ProdukHukum Keuangan
13 January 2003
Some Empirical Evidence on New Regional Taxes and Charges in Indonesia
Blane D. Lewis∗
Research Triangle Institute, North Carolina, USA
Summary: This paper estimates that regional governments created just less than 1,000 new taxes and
charges during the run up to and through fiscal year 2001.The available evidence indicates that about
40 percent of the newly formed revenue instruments were levied on goods or factors in the primary
sector. An estimated 60 percent of the new taxes and charges were implemented directly by regional
governments—that is, without central review and, therefore, in direct contradiction to law. Regional
governments typically argue that they produce new taxes because of fiscal need. The empirical
examination in this paper provides limited support for this claim, although weaknesses in the data
prevent a firm conclusion on the matter. Revenue generated by new taxes and charges would appear
to be negligible; even under the most optimistic of assumptions, any increase in regional own-source
revenues that may have resulted from the creation of new taxes and charges would be very small
relative to overall budgets. The instruments that regional governments have at their disposal—both
traditional and new—are inadequate to the task of producing much tax revenue. Without access to
more substantial tax bases, regional governments will remain unsuccessful in realizing significant
own-source revenues and fiscal decentralization in Indonesia will continue to be an unbalanced affair.
1.
Introduction and Background
It is widely recognized that Indonesia’s two-year-old experiment in fiscal decentralization has
been very uneven in its approach to the assignment of regional expenditures and revenues.
While the decentralization of service responsibility to sub-national governments has been
significant, public revenues remain highly centralized. At the end of fiscal year 2001 (the first
year of program implementation), regional governments accounted for approximately 30
percent of total public expenditures but collected only around five percent of all government
tax revenues (Ministry of Finance, 2002). Although there is almost ways some fiscal
imbalance in the assignment of expenditures and revenues to sub-national units of
governments in the context of decentralization programs, the extent of such in Indonesia
would appear to be quite pronounced.
Among other things, the large fiscal imbalance in Indonesia suggests an important potential
role for intergovernmental transfers. And transfers have indeed become significant in regional
government budgets under decentralization. In the aggregate, various new revenue sharing
and grant programs accounted for over three-quarters of total sub-national government
revenues in fiscal year 2001. Own-source revenues make up most of the residual in regional
budgets, approximately 15 percent of total regional fiscal resources.1
∗
The author is currently senior adviser to the Ministry of Finance (MOF) under a project financed by
the United States Agency for International Development (USAID). The views expressed here are
those of the author and should not be attributed to either MOF or to USAID. The author would like to
thank Paul Smoke for discussions, Mira Kestari and Treena Wu for research assistance, and Regional
Autonomy Watch and the Directorate General of Fiscal Balance/MOF for access to data.
1
See Lewis (2001) and Lewis (2002) for analyses of the current system of intergovernmental transfers
in Indonesia.
Sub-national units of government in Indonesia comprise provinces and districts (rural and
urban local governments—kabupaten and kota). Currently, provinces have at least some
authority over taxes related to motor vehicles, change of title of motor vehicles, fuel, and
ground water extraction and use. Tariffs over these taxes are set at uniform rates across the
country by the central government. Local governments exercise control over taxes concerning
hotels, restaurants, entertainment, advertisement, street lighting, some (“class C”) mineral
exploitation, and parking. Kabupaten and kota governments control the relevant tax tariffs
below centrally specified ceilings.2 Both provinces and kabupaten/kota may collect user
charges and fees of various sorts.
Regarding the recent assignment of regional government revenues, many observers have
taken Indonesian policy-makers to task both for what they did as well as for what they did not
do but should have. On the latter count, most analysts have argued that the center should have
devolved to sub-national units at least a modicum of control over some more significant
source(s) of revenue, such as the property tax and/or the personal income tax (the latter via
the application of a regional supplemental rate on the national tax base), for example (Alm,
Aten, and Bahl, 2001). In the event, control over property tax policy and/or administration
was not decentralized.3 And neither was any other major source of revenue awarded to subnational governments under decentralization. Instead, Indonesian policy-makers opted merely
to expand the bases of some of the regions’ traditional taxes, as listed above4. In addition, and
most importantly for the present purposes, the central government also decided to allow
regional governments to create their own taxes and charges. More specifically, under certain
conditions, provincial governments are now permitted to create new charges and
kabupaten/kota may establish both new taxes and charges. It is this authority to establish new
revenue raising instruments at the regional level that has generated such disapproval among
many analysts.
