Congrès des Pouvoirs Locaux et Régionaux de l'Europe
Congress of Local and Regional Authorities of Europe

SEVENTH SESSION

(Strasbourg, 23-25 May 2000)

OPINION 14 (2000) [1]

ON

THE DRAFT RECOMMENDATION OF THE COMMITTEE OF MINISTERS,

PREPARED BY THE CDLR,

ON "LOCAL TAXATION, FINANCIAL EQUALISATION

AND GRANTS TO LOCAL AUTHORITIES"

The Congress,

1.         Having been consulted by the Steering Committee on Local and Regional Democracy (CDLR) at its 24th meeting on the draft Recommendation of the Committee of Ministers to the member states on "Local taxation, financial equalisation and grants to local authorities",

2.         Wishes to thank the CDLR for having consulted it and revised the draft recommendation so as to take account of its initial observations,

3.         Taking into account the opinion of its Working Group responsible for monitoring the application of the European Charter of Local Self-Government on the revised draft recommendation,

4.         In view of submitting the final draft recommendation to the Committee of Ministers for adoption:

─         decides to submit to the CDLR complementary proposals of amendments which are presented in bold in the appendix to the present document,

─         requests the CDLR to take into account these proposals and Recommendation 79 (2000) on "Financial resources of local authorities in relation to their responsibilities: a concrete test for subsidiarity" adopted by the Congress at its 7th Plenary Session (Strasbourg, 23-25 May 2000) in the framework of its activities for politically monitoring the implementation of the European Charter of Local Self-Government.

APPENDIX

DRAFT Recommendation

of the Committee of Ministers to member states

"ON LOCAL TAXATION, FINANCIAL EQUALISATION

AND GRANTS TO LOCAL AUTHORITIES"

This recommendation replaces Recommendation No. R (91) 4

of the Committee of Ministers to member States

on the equalisation of resources between local authorities

The Committee of Ministers, under the terms of Article 15.b of the Statute of the Council of Europe,

Considering that the aim of the Council of Europe is to achieve a greater unity between its members for the purpose of safeguarding and realising the ideals and principles which are their common heritage and facilitating their economic and social progress, and that this aim can be pursued, inter alia, by common action in economic, social, legal and administrative matters;

Considering that local self-government involves a certain degree of financial autonomy;

Considering the provisions of Article 9 of the European Charter of Local Self-Government that it adopted as an international Treaty on 15 October 1985 and that so far has been ratified by thirty-two Council of Europe member states;

Taking into account Recommendation (..) 2000 of the Congress of Local and Regional Authorities of Europe, adopted in the context of its activities of monitoring the implementation of the European Charter of Local Self-Government, which refers to local authorities’ financial resources in relation to their responsibilities;

Considering that local taxation, financial equalisation mechanisms and state grants should be adapted to the needs of local communities authorities in order to optimise the effectiveness of their activity whilst observing rules and codes of conduct applicable at national level;

Considering that the solutions given to financial problems of local authorities should be adapted to each state's specificity as resulting, inter alia, from its structure, territorial organisation, distribution of powers between different levels of government and traditions;

Recommends the governments of member states:

1.                  ensure a fair distribution of public financial resources between the different tiers of self-government, taking into account the responsibilities assigned to each of these tiers and their evolution;

2.                  guarantee local authorities a system of financing their expenditure which is based on the following principles:

–        local authorities' resources and their allocation shall be commensurate with the need to deal effectively with the execution of their duties and discretionary tasks responsibilities

–        a substantial proportion of transfers, as well as own resources, must not be earmarked;

─   local authorities are entitled, within the national economic policy, to raise enough revenue a    dequate resources of their own; the possibility of sound competition in tax levels should be maintained, whilst avoiding harmful tax competition.

─         the amount of state grants shall be fair and foreseeable;

─         the system of financing as a whole shall be consistent with the constraints of the national economic policy.

3          to review – if necessary – the legal and administrative framework for local taxation, financial equalisation and grants to local authorities having regard, inter alia, to the guidelines appended to this recommendation and to other ways of achieving a distribution of grants which is fair and encourages the improvement of services and their efficient provision;

4.         to involve local elected representatives in the debate on reforms to be undertaken in this area and on the mechanisms for implementing such reforms.

Appendix

Guidelines on local taxation, financial equalisation

and grants to local authorities

1.                  Guidelines concerning local taxation

a.                  Tax-revenue level

Financial autonomy of local authorities implies a level of own resources which is commensurate with their competencies, as they are defined by Constitution or law. In general, the most important own resource is should be tax revenue. This revenue represents for local authorities a factor for independence, which their representative bodies derive from their election by the citizens. Moreover, the availability of own taxation revenue provides local elected representatives with some degree of security, enabling them to forecast the level of resources available in the long term. With this in mind, a certain degree of fiscal decentralisation is required.

In order to estimate this degree, the following parameters may be used:

–        the ratio between the local authorities' tax revenue level and the total tax revenue for the country;

–        the ratio between the local tax revenue and the total local revenue;

–        the weight of tax revenue compared to the weight of grants (both general and specific) from the state and other public authorities.

When the degree of fiscal decentralisation appears to be low on the basis of the previous parameters, the states should examine, with the local authorities, measures which will make it possible to increase the proportion of local authorities' own and/or shared tax revenues, without increasing the global fiscal pressure.

b.                  The structure of local taxation

The structure of local taxation should meet the following conditions:

─         a fair distribution of the tax burden according to the taxpayers’ ability to pay;

─         an appropriate yield and low administration and compliance costs;

─         visibility of the tax burden for contributing individuals and enterprises (this being a precondition for an effective distribution of resources according to citizens’ preferences);

─         right for local authorities to vary – where appropriate, within a pre-established bracket – the rates of the taxes they levy;

─            the difference in tax rate between various local authorities should not be too great or could be unless it is justified by such factors as a different level of services;

─         low economic distortions (minimum impact on the growth and the economic structure), demographic distortions (the fiscal structure should not stimulate the migration of persons) and social distortions (it should not weaken further social groups in difficulty)

–        a degree of buoyancy allowing for the adjustment of tax revenue according to the evolution of costs.

