governments.’’1 What is clear is that effective decentralized
service provision requires revenue decentralization. Giving decentralized governments a
degree of revenue autonomy allows them to be more responsive to their citizens because
that lets them adjust the size of their budgets, not just allocate transferred funds, and
establish how the costs of services will be distributed. This paper extends the
decentralization discussion by exploring decentralization options for administration of
regional and local taxes and the gains that might result.2 Administration is crucial to tax
policy because, as Tanzi and Pellechio point out, ‘‘. . . poor tax administration will
change the way taxation affects the traditional objectives of government policy, namely,
allocation of resources, redistribution of income, and stabilization.’’3
Because the decentralization discussion now crosses nations at all stages of
developmentFdeveloped, developing, and transitionFthis investigation is not limited
to one sort of country. Indeed, there are lessons to be learned in the experiences of all.
The range of nations presents a great laboratory for experimentation in tax
administration, some exercises successful and some not, but all providing useful
information.
International experience offers two important lessons on local and regional revenue
autonomy. First, taxes available to a government might not be administered by the
government that levies them. When given the option, some subnational governments will
administer their own taxes and others will choose administration by others. There is no
necessary reason why the government that levies a tax should administer it, but neither is
there any necessary reason why it should not.
Second, decentralized administration should not automatically be excluded as
technically impossible or unwise for any country. Actual practice depends on a mix of
technical and political considerations.4 Decentralized administration maximizes local
revenue policy control, administration itself being an element of revenue autonomy,
while central administration provides advantages of scale and expertise. Central
1. United Nations. Final Declaration, Fifth Global Forum on Re-inventing Government: Innovation
and Quality in the Government of the 21st Century, 2003. Available from: http://unpan1.un.org/intradoc/
groups/public/documents/un/unpan012884.pdf
2. Ebel and Taliercio identify six distinct degrees of revenue policy autonomy: subnational government
sets tax rate and base, subnational government sets tax rate only, subnational government sets rate but only
within centrally permissible ranges, tax sharing whereby central and subnational revenue split can be
changed only with subnational government consent, revenue sharing with share determined unilaterally by
central government, and central government sets rate and base of subnational revenue. Degrees of
administrative autonomy are subject to similar gradients. Robert Ebel and Robert Taliercio, ‘‘Subnational
Tax Policy and Administration in Developing Economies,’’ Tax Notes International 37 (March 7, 2005):
919–936.
3. Vito Tanzi and Anthony Pellechio, ‘‘The Reform of Tax Administration,’’ International Monetary
Fund Working Paper 95/22 (Washington, DC: International Monetary Fund, 1995), 2.
4. Charles Veehorn and Ehtisham Ahmad, ‘‘Tax Administration,’’ in Fiscal Federalism in Theory and
Practice, ed. Teresa Ter-Minassian (Washington, DC: International Monetary Fund, 1997), 109.
42 Public Budgeting & Finance / Spring 2007

administration may be used for some local taxes, local administration for others, and
cooperative combination for still others.5
CENTRAL ADMINISTRATION
A single national tax administration collects all taxes in many countries. When only the
central government has taxing authority, single administration is the best option for
consistent and uniform administration. Uniformity is also critical when central taxes are
shared on an origin basis with subnational governments and is convenient when those
governments may levy supplemental (or piggybacked) rates on a national base.6
When a tax is centrally administered, the central government employs the
administrative staff. Administration may be decentralized through dependent regional
offices, but these are part of a single central administration. Other elements of central
administration typically include returns that encompass both central and subnational
taxes, unified taxpayer registration, taxpayer identification numbers that serve all
governments, combined revenue and taxpayer accounting information systems, and a
single delinquency control and audit strategy.7
The central administration collects central taxes, the revenue from which may finance
central government services, may be transferred to regional or local governments, or may
be shared by formula with lower governments, as well as any local or regional taxes.8 The
5. User chargesFwater, solid waste collection, etc.Fare typically administered by the government
providing the service, regardless of the tax collection system. They are not part of this investigation, however.
6. Unfortunately, the Government Finance Statistics of the International Monetary Fund do not
distinguish taxes levied by subnational governments from central government taxes that have been
allocated to subnational budgets. They are different: with the latter, the margin for tax policy remains
centralized and an important factor for localization, accountability, and prudence is gone. As Ebel and
Yilmaz write, ‘‘Accountability at the margin is an important characteristic of a revenue system that fosters
prudence in debt and expenditure management. It is impossible for a subnational government not to have
control over revenue margins and still be fully accountable’’: Robert Ebel and Serdar Yilmaz, On the
Measurement and Impact of Fiscal Decentralization (Washington, DC: World Bank, 2002), 11. Proper
categorization matters: if revenues assigned local government in Latvia are counted as own source, the own
source share of total revenue for 1999 equals 66.2 percent; if only those taxes controllable at the margin by
local government are counted, the share falls to zero because the central government establishes rate and
base for the ‘‘local’’ taxes: Organisation for Economic Co-operation and Development, The OECD 1999
Survey on Fiscal Design across Levels of Government: Summary Note (Paris: OECD, 2000), 29.
7. The functions differ for property taxes. Here, the emphasis is on maintaining property records and
developing a system of mass valuation of property parcels; the focus is not on encouraging voluntary
compliance and, because the parcels are immobile, collection can proceed more slowly. The process is
critical in countries in transition from plan to market; Lithuania presents one example of this process
(Kestutis Sabaliauskas and Albina Aleksiene, ‘‘Progress toward Value-Based Taxation of Real Property in
Lithuania,’’ Land Lines, October 2002).
8. Tax sharing transfers, used in many countries of the former Soviet Union and in Germany, involves a
tax adopted by the central government and shared on a derivation basis. These arrangements do not afford

National Tax Board/Regional Tax Authorities structure in Sweden illustrates
decentralization within a central system. Ten regional authorities (one for each county)
collect taxes. Each tax authority has a county tax director and a governing council, but
they are under the guidance of the National Tax Board. Within the National Tax Board
is the Enforcement Service (KFM), itself organized with ten regional authorities (not
coterminous with Tax Authority regions), that confirms and collects debts. The KFM
collects unpaid taxes for the Tax Authority, but its authority extends to other
government claims (television licenses, parking fines, etc.), and to private judgments from
general and administrative courts. The National Tax Board administers both
organizations, issues directives on their implementation of laws, and maintains uniform
administration across the country.
The single, central administration would collect any regional or local taxes. The
Russian Federation offers one example: the central Ministry of Taxation collects all taxes
throughout the country, including those levied by regional or local legislative action.9
Some taxes for subjects of the Federation and local units of self-government are
piggybacked tax surcharges (e.g., the enterprise profits tax), some may be levied by the
Federation Duma for subnational budgets (e.g., the individual income tax), and some are
levied by action of the region (e.g., the retail sales taxes while they were permitted) or by
localities, but the central ministry administers them all. The new land tax, intended to
become a primary source of revenue for units of local self-government, has properties
valued according to regulations promulgated by the Federal Agency for Cadastre of
Immovable Property, although actual assessments are performed by private contrac-
tors.10 The units of local self-government select the tax rate, within a prescribed limit,
and the Ministry of Taxation collects the tax.
In the early transition years, dual subordination in tax administration was a
significant concern in Russia and other countries of the former Soviet Union: while tax
inspectors were organizationally part of the central government (the tax inspectorate
within a ministry of finance or an independent ministry of taxation), the field staff had
(footnote Continued)
the fiscal autonomy of local taxation, because the structure of the taxes, their rates, their administration,
and the sharing rate are centrally controlled. They are not local taxes, but rather are a special transfer
program. The most complete tax sharing programs among industrialized democracies is in Norway; local
governments receive an established percentage of net wealth and individual income tax collected within
their jurisdictions. The localities receive a sizable share of all tax collected in the nation, but they lack tax
autonomy because base, rate, and administration are central choices: Paul Van den Noord, ‘‘The Tax
System in Norway: Past Reforms and Future Challenges,’’ Organisation for Economic Co-operation and
Development Economics Department Working Paper No. 244 (Paris: OECD, 2000), 23–24.
9. The federal Tax Police, separate from the Ministry of Taxation, was responsible for preventing,
exposing, and suppressing tax crimes and violations of the tax law. Its local offices were distinct from those
of the Ministry of Taxation. In winter 2003, the Tax Police became a part of the Ministry of the Interior.
10. Valentina Gerasimova et al. ‘‘Land Value Taxation for Local Government Finance in the Russian
Federation: A Case Study of Saratov Oblast,’’ Working Paper WP06KZ1 (Cambridge, MA: Lincoln
Institute for Land Policy, 2006).