By law, regional governments must persuade their citizens and parliaments that the new taxes
and/or charges that they wish to establish are needed before they can be formally adopted.5
And sub-national units must also convince the central government that the new revenue
instruments satisfy certain “good tax” criteria. Central government provided the regions with
such standards in the context of the law that gave the latter the authority to create new
revenue instruments in the first instance. In addition, the law requires regional governments
to submit their newly established taxes and charges to the center for formal review within a
period of 15 days after the tax or charge has been ratified by regional by-law.6 The central
government has the right to cancel any new revenue instrument that it judges unsatisfactory
vis-à-vis the stated criteria; if the center decides to reject a particular new tax or charge it
2
By law, provinces must share 30 percent of the motor vehicle-based taxes and 70 percent of the fuel
and ground water taxes with kabupaten/kota. The latter must share 10 percent of their total ownsource tax revenues with villages.
3
See Lewis (forthcoming) for an overview of the property tax in Indonesia and an examination of the
central government’s performance in administering the tax.
4
In addition, the tax on ground and surface water extraction and use was re-assigned from local
governments to provinces. The only ostensibly new source of revenue for sub-national governments is
the kabupaten/kota parking tax; this tax was, however, already being levied by many local
governments before current law came into effect..
5
Law No. 34/2000 regarding the Revision to Law 18/97 regarding Regional Taxes and Charges.
6
The central government monitoring and review team comprises officials from the Ministries of
Home Affairs and Finance.
2
must do so within a period of one month after it has received the by-law from the regional
government in question.
What has been the effect of regions’ recently awarded authority to establish new taxes and
charges? The conventional wisdom in Indonesia appears to be that regional governments
have responded rather too aggressively in creating new tax and charge instruments. And the
central government has also been roundly blamed for being lax in its review of the new
instruments and for allowing an excessive number of such to stand. Many observers have
argued that the newly created revenues are mostly inappropriate and that they have had a
significant and harmful effect in one respect or another (Ray, 2001; SMERU, 2001).
In response to criticisms regarding their alleged overly assertive formation of new taxes and
charges, regional governments have mostly argued that they established the new revenues
simply to assist in meeting new expenditure requirements under decentralization. Many
regional officials in Indonesia complain that basic own-source revenues and
intergovernmental transfers together have proved inadequate in amount to fund their now
augmented service responsibilities. Thus, regional governments claim that their motivation
for creating new taxes and charges is a legitimate one of fiscal need.7
Of course, whether the new taxes and charges have actually resulted in substantial increases
in regional own-source revenues is an altogether different question. Many analysts have
noticed that own-source revenues have indeed increased under decentralization. And at least
a few have posited that this increase in regional revenues is a direct result of newly formed
taxes and charges. Obviously, this need not necessarily be the case; the rise in regional ownrevenues might just as well have resulted, in part or in full, from a more intensive use of
traditional own-sources.
This paper examines some of the issues raised above regarding newly created regional taxes
and charges in Indonesia. The investigation has three specific purposes. First, the paper
assesses the evidence regarding the number and kind of new taxes and charges established by
regional governments. Second, the paper examines regional governments’ claim that fiscal
need is a primary motivating force behind the creation of new revenue instruments. And
third, the paper attempts to determine the revenue impact of the newly created regional taxes
and charges.
The paper does not address equity and efficiency concerns related to new regional taxes and
charges. Such issues merit investigation, of course. But an examination of the incidence or
allocative effects of the new regional revenue instruments is beyond the scope of this
analysis. We leave these important questions to future research.
The rest of the paper proceeds as follows. First, a general profile of regional government
revenues before and after decentralization is presented. Second, the data employed in the
paper are described and some preliminary information on the number and type of newly
created regional taxes and charges is provided. Third, a simple econometric model for count
data is developed and used to explore the extent to which the establishment of new local taxes
7
Regional government officials in Indonesia have mostly not contended that their new taxes and
charges were established for regulatory purposes. Devas and Kelly (2002) examine the sometimes
conflicting objectives of revenue raising and regulation for sub-national governments in developing
countries, with a special focus on Kenya.
3
and charges is a function of fiscal need, among other possible determinants. In addition, this
section of the paper derives a consistent estimate of the total number of new sub-national
taxes created across all of Indonesia. Fourth, some empirical evidence regarding the revenue
impact of new local taxes and charges is offered. Finally, the paper summarizes the results
and derives some conclusions relevant for the continuing development of fiscal
decentralization policy in Indonesia.
2.