It is possible to satisfy these requirements both with a system based on own  exclusive taxes and with a system based on a combination of own taxes (exclusive and joint) and shared taxes, where the share allocated to local authorities is defined by law.

2.                  Guidelines on financial equalisation

A substantial degree of financial equalisation is a necessary condition of fiscal decentralisation and a strong local government. At the same time, it may contribute effectively to the achievement of the objectives of economic stability and to the success of policies for a balanced sustainable territorial development.

a.                  Methods of estimating spending needs towards  equalisation

When estimating spending needs, criteria should be favoured which:

─         are objective and over which individual local authorities have no direct control;

─         are not liable to affect the local authorities’ freedom of choice, within the bounds of available resources;

─         do not penalise local authorities which attempt to streamline the management of their services with a view to improving efficiency and do not create unintended incentives to particular courses of action which are in conflict with the objectives of local accountability and efficiency in the provision of services;

─         take into account as far as possible the demographic, geographical, social and economic characteristics which lead to disparities in their costs;

The formulae used when estimating spending needs should meet the following conditions:

─         the weighting given to the individual indicators should be set on the basis of objective e    vidence about spending variations generated by the variations of these indicators;

─         inasmuch as the assessment of needs nevertheless involves value judgements as to the weight to be given to different indicators of need, it is necessary to identify and assess the results of such judgements in consultation with representatives of the local authorities concerned or their associations;

─         formulae (models) for the estimation of needs should be as simple as possible, so as to promote understanding and accountability, but complete and precise enough so as to be reliable;

─         formulae for the estimation of needs should remain as stable as possible so that local authorities are able to make long-term forecasts and so that changes in assessed needs reflect real changes in the situation of local authorities;

b.                  Financial equalisation mechanisms

Governments should periodically verify the functioning of their equalisation systems and examine, with local authorities, the improvements which could be made with a view to remedying the adverse effects of the unequal distribution of resources and expenditure requirements and granting local authorities genuine freedom of choice in the areas within their responsibilities.

Financial equalisation must be implemented at all levels, that is, vertically between central authorities (or federal authorities in federations), regional authorities (or authorities of federate entities in federations) and local authorities, and horizontally, among the various local authorities.

The equalisation systems should be designed so that they can at least partially equalise the fiscal strength of local authorities in order to enable them, if they wish, to provide a broadly similar range and level of services while levying similar rates of local taxation.

However, it is necessary to ensure that such equalisation of financial capacity does not undermine local autonomy by inducing local authorities in practice to provide the same level of services or apply the same rates of tax.

Financial equalisation must not dissuade the better-off local authorities from making additional tax-raising efforts on the grounds that the proceeds would only be used for transfers to other authorities.  Similarly, equalisation must not discourage the poorer local authorities from exhausting their fiscal capacity.

Financial equalisation arrangements should cover as much of local government activity as possible; where there is more than one tier of local government, it would be useful to envisage the possibility of applying equalisation objectives to the totality of local services and tax rates in a given area;

Appropriate information should be given to local authorities on the functioning of the equalisation system, as local authorities cannot accept a system they do not know or understand.

It is also appropriate to favour voluntary redistribution mechanisms for certain local taxes; these mechanisms may be introduced, in particular, in urban areas between the central city and surrounding municipalities.

In general, equalisation by means of grants is less likely to create ill-feeling between local communities; however, where local fiscal capacity varies so greatly that the decided level of equalisation of resources cannot be achieved solely by means of government grants, it may be useful to consider having recourse to resource-sharing arrangements (based on law and consistent with the principle of solidarity among authorities of the same level) by which part of the tax revenues of the wealthy authorities is transferred to the less wealthy;

Where there is more than one local tax, financial equalisation should be made for each tax, unless a single tax is dominant and local authorities have little say in the balance between their various taxes;

3.                  Guidelines on financial grants to local authorities

a.                  General grants

Government (and regional authority) financial support for local budgets should take, in most cases, the form of general (not earmarked) grants.

The total amount of general grants should be determined on the basis of criteria which take into account such factors as the economic growth and the increase in costs, especially when the level of local authorities’ own resources and their room for manoeuvre on these resources do not allow for adjusting them to the growth of expenditure as a result of economic factors.

It would also be appropriate if government guaranteed local authorities a certain stability in the evolution of this total amount, possibly by law or within the framework of agreements aiming at ensuring economic stability with the co-operation of all tiers of governments.

The criteria for distributing general grants must, as a rule, be clearly defined according to the legal framework on a non-discretionary basis. This should allow local authorities to calculate in advance the amount of general grants they will receive and to adopt their budgets accordingly.

b.                  Specific grants

Specific (earmarked) grants limit local authorities' policy discretion and are less effective than general grants as instruments of equalisation. Subsequently, the use of specific grants should be limited, in general, to what is necessary for achieving the following objectives:

–                    (co-)financing capital expenditure, within the framework of policies for a balanced sustainable territorial development;

–          ensuring that certain local public services are provided at a standard level on the whole national territory;

–                    compensating the spillover effects which may affect the supply of certain public services;

–                    funding certain public services which local authorities provide on the state’s behalf or compensate for expenses covered by local and regional authorities when implementing competencies which are delegated by other authorities.