considerable loyalty to local authorities because those authorities provided office space,
heat, supplies, and other amenities, if not salaries or salary supplements and it was
common for regional authorities to have the right to approve appointments of regional
administrators of the central tax authority. This created administrative and financial
problems. In this period, not all tax liabilities were collected and not all collections were
in live cash, as opposed to payment in kind. Divided loyalties brought subnational
budgets favored treatment. Regional and local governments got cash; the central
government got payment in kind that could be valued at whatever amount the collection
authority chose. This illustrates a general issue whenever administration of one
government works for another: will effort be vigorous when the proceeds will go to
another government?11
Examples of higher administration of lower-level taxes include the following:
(i) Localities in Nordic countries supplement the central personal income tax with a
piggybacked tax administered by the central government. For example, the
Swedish National Tax Board previously discussed administers such local taxes.
The rates are proportional but vary between municipalities, with lowest rates in
well to do suburbs of large cities and highest rates in the rural north and in
municipalities suffering industrial decline. Denmark, Finland, and Iceland levy
similar taxes.
(ii) Some localities in the United States levy supplements to state individual income
taxes. The local tax is commonly satisfied through a single line on the state return.
State administration makes it feasible to tax a broad measure of taxable income,
not just payroll, the base typical of local administration, but localities complain
about slow distribution of collections and accuracy of revenue distribution. As
far as state administrators are concerned, allocating collections to the proper
locality complicates revenue accounting and enforcement.
(iii) Some local governments in the United States levy supplements to the state retail
sales tax. Indeed, local sales taxes are the second largest source of tax revenue to
local governmentsFa distant second to property taxes in importance.12 State
authorities must undertake revenue accounting to separate payments between
state and local amounts and among the several taxing localities and distribute
collections on a timely basis.
(iv) Local governments in Switzerland levy supplements to canton individual income
taxes. Each canton has its own tax system and local communes may levy taxes as
authorized by the canton. The communal tax equals a percentage or multiple of
11. In Vietnam, administration is central and tax revenue is shared with subnational governments.
However, dual subordination between central and subnational governments provides the subnational
governments a degree of control at the margin (Ebel and Taliercio, op. cit.).
12. In large American cities, a local income or sales tax often yields more revenue than does the property
tax. For instance, income taxes in New York City and Washington, DC, yield more than do their property
tax. In Denver, the city sales tax yields more than half of all city tax revenue.

the basic canton tax rate. Federal law requires cantons to harmonize with the
federal base, but they may set the amount of deductions and their rate schedules.
The communal tax piggybacks the canton tax and federal tax is reported on the
canton return. Thus, the canton is responsible for assessing and collecting federal,
canton, and communal income tax.13 In contrast to many nations, canton, and
municipal governments receive the bulk of income tax collections, not the federal
government, and the income tax is a modest federal revenue source.
(v) Property taxes in many countries give local governments some choice of tax rate,
but the national revenue agency administers the tax. Sometimes, however, the
localities do not choose the rate, but receive the proceeds of the centrally adopted
and administered tax (Lithuanian is one example); these arrangements are
properly considered origin-based transfers from a central tax. Assessment and
collection are central in such diverse countries as Albania, Armenia, Cyprus, the
Czech Republic, Estonia, France, Georgia, Indonesia, Jamaica, Jordan, Latvia,
Pakistan, Portugal, Russia, and Singapore.14 Municipalities in Estonia perform
some property tax administration duties, but the central government dominates
assessment and collection. In countries of the former Soviet Union, the tax is
often based on property area, sometimes with index adjustment for property type,
with little or no local choice over rates.
(vii) The Canada Customs and Revenue Agency (CCRA) administers provincial sales
taxes with the national goods and services (value added) tax (GST) in three
provinces, the provincial corporate income tax in all provinces and territories
except Quebec, Ontario, and Alberta, and the personal income tax in all provinces
and territories except Quebec. A single return satisfies both national and
provincial taxes.15 CCRA administration is free if the provincial tax copies its
national counterpart, costs the incremental cost of administration if the
provincial tax is harmonized but differs somewhat from the national counterpart,
and is charged average cost of administration if the tax is not harmonized.
Local governments can arrange centralized administration for themselves, if

permitted. One example is the Central Collection Agency (CCA), a part of the Cleveland
(OH, USA) Department of Finance, that administers the individual income taxes
(applied to wages, salaries, and other employee compensation, rental income, and
13. German lander also administer major central taxes, another reversal of the normal arrangement for
unified administration.
14. William Dillinger, Urban Property Tax Reform (Washington, DC: World Bank, 1991); Richard R.
Almy, ‘‘A Survey of Property Tax Systems in Europe,’’ Report prepared for Department of Taxes and
Customs, Ministry of Finance, Republic of Slovenia (Phoenix, AZ: Almy, Gloudemans, Jacobs, and
Denne, 2001); and William McCluskey and Brendan Williams, ‘‘Introduction: A Comparative Evaluation,’’
in Property Tax: An International Comparative Review, ed. William McCluskey (Brookfield, VT: Ashgate
Publishing, 1999), 1–31.
15. Canada Customs and Revenue Agency and Department of Finance, Federal Administration of
Provincial Taxes, New Directions (Ottawa: Department of Finance, 2000).

unincorporated business profits) levied by 43 northern Ohio municipalities.16 CCA
performs all administrative functions: it maintains the taxpayer list, mails returns to
taxpayers, provides taxpayer assistance, processes payments (both estimated and
reconciliations from individual taxpayers and withholding payments from employers),
bills any tax due and assesses penalties and interest, mails delinquency notices, audits
taxpayers, and distributes collections each month.17 CCA contracts limit its service
charge to 5 percent of collections, but actual charges, based on CCA expenses (the total
is allocated among municipalities by a formula based on revenue and number of
transactions), are much below the limit. Municipalities can chose whether to levy the tax,
can choose the rate that they levy, and can choose whether to administer the tax
themselves or to contract with CCA for the service. The municipalities have great fiscal
autonomy and, because municipalities can opt in or out, CCA must pay great attention
to service quality and cost.
INDEPENDENT LOCAL ADMINISTRATION18
Independent subnational authority to enact taxes and to administer them affords high
fiscal autonomy. These subnational taxes might not be levied by the national
government, so independent administration may diversify the overall revenue scheme
of the country as well as provide regional or local fiscal autonomy. Independent
administration requires regional or local governments to staff revenue agencies, write
administrative regulations, establish administrative processes, educate taxpayers about
their responsibilities, maintain taxpayer records, and develop delinquency control and
audit systems. Performance by state or provincial administrations is seldom reviewed
from above, although these governments do often provide technical assistance to and
performance evaluation of administration by their localities.19
16. There are other income tax administration groups in the state. One, the Regional Income Tax
Agency, serves even more localities than CCA.
17. An individual taxpayer earning income in more than one CCA municipality would file one return
with CCA that distributes taxable income and tax across each municipality and make a single payment to
CCA. Similarly, an individual may reside in one municipality, be employed in another, and owe income tax
to each. That would also be handled in the single return to CCA if both municipalities have CCA contracts.
Thus, the CCA provides taxpayer convenience.
18. Lower-level governments may also administer taxes levied by higher-level governments, although
this is rather rare. The most extreme example is in Germany where the Lander (regional governments)
collect the major taxes, even though these governments lack taxing authority themselves and survive on
revenue from shared federal taxes. In the United States, states that levy property taxes normally use local
assessment, collection, and enforcement systems, rather than establishing their own systems.
19. State administrations in the United States often evaluate the work of local property tax assessors.
Two examples: Maryland State Department of Assessments and Taxation, Assessment Ratios Survey
Report 2005. Available from: http://www.dat.state.md.us/sdatweb/stats/05rr_cov.html and New York Office
of Real Property Services, Assessment Equity in New York: Results from the 2005 Market Value Survey.

An important standard of public finance is the principle of subsidiarity, the idea that
governmental actions should be taken at the lowest level of government at which the
desired objectives can be achieved so that choices will be most responsive to the wishes of
the people. The principle suggests that independent regional and local tax administration
should be considered as an alternative for efficient, effective, and responsive implementa-
tion of tax policy. Casanegra de Jantscher maintains that ‘‘tax administration is tax policy’’
in developing countries.20 The same certainly holds true in transition nations and, given
variability in enforcement, to an important degree in any nation. If it is reasonable for
regional and local governments to develop tax policy in order to decentralize government
financing, then it is similarly reasonable to consider the economic and technical feasibility
of decentralized administration. This is particularly critical because the taxpayer’s contact
with the tax lawFthe representation of tax policyFis through the administrative
apparatus. As far as taxpayers are concerned, tax administrators represent tax policy.
Subnational governments need administrative capacity that is adequate to equitable
and efficient collection of taxes for which they are responsible. Because administration
itself is an element of revenue autonomy, the fact that centralized administration might
be less costly, might improve some facets of perceived distributional equity, or might
generate some additional revenue is not decisive. Leaving choice of administration to
responsible subnational authorities is part of autonomy and, as seen in Canada, can lead
to central administration of regional taxes, or, in the United States, to regional
administration of local taxes, as well as to independent subnational administration,
depending on the attractiveness (economic and political) of the options. Some taxes are
less technically suitable for subnational administration than others and not all
administrative functions are efficiently performed by small governments. However,
where lower-tier governments can become technically competent, subnational adminis-
tration can be considered.
United States
In the United States, finances are organized around the presumption that governments
will be responsible for financing the services that they provide, although that is less so for
localities than for state governments, and that taxing governments will be responsible for
deciding how to administer the taxes they levy. Duncan and McLure observe that ‘‘tax
policy and administration . . . are perhaps as decentralized as in any country in the
Available from: http://www.orps.state.ny.us/ref/pubs/cod/2005mvs/index.htm. The sales ratio study, an
analysis of the ratio of parcel taxable value to selling price of recently sold properties, which tests whether
the average ratio is consistent with the law and whether there are wide disparities in the ratio across
property parcels is the basic monitoring tool for property tax administration. However, few governments
outside the United States and Canada do such evaluations.
20. Milka Casanegra de Jantscher, ‘‘Administering the VAT,’’ in Value Added Taxation in Developing
Countries, eds. Malcolm Gillis et al. (Washington, DC: World Bank, 1990), 179.