Regional Government Revenues Before and After Decentralization
Table 1 provides a snapshot of regional government revenues just before and after fiscal
decentralization began implementation. Apparently, both provinces and kabupaten/kota have
realized quite significant increases in revenues under the government’s decentralization
program. Provincial revenues rose by 56 percent while those for kabupaten and kota
increased by 103 percent. For provinces, additions to own-source revenues were most
significant while increases in transfers played the most important role for kabupaten and kota.
As the table shows, provincial own-source revenues increased by 76 percent and transfers
grew by 26 percent. Kabupaten and kota own-source revenues and transfers expanded by 46
and 108 percent, respectively. The relevant point in the current context is that both provinces
and kabupaten/kota experienced noteworthy additions to their own-source revenues under
decentralization. An important question considered below is the extent to which newly
created taxes and charges contributed to those increases.
Table 1: Regional Government Revenues (Rp Bln)
FY 2000*
Percent
FY 2001 Increase
Provinces
Own-Source Revenues
Taxes
Charges
BUMD
Other
Transfers
Other
Total
5,733
4,793
323
159
459
11,342
1,714
18,790
9,924
8,459
486
144
836
14,331
5,024
29,279
73.1
76.5
50.5
-9.5
82.2
26.3
193.1
55.8
Kabupaten/Kota
Own-Source Revenues
Taxes
Charges
BUMD
Other
Transfers
Other
Total
3,596
1,812
1,269
96
408
33,381
2,218
39,195
5,233
2,269
1,750
110
1,105
69,280
4,940
79,453
45.5
25.2
37.9
14.0
170.7
107.5
122.7
102.7
* Nine month fiscal year; figures have been annualized.
4
3.
Data Sources and Some Preliminary Results
We draw on two main sources of information for this analysis. The first is a data set compiled
by Regional Autonomy Watch (Komite Pemantauan Pelaksanaan Otonomi Daerah—
KPPOD). The KPPOD data focus on sub-national government by-laws that have some
relevance to the business and economic environment, including those related to regional
taxation, among other things. The by-laws included in the data set were issued, for the most
part, during the period from FY 2000 through mid-FY 2002. In total, the data set comprises
3,068 entries and covers all 30 provinces and 231 kabupaten/kota.
The second information source is a comprehensive Ministry of Finance listing of regional
government tax and charge by-laws reviewed by the central government over the same
period. The central government data set includes by-laws related to both positive-list taxes
(i.e. provincial and kabupaten/kota “traditional” taxes, as itemized in the introduction above)
as well as newly created taxes and charges. The number of regional government by-laws
enumerated in the MOF data set is 1,354. This list also provides information on the outcome
of the review process, that is, whether or not the particular revenue instrument under
consideration was canceled or allowed to stand.
The above two sets of information were used to produce an inventory of all new (as opposed
to traditional) tax and charge by-laws issued during the run up to and through FY 2001. Each
entry in the data set includes the name of the by-law, the issuing regional government, the
date of issuance, whether or not it was reviewed by the central government, and, if it was
reviewed by the center, whether it was canceled or approved. These data cover all 30
provinces 231 kabupaten/kota8. Table 2 summarizes the pertinent information.
Table 2 Summary of KPPOD and Ministry of Finance Data
Issued Tax and Charge Perda
Perda Reviewed by Center
Perda Canceled by Center
New Taxes and Charges
Provinces
(30)
Kabupaten/Kota
(231)
65
27
10
55
916
406
113
803
The figures in Table 2 mask a significant amount of variation across regional governments, of
course. At the provincial level, sixteen governments did not create any new taxes and charges
at all; of the fourteen that did, the number created ranged from one to 10. Among the 231
kabupaten and kota covered, 71 places issued no new tax and charge by-laws. Of the 160
local governments in the sample that created at least one new revenue instrument, the total
number produced ranged from one to 32. The complete size distribution of newly created
taxes and charges for provinces can be found in Figure 1 and that for the sample of
kabupaten/kota is shown in Figure 2.
8
The geographic coverage of the KPPOD data set subsumes that of the Ministry of Finance data.
5
Figure 1: Size Distribution of New Provincial Taxes and Charges,
FY 2000-FY 2001 (30 Provinces)
20
10
0
0
1
2
3
4
5
6
7
8
9
10
Number of New Taxes and Charges
Figure 2: Size Distribution of New Kabupaten and Kota Taxes
and Charges, FY 2000-FY 2001 (231 Kabupaten/Kota)
80
60
40
20
0
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
Number of New Taxes and Charges
Table 3 presents the evidence regarding newly created taxes and charges by location. As the
table shows, provinces and kabupaten/kota on Sumatera have created the largest number of
new revenue instruments at both the provincial and kabupaten/kota level. The relative
importance of other places for the two types of sub-national governments can be seen in the
table.
