Structural reform, revenue adequacy and optimal tax assignment in local government

Lorenzo Robotti, Brian Dollery


A striking feature of local government reform in many Commonwealth countries has been a heavy reliance on structural reform, often in the form of forced local council amalgamation. This paper argues that the long-run success of structural change in local government hinges on several key factors, not least that voluntary rather than compulsory council mergers have a far greater chance of success. A second key ingredient resides in a high degree of local autonomy in both the composition and operation of decentralized governmental functions. A third vital factor lies in ensuring that revenue and tax assignment is sufficient to provide local government with financial autonomy. Finally, adequate powers of taxation need to be accorded to local government and this requires careful consideration of the types of taxes most suited to local government.

Full Text:



Bahl, R. 1999, 'Implementation rules for fiscal decentralization', mimeo, International Studies Program School of Policy Studies, Georgia State University, Atlanta.

Bahl, R. and Martinez-Vasquez, J. 2006, 'Sequencing fiscal decentralization', Policy Research Working Paper no. 3914, The World Bank, Washington, DC.

Bartolini, D. and Fiorillo, F. 2008, 'Local council partnerships: a theoretical approach' in Dollery and Robotti, paper presented to the Seminario di Departmento, University Politechnica delle Marche, Ancona, Italy, 11 May 2006.

Bird, R. M. 1999, Rethinking subnational taxes: a new look at tax assignment, International Monetary Fund, Working Paper no.99/165, Washington, DC.

Dollery, B. E., Byrnes, J. D. and Crase, L. 2007, 'Too tough a nut: Determining financial sustainability in Australian local government', Australasian Journal of Regional Studies, 13(2), pp. 110-133.

Dollery, B. E., Crase, L. and Johnson, A. K. 2006, Australian local government economics, University of New South Wales Press, Sydney.

Dollery, B. E., Garcea, J. and LeSage, E. 2008, Local government reform: A comparative analysis of advanced Anglo-America countries, Edward Elgar, Cheltenham.

Dollery, B. E. and Robotti L. (eds) 2008, The theory and practice of local government reform, Edward Elgar, Cheltenham.

Foster, C. D., Jackman R. and Perlman M. 1980, Local government finance in a unitary state, Allen & Unwin, London.

Garcea, J. and LeSage, E. 2008, 'Local government reform in Canada', in Dollery, Garcea and LeSage (eds.), Local Government Reform: A Comparative Analysis of Advanced Anglo-American Countries, Edward Elgar, Cheltenham.

Lindhal, E. 1919, 'Just taxation -a positive solution', in R.A. Musgrave, R. A. and Peacock, A. T. (eds), 1958, Classics in the theory of public finance, McMillan, London.

Local Government Rates Inquiry Panel (New Zealand), 2007, Funding local government, Report of the Local Government Rates Inquiry, Wellington.

Lyons, M. 2007, Lyons Inquiry into local government: Place-shaping: A shared ambition for the future of local government, HMSO, London.

McLure, C. E 1999, 'The tax assignment problem: conceptual and administrative considerations in achieving subnational fiscal autonomy', mimeo, World Bank, Washington, DC.

Oates, W. 1972, Fiscal Federalism, Harcourt Brace Jovanovich, New York.

Oates, W. 1996, 'Taxation in a federal system: the tax assignment problem', Public Economic Review, vol. 1, pp. 35-60.

Olson, M. 1969, 'The principle of fiscal equivalence": the division of responsibilities among different levels of government', American Economic Review, Vol. 59, no. 2, Papers and Proceedings of the Eighty-first Annual Meeting of the American Economic Association (May, 1969), pp. 479-487."

Palestrini, A. and Polidori, P. 2008, 'A theoretical model of shared service arrangements in local government', in Dollery, B. E. and Robotti L. (eds) 2008, The theory and practice of local government reform, Edward Elgar, Cheltenham.

Shah, A. (ed.) 2006, Local governance in developing countries, World Bank, Washington, DC.

Shah, A. (ed.) 2008, Macro federalism and local finance, World Bank, Washington, DC.

Studenski, P. 1940, 'Towards a theory of business taxation', The Journal of Political Economy, Vol. 48, no. 5, pp. 621-654.

Weingast, B. R 2006, 'Second generation fiscal federalism: implications for decentralized democratic governance and economic development', Discussion draft, Hoover Institution, Stanford.

Wicksell, K. 1896, 'A new principle of just taxation', Musgrave, R. A & Peacock, A. T. (eds), 1958, Classics in the theory of public finance, McMillan, London.