world.’’21 States have almost unlimited discretion as to the taxes they levy and they must
administer those taxes themselves. From 1976 to 1992, the federal Internal Revenue
Service (IRS) could administer state income taxes, provided the state adopted the federal
tax base and met a few other conditions. No state accepted the offer, because state
lawmakers believed it to excessively constrain their autonomy.
The most important state taxes are the retail sales and the individual income taxes,
together yielding two-thirds of state tax revenue.22 States use the federal law as a starting
point for their individual (and corporate) income taxes, from convenience rather than
any requirement, but they collect each tax on their own. There is no federal general sales
tax, so states define and enforce these taxes independently, although they do copy each
other. Few states perform rigorous measurement of tax compliance rates, but those that
do find compliance comparable to that achieved by the federal IRS.23 States benefit from
income tax enforcement efforts of the IRS, even without piggybacking, but they achieve
excellent sales tax compliance on their own. Estimates show state sales tax compliance to
be better than for the federal individual income tax.
The majority of the more than 87,000 local governments may levy taxes within state
constraints. The real property tax is the primary local tax sourceF73 percent of total tax
revenue nationwide in 2004Fand the localities usually administer the tax themselves,
although within state standards and with state technical assistance and monitoring.24
Many localities hire private mass appraisal firms for property valuation, thus taking
advantage of their technical expertize, experience, and scale.25 Governments that
contract for appraisal usually handle the other elements of tax collection themselves.
Localities in some states levy retail sales and income taxes, but many of these taxes are
administered by the state, as described earlier. When local governments collect their own
sales taxes, the tax base frequently differs from that of the state tax. That complicates
21. Harley T. Duncan and Charles E. McLure Jr., ‘‘Tax Administration in the United States of
America: A Decentralized System,’’ Bulletin of International Fiscal Documentation 51 (February 1997): 74.
22. U.S. Bureau of Census, State and Local Government Finances: 2003–04. Available from: http://
www.census.gov/govs/www/estimate04.html
23. The state of Minnesota estimated tax gaps (the difference between what should be reported and
what actually is paid) at 8.2 percent for its sales and use tax, 12.0 percent for its individual income tax, and
3.0 percent for its corporate income tax: Minnesota Department of Revenue, Annual Performance Report
2000 (St. Paul, MN: Minnesota Department of Revenue, 2001), 12. Similar work by the state of
Washington estimated the noncompliance for its sales tax to be 1.5 percent of total liability; for its use tax,
20 percent of liability; and for its business and occupation tax (a multirate turnover tax), 2.6 percent of
liability: Washington Department of Revenue, Department of Revenue Compliance Study (Olympia, WA:
Washington Department of Revenue, 2003).
24. U.S. Bureau of Census, State and Local Government Finances: 2003–04. Available from: http://
www.census.gov/govs/www/estimate04.html
25. Evidence has shown local property assessors, whether elected, appointed, or working under private
contract, to all be capable of good quality, i.e., generally uniform, assessments: John H. Bowman and John
L. Mikesell, ‘‘Elected versus Appointed Assessors and the Achievement of Assessment Uniformity,’’
National Tax Journal 42 (June 1989): 181–189. The tools necessary for good assessmentFmaps, trained
personnel, information technology, etc.Fare easily available where there is political will.

vendor compliance, as does duplicate accounting and reporting to the two administra-
tions. Locally administered income taxes usually are limited to earned income (wages,
salaries, and sometimes business earnings). Local enforcement of these income and sales
taxes is seldom as rigorous as state administration, although larger localities have serious
delinquency control and audit programs.
Canada
The tradition in Canada has been independent administration of major provincial and
local taxes, with the exception of income taxes as noted previously (and even with income
taxes, some provinces administer their own taxes: Quebec for individual and corporate
and Ontario and Alberta for corporate). The adoption of the federation GST brought a
change in the scheme. The provincial sales tax regimes now divide into four groups: (i)
five provinces levying and administering their own sales taxes independent of the
federation tax and of each other; (ii) one province (Quebec) levying its own sales tax and
administering both that tax and the federation tax; (iii) three provinces levying a sales tax
that is fully harmonized with the federation tax and administered by CCRA; and (iv) one
province and all the territories levying no sales tax. As in the United States, the quality of
subnational administration is high.
Australia
Taxes are levied and collected at three levels of government in Australia, although a
much greater share of subnational expenditure is financed by central grants than is the
case in the United States and Canada. The states must rely on substantial federal grants
because they are blocked by interpretation of the national constitution or by grant
stipulations from levying any general consumption or broad-based income taxes.
The Australian Tax Office administers the broad-based goods and service (value
added) tax, income taxes assessed on companies, trusts, and individuals, and a variety of
lesser indirect taxesFin other words, all the major taxes levied in the country.
Independent revenue departments in each state and territory administer taxes levied by
these governments, the most significant being employer payroll taxes, land taxes, and
stamp duties. Municipalities levy and collect real estate taxes (rates) on the basis of rate
notices distributed to taxpayers. State government valuation offices or contract valuers,
not offices of the municipalities, establish the taxable value for these municipal levies.
The states establish the standards that must be used for these valuations. There is no
provision for information exchange across the levels of government.
Brazil
National, state, and municipal governments in Brazil design, implement, and collect
their own taxes. The most productive tax in Brazil is the Imposto Sobre Operacoes

Relativas a Circulacao de Mercadorias e Servicos (ICMS), a value-added tax that
applies at all stages of production/distribution, generally to goods but not to services
(except interstate and intercity transportation and communication services).26 State tax
authorities collect the tax, but the federal constitution requires states to transfer 25
percent of proceeds to their municipalities, partly on the basis of origin of collections
and partly according to state legislated formulas. The states set the rate on intrastate
trade within federally established floor and ceiling; there are multiple rates by type of
product (the standard rate is 17 or 18 percent; luxuries may be taxed at a higher rate
and some staple food products may be taxed at a lower rate). However, a common
federal rate applies to interstate sales.27 The importing state allows credit for tax paid
to the state of origin. The normal interstate rate is 12 percent, but on trade from rich to
poor state the rate is 7 percent. The ICMS administrations establish fiscal frontier
checkpoints, what amounts to customs posts, to control these inflows and outflows.
The information collected here is transmitted to assessing authorities to verify payment
of tax on the transactions.28 Of course, these checkpoints both interfere with the free
flow of trade and create an opportunity for corruption. The federal government levies
the Imposto sobre Produtos Insustrializados (IPI), a value added tax on manufacturing
levied on all transactions of taxable industrial products on a base defined as sales less
purchases of inputs.29 However, there is no administrative integration from federal to
state levels between IPI and ICMS, although ICMS registration is coordinated with
federal income tax authorities.
Nigeria
Nigeria provides for subnational tax administration, but the results are less satisfactory
than in the countries discussed before. Much of federal revenue goes to a Federation
Account for formula distribution among federal, state, and local authorities. The value
added tax is also shared with the subnational portion distributed partly by formula and
partly by place of collection. State and local governments collect what are called
26. Other taxes include state taxes on property and automobiles, municipal taxes on urban property and
on real estate transactions, and federal taxes on income, excises, and rural land. Municipalities also levy the
Imposto Sobre Servicos (ISS), a locally collected tax on gross receipts of services in industrial, commercial,
and professional sectors. Rates vary across municipalities from 0.5 to 10 percent, within a maximum
established by federal law.
27. The National Public Finance Council (Conselho de Politica Fazendaria or CONFAZ), a body
consisting of all state secretaries of finance, coordinates exemptions and rate reductions for the interstate
ICMS. CONFAZ has failed to stop tax wars between the states fought through special tax preferences, but
it has been working to develop a unified taxpayer master file from taxes at all levels to aid tax
administration.
28. Mahesh C. Purohit, ‘‘Value Added Tax in a Federal Structure: A Case Study of Brazil,’’ Economic
and Political Weekly 32 (February 1997): 361.
29. Around 40 percent of IPI revenue comes from automobiles, tobacco products, and beverages.
Three-quarters of all collections come from three states: Minas Gerais, Rio de Janerio, and São Paulo.