6
Table 3: New Taxes and Charges by Location
(30 Provinces and 231 Kabupaten/Kota)
Propinsi Percent
Number of Total
Kab/Kota Percent
Number of Total
Sumatera
Java-Bali
Kalimantan
Sulawesi
Eastern
20
8
6
12
9
36.4
14.5
10.9
21.8
16.4
301
244
71
125
62
37.5
30.4
8.8
15.6
7.7
Total
55
100.0
803
100.0
We consider two different typologies of newly created taxes and charges. The first relates to
whether the new revenue instrument is a tax or a charge (or something else). Table 4 provides
some information on the tax or charge nature of new revenue instruments created by
(covered) regional governments during the first year of fiscal decentralization. As noted
above, provincial governments were by law only allowed to create new charges. As such, not
surprisingly, all new revenue instruments of provinces are charges. Kabupaten/kota are
allowed to create both new taxes and charges. As the table shows, the vast majority of new
revenue instruments created by kabupaten and kota were charges—90 percent of the total.
Only 49, or six percent of the total, were taxes. Another 29, or four percent, were “other”.
These are mostly “contributions”—essentially forced payments to local governments by
businesses of one type or another. In general, care should be taken in interpreting these
figures. Experience shows that sometimes revenues identified as charges by local
governments are really taxes.
The second categorization scheme employed here concerns the economic sector of the taxed
good or factor. We consider six different sectors: primary (agriculture, livestock, fisheries,
forestry, mining), secondary (manufacturing and construction), distribution (trade and
transportation), services, government administration, and other. Table 4 provides the details.
As the table shows, the primary sector is the principal focus of new taxes and charges by both
provinces (42 percent of the total) and sampled kabupaten/kota (41 percent of the total). For
provinces, the service sector is the next most important (20 percent), followed by distribution
(18 percent), government administration (11 percent), and other (nine percent). Note that
provincial governments did not create any new taxes and charges in the secondary sector.
For local governments, services is also the second most important sector (21 percent),
followed by distribution (12 percent), the secondary sector and government administration
(both at 11 percent), and other (five percent).
7
Table 4: Number of New Taxes and Charges by Type
(30 Provinces and 231 Kabupaten/Kota)
Provinces
Percent
Kab/Kota
Percent
Taxes
Charges
Other
Total
0
55
0
55
0.0
100.0
0.0
100.0
49
725
29
803
6.1
90.3
3.6
100.0
Primary
Secondary
Distribution
Services
Govt Admin
Other
Total
23
0
10
11
6
5
55
41.8
0.0
18.2
20.0
10.9
9.1
100.0
327
87
95
168
87
39
803
40.7
10.8
11.8
20.9
10.8
4.9
100.0
It may be useful to stress the point that while the data presented above cover all provinces in
Indonesia, the figures for districts and municipalities are based just on the sample of 231
places. Clearly, this sample of local governments was not randomly drawn. As such, the
results presented above may not be representative of districts and municipalities, in general.
A method that may be used to adjust for the non-random nature of the data is considered next.
4.
Explaining and Estimating the Number of New Taxes and Charges
A Simple Empirical Model to Explain the Number of New Taxes and Charges
The nature of the questions explored in this paper regarding the number of new taxes and
charges suggests the use of an empirical model for count data. The Poisson model is the
standard technique for analyzing such data.9 The most basic Poisson model is often criticized
for its assumption that the mean and variance of the dependent variable under consideration
(i.e. the count) are equal. A standard test for “overdispersion” indicates that this assumption
is indeed weak in the current case.10 Below, we employ a Poisson model with “normal
heterogeneity” to account for the evident overdispersion. In addition, we must also adjust for
the fact that the sample of kabupaten/kota used in the analysis has not been drawn in a
random manner. We use a “sample selection” model in order to make the necessary
corrections. See Greene (2000) for a description of the basic methods.
As noted above, regional governments typically argue that they create new taxes and charges
because they possess insufficient revenues to cover required expenditures. If this were true,
then one might expect that the number of taxes and charges that regional governments create
would be positively related to their expenditure requirements and/or negatively related to the
resources that they have at their disposal, all other things being equal11. More specifically, it
9
See Cameron and Trivedi (1998) for a recent review of econometric models based on count data.