Internally Generated Funds; much of this revenue comes from taxes for which the federal
government, not the subnational government, determines base and rate. Some minor
taxes may be adopted and collected on state or local action alone.
The states collect their taxes, including those adopted by federal law, with their own
State Board of Internal Revenue. Local Government Revenue Committees administer
the minor revenue sources assigned the local authorities. Since 1998, each state has had a
Joint State Revenue Committee that includes the chair of the state service and the chairs
of the local revenue committees; the committee is responsible for harmonizing taxation
within the state. The 1993 personal income tax decree established a Joint Tax Board that
includes chair of the Federal Inland Revenue Service, the national tax collection agency,
and a member from each of the states. Among its functions are to deal with double
taxation issues and to promote uniformity in the application of the personal income tax
across the states.30 The subnational units frequently lack adequate systems to track
collections, master lists of taxpayers, and adequate staff. While they can track companies
through the national value-added tax (VAT) registration numbers, they have no
identification number system for individuals.31
In contrast to most experience, this system gives subnational governments
considerable autonomy in tax administration while limiting their autonomy in regard
to their tax structure. State tax policy discretion is solely in regard to how they
administer their taxes that have been adopted by the national government. Therefore, the
only difference in tax effort across subnational units can come through differences in
administrative vigor, not thorough the more transparent variation in tax base or rate.
Unfortunately, administrative capacity has fallen short of the demands of administrative
autonomy. All levels of administration face problems of low compliance, bribery and
corruption, shortage of qualified staff and inadequate resources, poor records manage-
ment, and absence of internal controls.32
Estonia
Estonia offers local authority to levy and administer a sales tax. The taxes are on the
gross receipts of sales to final consumers and rates may not exceed 1 percent. Local
officials verify taxpayer reports by checking reported gross receipts against VAT sales
declarations and enforce the taxes by denying operating licenses to businesses that have
not paid the tax. Localities may choose to contract with the National Tax Board for
30. International Monetary Fund, ‘‘Nigeria: Selected Issues and Statistical Appendix,’’ IMF Country
Report No. 01/132 (Washington, DC: IMF, 2001).
31. James Alm and Jameson Boex, ‘‘An Overview of Intergovernmental Fiscal Relations and
Subnational Public Finance in Nigeria,’’ International Studies Program Georgia State University Working
Paper 02–1 (Atlanta: Georgia State University, 2002).
32. J. O. Anyadyba, ‘‘A Critical Appraisal of the Nigerian Tax System: 1980–2002,’’ Finance India 20
(March 2006): 141–142.

collection of the tax.33 Seven of 247 local governments collected a local sales tax in 2002,
all choosing self-administration. Yields ranged from 0.02 to 1.2 percent of total local
revenue, with a median of 0.6 percent among adopting local governments.
Czech Republic
The pattern in the Czech Republic, in which the local government administers only
minor taxes and fees, represents the situation in many countries. Most local taxes have
been adopted by the national parliament and are collected by the central tax authority
(the General Financial and Tax Board). Most local revenue comes from shared personal
and corporate income taxes and a property tax. Local governments may levy a property
tax rate within central rate limits, but they have no authority over income tax rates or
base. The local share of income taxes is distributed according to origin of collections and
population. The locality in which the property is located receives the property tax. The
General Financial and Tax Board under the Ministry of Finance administers all major
taxes in the Republic, including those accruing to both central and local governments,
through 223 local offices.
The national parliament lists local fees and taxes that may be levied, subject to rate
limits: dog fees, resort and recreation fees on visitors, tax on use of public space, fees on
entry tickets, fees on recreational units, motor vehicle entry fees, and fees on gambling
machines. Over 90 percent of Czech municipalities levy at least one of the taxes; the most
productive are those on use of public space and gambling. These sources yield only 2.7
percent of local tax revenue (including the shared taxes as local taxes) in 1999.34
However, local government tax offices are fully responsible for assessment, collection,
enforcement, audit/inspection, and first level appeals for these taxes.35 This scheme
presents a veneer of fiscal autonomy, including autonomous administration, but because
the sources have minimal revenue potential, the experience provides little evidence of
actual local administrative capacity.
Hungary
Hungary, another unitary state, places taxing authority and tax administration at central
and local levels. The former collects national taxes, including both taxes that support the
central government and taxes that are shared or otherwise distributed to localities. The
33. Georg Sootla et al., ‘‘Local and Regional Tax Administration in Estonia,’’ in Local and Regional
Tax Administration in Transition Countries, ed. Mihaly Hogye (Budapest: Local Government and Public
Service Reform Initiative Open Society Institute, 2000).
34. Organisation for Economic Co-operation and Development, Fiscal Design Across Levels of
Government, Year 2000 Survey, Country Report: Czech Republic (Paris: OECD, 2001), 27.
35. Kveta Kubatova, ‘‘Local and Regional Tax Administration in the Czech Republic,’’ in Local and
Regional Tax Administration in Transition Countries, ed. Mihaly Hogye (Budapest: Local Government and
Public Service Reform Initiative Open Society Institute, 2000).

central Tax and Financial Control Office administers the income taxes, the value-added
tax, and central excises through 19 offices operating around the country and four offices
in Budapest. The local government tax offices administer the taxes levied by the local
government; these offices are independent of local offices of the Tax and Financial
Control Office and of each other.
Under the Local Self Government Law (1990), local governments share certain
centrally raised revenues (individual income tax, vehicle tax, and rental fees for agricultural
land) and receive state grants, but they also levy their own taxes. They are permitted six
types of taxes: a local business tax based on net sales revenue of products or services sold,
net of the cost of goods sold, the value of subcontractor’s work, and the cost of materials;
a communal tax on private individuals (flat amount per dwelling); a communal tax on
businesses (based on number of employees); a land tax (based on either area of plot or its
market value); a building tax (based on either useful surface area or market value); and a
tourism tax (based on guest nights spent, charge per guest night, or net floor space). For
the whole nation, local taxes generated 39.8 percent of current local revenue in 1997.36 The
local business tax, the most productive, yields over 80 percent of local tax revenue. A few
taxpayers, sometimes only one, pay half or more of total tax revenue in some jurisdictions.
In these instances, the local government sometimes negotiates with the large taxpayers the
amount that will be paid and sometimes those large taxpayers expect extraordinary rights
to participate in decisions about how local revenue will be spent.
The local tax offices perform the standard administrative functions. Local offices use
the same taxpayer identification numbers as the central government tax offices, but central
and local files are not integrated. However, the local tax authority may request
information from the central tax administration on taxpayers within its jurisdiction, an
important tool in identifying noncompliant taxpayers. Central authorities give local
governments software for computer-based taxpayer registration, thus allowing a uniform
system of registration across the administrations.37 Local governments may not access
bank accounts to clear tax obligations, so the central offices have this collection advantage.
The taxes in Hungary make a considerable contribution to the finance of local government
services and the local governments make a concerted effort to administer them.
Property Tax Experience

Real property taxes are often cited as good candidates for independent subnational
administration.38 Their strengths for subnational application are outlined by McCluskey
36. Mihaly Hogye et al., ‘‘Local and Regional Tax Administration in Hungary,’’ in Local and Regional
Tax Administration in Transition Countries, ed. Mihaly Hogye (Budapest: Local Government and Public
Service Reform Initiative Open Society Institute, 2000), 238.
37. Organisation for Economic Co-operation and Development, The OECD 1999 Survey on Fiscal
Design Across Levels of Government: Summary Note (Paris: OECD, 2000), 43.
38. A real property tax requires a listing of parcels that includes for each its ownership, location, area,
improvements, land use, and assessed value. To base the tax on current market value also requires an active

and Williams: real property ‘‘is visible, immobile, and a clear indicator of one form of
wealth. The property tax is thus difficult to avoid and if well administered can represent a
nondistortionary and highly efficient fiscal tool.’’39 Furthermore, few fiscally significant
taxes are more susceptible to local administration than the property tax. And
administration is important for gaining the fiscal potential of the tax. As Roy Kelly
observes, ‘‘improving administration, not fine-tuning policyFis the critical key to better
property tax performance.’’40 Local governments in larger urban areas often are
responsible for administration of their real property taxes, even when subnational
governments are given no other significant fiscal autonomy. However, except in a small
number of countries, notably the United States and Canada, the tax has not been used to
its full potential and is frequently levied, if at all, at the central level, thus not
contributing what it might for local fiscal autonomy.41 When localities administer the
tax, they are responsible for maintaining property and ownership records, determining
taxable property values, calculating and distributing property tax bills, managing receipt
of payment, and applying tax enforcement actions against nonpayers. Countries in which
the local property tax base is assessed and collected locally include Brazil, India, Japan,
Mexico (sometimes state), Kenya (largest cities), Philippines, Hungary, Romania, Slovak
Republic, Greece, Italy, Netherlands, Switzerland (cantons), and the United States.42
Why are not locally administered real property taxes more heavily exploited for
subnational revenue? The reasons are more political than economic or technical. First,
the difficulty and the cost of administering an equitable property tax is exaggerated by
property market. With few transactions to work with, market value estimates are extremely hypothetical.
McCluskey and colleagues (William J. McCluskey, Francis A. S. Plimmer, and Owen P. Connellan,
‘‘Property Tax Banding: A Solution for Developing Countries,’’ Assessment Journal 9 (March/April 2002):
37–47) suggest that United Kingdom-style property banding (parcels are assigned to general valuation
bands with all parcels in a band paying the same tax and with no attempt to assign a discrete value to any
parcel) could be useful as a value-oriented system in transition and developing countries.
39. William McCluskey and Brendan Williams, ‘‘Introduction: A Comparative Evaluation,’’ in
Property Tax: An International Comparative Review, ed. William McCluskey (Brookfield, VT: Ashgate
Publishing 1999), 5.
40. Roy Kelly, ‘‘Designing a Property Tax Reform Strategy for Sub-Saharan Africa: An Analytical
Framework Applied to Kenya,’’ Public Budgeting & Finance (Winter 2000), 49.
41. A common argument for centralization of real property tax administration involves economies of
scale, specialization of staff, and computerization. However, no quality advantage from jurisdiction size has
been found in empirical evidence from the United StatesFsmaller unit valuations are at least as accurate as
those done in larger jurisdictions: Michael E. Bell, An Optimal Property Tax: Concepts and Practices
(Washington, DC: Economic Development Institute, World Bank, 1999), 14. Smaller units overcome and
size advantage by contracting for outside expertise.
42. William Dillinger, op. cit.; Richard R. Almy, ‘‘A Survey of Property Tax Systems in Europe,’’
Report prepared for Department of Taxes and Customs, Ministry of Finance, Republic of Slovenia
(Phoenix, AZ: Almy, Gloudemans, Jacobs, and Denne, 2001); and William McCluskey and Brendan
Williams, op. cit., 1–31.

those more familiar with income and consumption taxes than with property taxation.
The property tax requires assessment of the tax base, not an accounting of transaction
records.43 As Bell and Bowman point out, ‘‘the fact that most property does not sell in a
market transaction each year means that the value is not observable.’’44 Assessment is
costly. However, there is virtually no compliance cost, so administrative cost equals total
cost of collection.45 The total collection cost for a typical taxpayer passive real property
tax is not dramatically different from the total cost of collecting taxpayer active sales or
income tax when one recognizes both administrative and compliance costs.46 And the
difficulty issue is exaggerated: in contrast with the private appraiser, the tax assessor is
concerned less with the precise of valuation of each parcel than with producing a uniform
standard for distributing the property tax burden across parcels throughout the
assessor’s jurisdiction. For that purpose, the techniques of mass assessment are well
developed. Valuations will be estimates, so a market-based property tax absolutely
43. The property tax need not be market based. A simple area-based system affords a transparent
measure for distribution of tax burden: those with more land or a larger structure pay a higher property tax
than do those with less. Zorn, Tesche, and Cornia propose such a scheme in Bosnia–Herzegovina because
the area base ‘‘reduces the contentiousness of what usually is the most controversial administrative
questionFthe method used to value property.’’ (C. Kurt Zorn, Jean Tesche, and Gary Cornia,
‘‘Diversifying Local Government Revenue in Bosnia–Herzegovina through an Area-Based Property Tax,’’
Public Budgeting & Finance (Winter 2000): 86.) An area-based assessment scheme, with adjustment for
location and type of property, is used in the Slovak Republic (Phil Bryson and Gary C. Cornia, ‘‘Fiscal
Decentralization and the Property Tax,’’ in National Forum on Fiscal Decentralization: Possibilities and
Preconditions of Fiscal Decentralization in the Slovak Republic, ed. Alexander Thurzo (Washington, DC:
The Fiscal Decentralization Initiative for Central and Eastern Europe, 2000, 8–9). Area-based systems are
common in countries in transition from Soviet-style systems ‘‘because they satisfy a widely held belief that
taxation decisions are official acts that must be satisfied by the proper authority, an approach at odds with
a tax base drawn from market data. . . . As a result, sometimes, the best way to introduce a value-based tax
is to introduce market elements into the area-based system.’’: Jane Malme and Joan M. Youngman,
‘‘Introduction,’’ in The Development of Property Taxation in Economies in Transition, Case Studies from
Central and Eastern Europe, eds. Jane H. Malme and Joan M. Youngman (Washington, DC: World Bank,
2001), 7.
44. Michael E. Bell and John H. Bowman, ‘‘Local Property Taxation in South Africa: Current
Performance and Challenges for the Post-Apartheid Era,’’ Public Budgeting & Finance 17 (Winter 1997): 77.
45. Taxpayers in some countries, e. g., Sweden, Poland, Slovak Republic, Indonesia, may be required to
provide information to the tax authorities to assist their valuation work. Other countries require taxpayer
valuation along with reporting and the enterprise property tax in Russia is self-assessed. Taxpayer activity
is particularly common for transition countries, where the socialist system required taxpayer-based
declaration. Among developed countries, Turkey probably places greatest responsibility on the property
owner, requiring reporting, valuation, and calculation of tax. In general, a fiscal cadastre which organizes
land and buildings geographically, rather than a taxpayer-based file, better insures that all taxable parcels
are discovered and correctly valued (William McCluskey, Richard Almy, and Alena Rohlickova, ‘‘The
Development of Property Taxation in the New Democracies of Central and Eastern Europe,’’ Property
Management 16, no. 3 (1998): 145–159).
46. Richard R. Almy, ‘‘A Survey of Property Tax Systems in Europe,’’ Report prepared for Department
of Taxes and Customs, Ministry of Finance, Republic of Slovenia (Phoenix, AZ: Almy, Gloudemans,
Jacobs, and Denne, 2001), 9.

requires a transparent and accessible appeal process in which mistakes by the tax assessor
can be resolved.
Second, the property tax has powerful enemies. The tax strikes people with wealth, the
real properties to be taxed are obvious, and the levy itself is visible. People with property
wealth usually have political power and use that power to thwart taxes aimed at their
holdings. They prefer taxes borne by others; preventing a real property tax provides a
way to duck a greater share of the cost of government. As Burgess and Stern maintain,
low utilization of property taxation ‘‘reflects the success of the resistance of the rich and
powerful to measures which harm their interests.’’47
Third, property owners have few avoidance options. Because the tax places few
compliance requirements on property owners, the taxpayer has few lawful options for
controlling liability. And when government agents do valuations, as is typically the case,
the taxpayer has scant opportunity to fiddle to reduce tax.48 Evading a real property tax
requires collusion with government officials, not concealment and accounting tricks; it
cannot be done independently by the taxpayer, which is contrary to the case with the
taxpayer active taxes on income or consumption.49 The taxpayer may ignore the
property tax that has been levied; in countries like India and the Philippines, as much of
the tax that is collected goes uncollected. And municipalities in the Slovak Republic, for
instance, have had difficulty collecting real estate taxes from insolvent businesses. But
these failures to pay are evasion (outside the law), not avoidance (within the law), and
even these payments can be guaranteed, because property itself is in the jurisdiction and
can be claimed by the taxing government.50
The Netherlands offers one example of a nationwide decentralization of property tax
administration. Before 1992, the central government administered property taxes. Since
then, administration of the property tax (onroerende zaak belasting) has become the
responsibility of mayors and municipal councils. Municipalities maintain property
47. Robin Burgess and Nicholas Stern, ‘‘Taxation and Development,’’ Journal of Economic Literature
21 (June 1993): 802.
48. In Russia and some other parts of the former Soviet Union, a requirement that structures be
completed and registered with the local authorities before the property may be added to the tax list hinders
property taxation. Many properties, although occupied, are never quite finished. Western countries avoid
this problem by assessing unfinished structures on a percent-completed basis.
49. The taxpayer can, however, act independently to reduce personal property tax. For instance, when
household personal property taxes were levied in the American Midwest, property owners would hide
expensive items from the local tax assessor and, if the assessor left a self-reporting form, would ‘‘forget’’ to
mention those items. This widespread perjury was an important factor behind the repeal of most household
personal property taxes. Of course, these actions were evasion, not avoidance.
50. Another collection approach, the ‘‘rate clearance certificate’’ in Kenya, relies on taxpayer initiative
to clear outstanding liabilities and has its impact only when the property is transferred or when the property
holder seeks a local business permit or some local service. It is not particularly effective (Kelly, op. cit., 49).
Tax sales do the trick; selling the parcel to cover taxes owed brings owners with payment in hand. However,
tax sales are politically difficult.

records, assess properties (at market value), and collect the tax.51 Municipalities may
require property owners to submit returns with information about their parcels and
owners may be required to give their opinion on property value in the valuation process.
Both owner and tenant must provide rental information; the tax is legally paid by both
users and owners of properties. Municipalities are almost evenly divided between those
using civil servants for assessment and those using contract assessment firms. In both
cases, courts resolve parcel valuation disputes. The National Valuation Board must
approve local revaluation plans and makes assessed value to market value studies to
evaluate assessment uniformity, but it is not actively involved in administration. Tax
rates vary from municipality to municipality, according to council choices, so there are
differences in tax paid on comparable properties, depending on the location of the
parcel.52
Business Licenses
Local governments license business activities in most countries. Sometimes the licensing
regulates monopolies or prevents public harm from imperfect information, but
sometimes the license functions as a benefit-based tax on the privilege of operating in
the locality. Such taxes rank globally as the second largest local own-source revenue
source, behind the property tax. In practice, licenses may be simple or difficult to
administer, depending on their structure. A flat fee or one that varies by broad business
category is transparent and easily collected; one attempting to tune the tax to economic
capacity, for instance by basing the license on measured economic activity, can be
significantly more difficult to collect.
At worst, licensing can become a barrier to business development and a tool for
official corruption, as well as a means for unfairly distributing the cost of government.
But the structure and administration of licenses can reduce these problems by licensing
all comers (i.e., decoupling revenue and regulation objectives), by encompassing all
businesses and trades in a single system, by making the licensing process simple and
accessible, and by using a single fee structure with nonpunitive rates.53 Rates may
increase by business size, but the same system should apply to all business types to avoid
classification issues.
51. Until the late 1980s, Dutch municipalities could opt for property taxation according to area: Cees G.
M. Sterks and Cornelis A. de Kam, ‘‘Decentralizing Taxation in the Netherlands,’’ in Public Finance with
Several Levels of Government/Les finance publiques avec plusieurs niveaux de gouvernement, ed. Remy
Prud’homme (The Hague, Netherlands and Koenigstein, Germany: Foundation Journal Public Finance,
1991).
52. The fate of the Dutch local property taxes is unclear. The liberal party has sought recentralization of
the property tax under a different label.
53. Nick Devas and Roy Kelly, ‘‘Regulation or Revenues?: An Analysis of Local Business Licenses,
with a Case Study of the Single Business Permit Reform in Kenya,’’ Public Administration and Development
21 (2001): 385–387.

Localities apply many business license formats. German local governments have long
levied a business tax based on a combination of capital and profits. French localities tax
businesses on a combination of payroll and property. In the United States, localities
apply a wide range of business licenses, sometimes as a flat fee, sometimes driven by
turnover, and sometimes on number of employees.54 Countries in Francophone Africa
levy a business tax driven by value of premises, number of employees, turnover, and
equipment.55 Localities in Hungary levy business taxes that generate over 80 percent of
local tax revenues.
In sum, local governments in all types of countries levy and administer license taxes.
While these taxes seldom satisfy international revenue policy standards, they are
important sources to some jurisdictions and provide an element of fiscal (and
administrative) autonomy. Rather than castigate use of the source, a better
decentralization strategy would be to reduce the undesirable structural features of the
licenses, at least until better local revenue options are provided.56
COOPERATIVE ADMINISTRATION
When there are multiple tiers of independent tax administration, vertical and horizontal
cooperative administration can provide many advantages of centralized administration,
while permitting some autonomy and other advantages of local operations. When a
subnational government voluntarily cooperates, there can be no argument that such
relationships interfere with fiscal autonomy. Tax administration can divide tasks among
central and subnational government, with lower units choosing tax base and rate
and conducting certain administrative functions while the central government ‘‘co-
administers’’ other functions. The core functions of tax administrationFtaxpayer
registration and service, declaration or assessment, revenue and taxpayer accounting,
delinquency control, audit, enforcement, and appeal57Fmay, for a particular tax, be
54. Some local retail sales taxes emerged from authority to levy local turnover-based business privilege
taxes.
55. Devas and Kelly, op. cit., 384.
56. Mention should also be made of the octroi, a trade tax levied by cities in Nepal, India, and other
countries of Asia and Africa. The tax is simple, buoyant, and productive, but an impediment to trade, as
Jenkins and colleagues describe in Nepal: ‘‘It was levied technically using street barriers lowered and raised
by tax inspectors. Together with the fact that this money was levied on out of town people and not on local
constituents, the whole procedure reminded one of medieval robber-barons descending from their castles to
collect ‘fees’ from traveling merchants, than of a tax fit for a modern government.’’: Glenn P. Jenkins, Roy
Kelly, and Rup Khadka, CentralFLocal Fiscal Relations in Low-Income Countries: The Case of Nepal,
Consulting Assistance on Economic Reform II Discussion Paper No. 69 (Cambridge, MA: Harvard
Institute for International Development, 2000), 19–20.
57. John L. Mikesell, ‘‘Tax Administration: The Link Between Tax Law and Tax Collections,’’ in
Handbook of Public Finance, eds. Fred Thompson and Mark T. Green (New York: Marcel Dekker, 1998),
179.

divided among tax authorities according to technical competencies. They will be
performed for each tax, but not necessarily by the government levying the tax and not
necessarily all by the same government.
Denmark illustrates one division of functions, where revenue from three kinds of
property tax is assigned to subnational governments: a land tax on all plots of land; a
service tax on buildings used for administration, commerce, and manufacturing; and a
property value tax on owner-occupied dwellings and summerhouses. The central
government has main responsibility for valuation of immovable property. Central
government appoints 224 valuation committees of three members with secretarial
assistance from the municipality. The Central Customs and Tax Administration
(CCTA), part of the national Ministry of Taxation, maintains a register of sales prices
and the municipalities maintain a valuation and collection register with description of the
land parcels from the national survey and land register and a building and dwelling
register with the description of buildings and dwelling units. The CCTA coordinates
valuation and gives instructions to the valuation committees. A property tax office in
each municipality collects the municipal and county share of the land tax and service tax.
The computer-generated annual property tax bill, divided into installments as
determined by the municipality, also includes municipal charges on the property (for
roads, sewerage, district heating, street lighting, water, etc.). Payment can be made in
cash at the municipal office, by the postal giro system or through the bank automatic
payment system. Central government collects the property value tax via withholding in
combination with the individual income tax.
Canada provides another illustration of joint property tax administration, where
arrangements for local government finances are left to the provinces and territories. As
earlier noted, tax administration for provincial and territorial taxes mixes centralized and
independent administration for income and sales taxes. The pattern for the local
property tax is, however, cooperation between the regional and local governments.
Property taxes yield virtually all the tax revenue collected by local governments in
Canada (98 percent) and localities collect 80 percent of all property taxes levied.58 Local
governments establish property tax rates and manage collection, but the province or
territory establishes basic structure for the local taxes, establishes property valuation
policy, and insures that assessment is done according to that policy. For uniformity,
valuation is centralized while the local government handles other functions.
The provinces use four organizational structures, most providing advantages of large
scale, to assure uniform assessments: crown corporations owned by provincial
governments with localities represented on their governing boards do assessments in
British Columbia (BC Assessment), New Brunswick (Service New Brunswick),
Newfoundland and Labrador (Municipal Assessment Agency), and Saskatchewan
(Saskatchewan Assessment Management Agency); a nonprofit corporation owned by
municipalities performs assessments in Ontario (Municipal Property Assessment
58. As a share of GDP, these property taxes are among the highest in the world.

Corporation, MPAC); provincial tax assessment departments do assessments in
Manitoba, Nova Scotia, Prince Edward Island, and the territories; and Alberta
Assessment Services, an agency of provincial government, establishes assessment
standards, provides technical support, and maintains quality control for assessments,
but municipalities do the assessments. The corporations provide other local government
services, but property assessment is most important.
Several countries centralize valuation but leave other elements of property tax
administration to lower levels. For example, New Zealand and Ireland centralize real
property assessment but leave collection to local authorities. Malawi taxes property on a
ratings basis; the central Ministry of Lands and Valuation does the property valuation
for local rating and the local authorities set the rates and handle collection.59 In Turkey,
the national Ministry of Finance estimates property values, with a considerable self-
assessment requirement, while the municipalities collect their taxes. A similar pattern
appears in Indonesia: taxpayers provide property parcel information to central tax
offices, regional offices of the central agency appraise on a three-year cycle, the central
tax administration does the billing, and local governments are responsible for
collection.60 That mix of functional responsibilities meets the needs of countries seeking
to localize revenue authority and administration while maintaining uniformity standard
for application of the property tax. Other instances of central valuation and local
collection are the United Kingdom, Kenya (except the largest cities), Germany,
Colombia, and Austria. Valuation is local and collection is central in Tunisia and
Slovenia.
The decentralized tax administration of the United States provides other illustrations
of cooperative administration. The federal IRS and state tax departments have
information exchange agreements that provide states with return data, third-party
reports (from banks, employers, brokerage firms, etc.), and IRS audit reports.61 This
information allows states to verify federal and state income tax return consistency, to
identify probable nonfilers, and to pick up audit results. States also obtain U.S. Customs
declaration information to allow them to enforce use tax obligations on expensive items
brought into the United States.62 U.S. experience with state personal and corporate
income taxes driven from the comparable federal taxes shows the feasibility of closely
linked but separately administered taxes. Indeed, separate administrations improve the
chances that taxpayers will correctly identify what government has levied the tax. IRS
and state tax departments also collaborate on taxpayer education and staff training.
59. A. M. Chinhadze and P. Dziko, ‘‘Property Tax Rating and Administration in Malawi,’’ in Property
Tax in Eastern and Southern Africa: Challenges and Lessons Learned. Paper 2. Available from: http://
www1.worldbank.org/wbiep/decentralization/library9/Afproptx.htm
60. Blane Lewis, ‘‘Property Tax in Indonesia: Measuring and Explaining Administrative (Under-)
Performance,’’ Public Administration and Development 23 (April 2003): 227–239.
61. Duncan and McLure, op. cit., 81–82.
62. John F. Due and John L. Mikesell, Sales Taxation (Washington, DC: The Urban Institute, 1994).

Cooperative administration can also be horizontal. State tax departments in the
United States, while independent of each other, cooperate to improve tax compliance.
Forty-six states plus the District of Columbia are voluntarily associated with the
Multistate Tax Commission, an entity that conducts sales and corporate income tax
audits of major corporations for the participating states (the individual state must
enforce any audit findings), operates a ‘‘nexus discovery’’ program to identify
unregistered taxpayers, and seeks proper determination of state and local tax liability
of multistate taxpayers. In addition, smaller groups of states have regional information
exchange agreements, particularly in regard to sales and use taxes. Three northeastern
states offer a mechanism by which a vendor may file a single sales tax return for
obligations to all three states. Other states work bilaterally on enforcement projects.
Finally, Mexico presents a special case of cooperative administration. The central
government administers federal taxes and all states have signed agreements that trade
much of their taxing authority for a share of federal revenues. However, state
governments sign agreements (convenios de colaboracion administrative) with the federal
government that allows them to verify federal compliance in exchange for a significant
portion of additional federal revenues they locate. That gives them revenue based on
their knowledge of local economic activities about which the central administration
might not be aware.63
COMPARING ADMINISTRATIVE OPTIONS
Experience with the different administrative formats for tax collection described
previously shows the wide range of practices. This range of practice permits a number
of conclusions about the advantages associated with central and local tax administration.
Centralized Administration
Assigning central administration the task of collecting taxes levied by subnational
governments has several advantages, as shown in international experience:
(i) Centralized administration improves the chances of realizing any cost savings from
economies of scale. Small local administrations could obtain the economies by
contracting with larger entities or by combining operations with other adminis-
trations, but this is less certain to occur than if administration is centralized.64
63. In the United States, some states administering local sales taxes provide lists of their local sales
taxpayers so that the locality can check for omissions.
64. There are few tests for economies of scale in tax administration. In one study, Sjoquist and Walker
find for property tax assessment in Georgia (USA) that a 10 percent in the volume of assessments results in
an increase in total costs of approximately 3 percent. (David L. Sjoquist and Mary Beth Walker,
‘‘Economies of Scale in Property Tax Assessment,’’ National Tax Journal 52 (June 1999): 207–220.) In a

(ii) A single centralized system improves the chances that taxpayers will receive
consistent treatment, no matter where in the country the entity or its taxable
activities are located. With good administrative control in the central system, the
same procedures and processes will apply everywhere in the nation. Because local
administration is closer to the people, there are concerns that the administration
will play favorites and that confidential taxpayer information will be misused.
Centralized administration also permits a single information system for tracking
economic activities of taxpayers and a single taxpayer identification number for
all taxes. A single master file allows enforcement and collection through
matching across taxes and a single registration into the information system
would simplify taxpayer compliance.
(iii) A central organization can facilitate rotation of personnel, a critical component
of internal control to reduce opportunities for corruption. In a small
administrative unit, there may be too few auditors of adequate skill relative to
the number of complex assignments to maintain regular rotation.
(iv) Central administration reduces the number contacts (filings, audits, etc.) between a
taxpayer and tax authorities and, because there are certain overhead costs
associated with collecting any tax, may reduce the cost of administration and
compliance for the overall revenue system, central plus subnational. As Boadway,
Roberts, and Shah observe, when two governments occupy a tax base, ‘‘(t)here are
fixed costs associated with collecting any tax which will have to be borne for each
tax type that is used by the states. Taxpayers will also have to incur costs of
compliance for all taxes levied.’’65 Central administration economizes on these
costs and eliminates any taxpayer confusion about what tax organization is
responsible for answering questions, receiving filings, receiving appeals, etc.
(v) The large administrative agencies that centralization produces may afford more
qualified personnel, may be able to pay higher salaries (and thus reduce the
attractiveness of corruption), may allow personnel to specialize, and may have
budgets that permit more sophisticated information technology.66 In small
study in Indiana (USA), Mikesell and Krupa find that 24 of 27 counties analyzed with a translog cost
function would experience reduced assessment cost if they consolidated assessment to the county from the
current township level. (John L. Mikesell and Olha Krupa, ‘‘Property Assessment at the Township Level in
Indiana: A Review of the System and Possible Impacts from Centralization of the Function,’’ Report to the
Indiana Township Assessors Association, March 2004).
65. Robin Boadway, Sandra Roberts, and Anwar Shah, ‘‘Fiscal Federalism Dimensions of Tax Reform
in Developing Countries,’’ World Bank Policy Research Working Paper, WPS 1385 (Washington, DC:
World Bank, 1994), 8.
66. The idea that higher pay will lead to better performance is generally accepted, but infrequently
tested. In an analysis in one American state (Connecticut), Bates and Santerre find no evidence linking
higher pay to better performance in property tax collection. (Laurie J. Bates and Rexford E. Santerre,
‘‘Property Tax Collector Performance and Pay,’’ National Tax Journal 46 (March 1993): 23–31.) However,
their performance measureFthe collection rateFwas extremely narrow. Kahn and colleagues find a

agencies, staff may need to handle all routine duties, thus losing both gains from
specialization and the internal control advantage of separation of duties.
(vi) A centralized, national tax administration can be better equipped to deal with
national and global businesses. Subnational agencies may be overwhelmed in
efforts to enforce compliance from such large businesses. Tannenwald observes
that, in the United States, ‘‘state and city tax departments are increasingly
‘outgunned’ in attempting to enforce [the corporate income tax].’’67 They lack
the legal and accounting talent to keep up with avoidance or evasion strategies of
large business. This problem certainly would be even greater in developing and
transition countries. A national tax administration will also be better able to deal
with taxable activities that cross regional or local boundaries within the nation.
(vii) Central administration may facilitate revenue transfers to mitigate horizontal
fiscal disparity across subnational governments. Revenue from taxes adminis-
tered by subnational governments usually stays with the government collecting
the revenue, leaving great disparity between regions with high endowment of the
tax base, e.g., natural resources, heavy industry, shopping malls, etc., and those
lacking such an endowment.
Independent Subnational Administration

If it is reasonable for regional and local governments to develop tax policy in a
decentralization program, then it is reasonable to consider whether independent regional
and local administration may be economically and technically desirable.68 Experience
with independent regional and local tax administration suggests the following:
(i) Familiarity with local conditions and easy adaptability to them can facilitate
taxpayer registration, collection, and enforcement.69 When local governments
Brazilian program (Retribuicao Adicional Variavel) created in 1989 to compensate tax collectors according
to individual and group performance in collecting taxes from evaders to have had a great impact on
collection of fines. (Charles M. Kahn, Emilson C. D. Silva, and James P. Ziliak, ‘‘Performance-Based
Wages in Tax Collection: The Brazilian Tax Collection Reform and Its Effects,’’ The Economic Journal 111
(January 2001): 188–205.)
67. Robert Tannenwald, ‘‘Are State and Local Revenue Systems Becoming Obsolete?’’ New England
Economic Review, no. 4 (2001): 42.
68. Many regions and localities have economies larger than some independent nations; if those nations
can successfully administer their own taxes, then surely economic and technical factors do not preclude
administration by these large subnational governments.
69. One local success comes from Togliatti (Samara Oblast), Russia, where there was a brief exception
(1997–1998) to the Russian central administration standard. The municipality introduced a tax on imputed
income (actually a property tax on small businesses) and established a municipal tax service for collection.
The administration operated successfully, but implementation of a Federation law on imputed income
brought an end to the tax and its administration. The federal version proved difficult to administer and less
successful than the municipal one: Galina Kurlyandskaya, Yelena Nikolayenko, and Natalia Golovanova,

have designed their own tax structures, local administration can be designed
specifically for that tax. Administration need not be a central one stretched to the
local structural peculiarities, administrative decisions can be made without
dragging them through a centralized bureaucracy and, should enforcement be
directed toward large taxpayers as an administrative strategy, the selection will be
based on large taxpayers to the locality or region, not those large in national
terms.70 And privatization of some administrative functions reduces concerns
about local capacity. As the World Development Report points out, ‘‘privatiza-
tion can reduce the number of skilled administrators needed by local
governments, as the privatized services require only monitoring and regulation
rather than actual management.’’71
(ii) Local administration can tax economic activities falling below the threshold of
central government interest because local administrators are familiar with the
local business environment and can bring small enterprises into the tax system at
relatively low cost. Bringing them into the subnational tax system may also assist
central government revenue mobilization if central and subnational administra-
tions exchange information.
(iii) When administration of local taxes is separate, it is easier for taxpayers to see
which government levies what taxes and to hold each accountable. Taxpayers
receiving a consolidated property tax bill or preparing a consolidated income tax
return often cannot easily discern what government is levying which portion of
the total tax. That reduces the degree to which fiscal autonomy provides
accountability for budget choices.
(iv) Independent regional and local tax authorities can act as laboratories for tax
administration experiments. They can exploit the nimbleness that often
characterizes smaller organizations to create new approaches and techniques.
For example, state revenue departments in the United States have led in the
application of new information technology, bar-coding, and imaging to tax
administration, the State Revenue Department of Western Australia markets its
revenue collection information system widely, and Gujarat state in India has
developed a computerized system for enforcing the road tax at interstate check
posts that reduces clearance time from 30 to 2 minutes. Some subnational
governments have greater flexibility and control over resources than others, some
have more creative administrators than others, and some have better environ-
ments for experimentation than others. That allows natural experiments in tax
‘‘Local Governments in the Russian Federation,’’ in Developing New Rules in the Old Environment, eds.
I. Munteanu and V. Popa (Budapest: OSI/LGI, 2001), 40.
70. Katherine Baer et al., ‘‘Improving Large Taxpayer Compliance: A Review of Country Experience,’’
IMF Occasional Paper 215 (Washington, DC: International Monetary Fund, 2002).
71. World Bank, World Development Report, 1999/2000 (Washington, DC: International Bank for
Reconstruction and Development/World Bank, 2000), 122.

administration, a result that cannot easily happen within a centralized
administration. Furthermore, the impact of failed experiments is localized and
limited.
(v) Independent administration can provide quick and certain control over revenue.
As Veehorn and Ahmad recognize, central administration means that, ‘‘local
governments may perceive that they have very little control over receipts.’’72 With
independent administration, the government does not await central distribution
because it controls funds as soon as the taxpayer makes payment.73
Unfortunately, the central administration would typically not have quickness
as a primary objective in dealing with another government’s revenue. Also,
independent local administration simplifies revenue accounting: there is no
dispute about the proper distribution of collections among taxing governments, a
frequent point of contention when one government collects tax levied by another.
(vi) Subnational governments like the employment that independent administration
provides. Unfortunately, some countries see labor intensity and high collection
cost as a virtue. This is what Fjeldstad observed about local tax administration in
Tanzania: ‘‘for certain small taxes and charges the collection costs are the reason
for the levy. In other words, the purpose is to create employment or at least an
income-earning opportunity for some one who might otherwise be unem-
ployed.’’74
(vii) Local governments may not be satisfied with the central enforcement standard.
As Alm has observed, the output of revenue administration includes both
government revenue and taxpayer equity.75 Subnational units may balance these
two outputs differently from the central administration and local administration
allows policy to reflect these differences.
(viii) Independent administration would ensure that regional or local interests are
rigorously represented in disputes about the distribution of tax revenues from
72. Veehorn and Ahmad, op. cit., 113.

73. Slow and inaccurate payment has been a common complaint among localities in the United States
whose sales or income tax is administered by the state government. Before the advent of electronic funds
transfer, larger cities in the State of Texas would fly to the state capitol to receive payment of local sales tax
collections so that the city could have faster use of the funds. When American states experience budget
problems, one response is to delay payments (transfers or centrally collected local taxes) to their local
governments. However, these complaints pale against the two-year lags in shared personal income tax
receipts received by localities in Hungary: Richard M. Bird, ‘‘Financing Local Government in Hungary,’’ in
Decentralization of the Socialist State, eds. Richard M. Bird et al. (Washington, DC: World Bank, 1995),
86. Delays are blamed on sorting returns when taxpayer residence differs from location of workplace or tax
office. Sweden handles the delay issue by distributing piggybacked local income taxes on a forecast basis
during the budget year, then settling up the following year from actual collections.
74. Odd-Helge Fjeldstad, ‘‘Fiscal Decentralisation in Tanzania: For Better or for Worse?’’ CMI
Working Paper 2001:10 (Bergen, Norway: Chr. Michelsen Institute, 2001), 4.
75. James Alm, ‘‘Tax Compliance and Administration,’’ in Handbook on Taxation, eds. W. Bartley
Hildreth and James A. Richardson (New York: Marcel Dekker, 1999).

enterprises or individuals that might be taxable in multiple jurisdictions. The
question of what jurisdiction is entitled to tax certain tax bases. For example, the
profit from business enterprise conducted in several jurisdictions or income for
individuals with work assignments in several areas, is contentious. Businesses and
individuals will make legal interpretations that reduce their tax liability. As a
result, subnational governments may receive less revenue than they believe to be
owed them, even though the taxpayer has paid all tax owed the central
government. A central tax authority that administers both central and
piggybacked subnational taxes is almost certainly going to be less concerned
with correct subnational tax apportionments than would subnational authorities.
In general, when higher governments (and the employees of these governments)
administer subnational taxes, there is the danger that administrators will give
collection of lower tier taxes less attention than taxes levied by the higher tier.76
(ix) Dual enforcement may check against omissions when central and subnational
administrations exchange information and may make corruption more difficult
because two sets of enforcement officials must be paid off. As Radian observes,
‘‘in countries where both central and local authorities collect taxes, there is higher
extractive capability than in nations that rely solely on central administration.’’77
(x) Burgess and Stern postulate that ‘‘[d]ifferences in the tradition of compliance
probably explain as much of the worldwide pattern of taxation as do under-
resourced or poorly organized tax administrations.’’78 Many developing and
transition countries have little tradition of tax compliance. Local administration
may have a better chance of bringing the population into the system than
administration by representatives of the distant central government.
(xi) The case for independent administration has a competitive aspect. The argument
made by McLure and Martinez for decentralization also applies to tax
administration: ‘‘Just as competition in the marketplace protects consumers
from the rapaciousness of business, so tax competition protects citizens from the
rapaciousness of politicians and bureaucrats.’’79 Tax collectors are popularly
viewed as among the most rapacious of civil servants.
76. Different sharing rates may create similar problems. In regard to India, Hemming, Mates, and
Porter observe: ‘‘The fact that the center retains different percentages of different taxesFwith the rest being
passed on to the statesFmay provide an incentive to concentrate the collection effort and resources of the
central tax administration on those taxes . . . it retains in full or in higher percentage.’’: Richard Hemming,
Neven Mates, and Barry Potter, ‘‘India,’’ in Fiscal Federalism in Theory and Practice, ed. Teresa Ter-
Minassian (Washington, DC: International Monetary Fund, 1997), 534.
77. Alex Radian, Resource Mobilization in Poor Countries, Implementing Tax Policies (New Brunswick,
NJ: Transaction, 1980), 89.
78. Burgess and Stern, op. cit., 799.
79. Charles McLure and Jorge Martinez-Vazquez, ‘‘The Assignment of Revenues and Expenditures in
Intergovernmental Fiscal Relations,’’ Paper prepared for the core course on Intergovernmental Relations
and Local Financial Management, World Bank Institute (Washington, DC: World Bank, 2000).

CONCLUSION: DILEMMAS OF DECENTRALIZATION
Centralized administration can provide quality service at low cost as the larger
administrative unit may gain the advantages of larger-scale operations, be able to hire
personnel with higher qualifications and then allow them to specialize, be able to afford
higher-quality information technology; have greater capacity in compliance disputes with
larger taxpayers; and be better equipped to deal with taxable activities that cross regional
or local jurisdictions. However, centralized administration may dull transparency and
accountability for local taxes, delay access to collections by the subnational
governments, and reduce local autonomy for tax policy. Central administration typically
restricts the structure of any tax for which it offers administration, thereby limiting tax
policy options available to the local government.
Independent subnational administration provides advantages of small scale, freedom
to innovate, revenue diversity, and nearness to taxpayers and can provide quality
administration at low cost. This administration can facilitate registration of taxpayers,
collection, and enforcement of many taxes; allow an administrative strategy based on
local policy choices and designed to protect the local tax base; eliminate the need to drag
administrative decisions through a centralized bureaucracy; ensure prompt receipt of
revenue by the locality; and provide a testing ground for administrative innovations.
This brings the decentralization dilemma. The decision to decentralize local tax
administration frequently involves, as Dillinger describes, ‘‘a tradeoff between
indifference and incompetence.’’80 When the central government receives no revenue
from administration of a tax, that tax is likely to receive less attention than is given taxes
yielding revenue for the central government. But the local government may have lower
capacity to administer its taxes than does the central government, in terms of qualified
personnel, technology, and ability to stand up to large businesses. Hence the trade-off:
the central government is capable but less interested in local collections and the local
government is keenly interested by less capable.
Regional or local governments will lack capacity if they have never administered taxes
before and central governments are reluctant to permit self-administration without
demonstrated capacity. When considering whether subnational governments would be
capable of self-administration, the test should be the extent to which they could become
capable of the tasks, not whether they are currently prepared to do the work. It means
that training and technical assistance should accompany any major decentralization of
administrative authority. In sum, incompetence can be remedied, but indifference is
permanent.
80. Dillinger, op. cit., 29.

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Developing Options for the Administration of

Local Taxes: An International Review*

Do decentralization arguments extend to administration of subnational taxes?

Decentralization has been a major thrust of governmental reform, motivated by the

Mikesell / Developing Options for the Administration of Local Taxes 41

42 Public Budgeting & Finance / Spring 2007

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44 Public Budgeting & Finance / Spring 2007

Mikesell / Developing Options for the Administration of Local Taxes 45

Local governments can arrange centralized administration for themselves, if

46 Public Budgeting & Finance / Spring 2007

INDEPENDENT LOCAL ADMINISTRATION18

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48 Public Budgeting & Finance / Spring 2007

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52 Public Budgeting & Finance / Spring 2007

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Property Tax Experience

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56 Public Budgeting & Finance / Spring 2007

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58 Public Budgeting & Finance / Spring 2007

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60 Public Budgeting & Finance / Spring 2007

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COMPARING ADMINISTRATIVE OPTIONS

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Independent Subnational Administration

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72. Veehorn and Ahmad, op. cit., 113.

66 Public Budgeting & Finance / Spring 2007

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80. Dillinger, op. cit., 29.

68 Public Budgeting & Finance / Spring 2007

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