There are a number of such tests. The one used here is based on simple regression techniques. See
Cameron and Trivedi (1990) and Greene (1998) for a description of the method.
11
Of course, what is of real importance to local governments in meeting needs is the amount of
revenue generated by new taxes and charges. In this sense, the number of new instruments formed is
10
8
might be argued that the number of new revenue instruments that various regional
governments formed in the run up to and during fiscal year 2001 might be positively related
to their relative expected expenditure requirements and negatively related to their relative
expected revenues for the fiscal year.
Of particular concern to regional governments are expenditures on staff. As such, expected
staff expenditures for FY 2001 are used to proxy expected expenditure requirements in the
model here. Actual salary expenditures for FY 2001 were pretty well known to local
governments before the fiscal year started (at least before increases in basic civil servant
salaries were mandated) and therefore expected staff expenditure is defined to be equal to
actual staff expenditure for the year. It is anticipated that, all other things being equal, larger
expected staff expenditure requirements would lead to a greater number of new taxes and
charges.
Local revenues comprise those from own-sources and transfers. Local governments typically
base expectations regarding the amount of own-source revenues available in any fiscal year
as a function of last year’s revenues. So their expected own-source revenues for FY 2001
would have been based on such revenues from FY 2000. Actual revenues from transfers for
FY 2001 were known in approximate amount at least somewhat in advance. Therefore, total
expected local government revenue is defined to be equal to (annualized) own-source
revenues from FY 2000 (plus an extra 10 %, as per common local government practice) plus
actual FY 2001 transfers. It is hypothesized that local governments create relatively fewer
new taxes and charges as expected revenue increases, all other things being equal.
Other variables used as regressors in the model include those for gross regional development
product and poverty. It is expected that places with relatively larger gross regional output
might create a greater number of new taxes and charges, ceteris paribus. And it is anticipated
that local governments with relatively higher levels of poverty might create a smaller number
of taxes and charges, all other things being equal.
In addition to the above, dummy variables for municipality status (KOTA) and for
geographic region are included in the regression. Many observers in Indonesia seem to
believe that municipalities have been more aggressive in creating new taxes and charges than
kabupaten have been and that hypothesis is tested here. Regarding geographic region, a
dummy variable is included to indicate whether the districts/municipalities is on Java-Bali
(JAVA = 1) or not (JAVA = 0). Local governments in the sampled places on Java-Bali
appear to have produced a fewer number of new taxes and charges than other sub-national
governments (in per capita terms). The hypothesis that this holds in the more comprehensive
model is considered here.
The variables described above are entered into the simple sample selection model for counts
described above. Per capita log forms are used for expected staff expenditures (STAFF),
not the most interesting measure to examine. Still, the number of new taxes and charges created in
response to need might be relevant if individual instruments produce small, approximately equal
amounts of revenue across places (in per capita terms), such as might be the case with nuisance taxes,
for example. In any case, there are no data, as of yet, on the amount of revenue produced by
individual sub-national tax instruments for fiscal year 2001.The analysis here is forced to abstract
from issues related to the revenue generation of individual taxes and charges.
9
expected fiscal capacity (FISK), and gross regional development product (GRDP) and the
poverty variable is operationalized as the incidence of poverty (POVERTY). Dummy
variables are entered into the model as described above. The model can be consistently
estimated either by two-step non-linear least squares procedures as in Terza (1994) and
Greene (1994) or via full information maximum likelihood (FIML) techniques as in Greene
(1998). All three estimating techniques were tried here with reasonably similar outcomes,
although FIML estimation of the model seems to produce a somewhat better fit. The results
reported just below are those based on the FIML methods.
Table 5 shows the relevant regression output. The three panels of the table show the
parameters for the (probit) selection equation, the Poisson probability model, and the
combined effect of the two, respectively. For each of the independent variables discussed
above, the table provides the estimated coefficient, the standard error, the t statistic, and an
indication of the statistical significance of the coefficient. The chi-square statistic is provided
at the bottom of the table along with its level of significance.
10
Table 5: Regression Results
Panel A: Parameters of Probit Selection Model
Variable
Constant
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
0.209
0.141
-0.134
0.042
-0.004
0.132
-0.095
SE
0.613
0.069
0.064
0.041
0.002
0.081
0.065
t value
0.341
2.060 **
-2.099 **
1.022
-1.991 **
1.622
-1.460
Panel B: Parameters of the Poisson Probability
Variable
Constant
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
5.733
0.648
-1.110
0.165
-0.027
-0.997
-1.975
SE
6.135
0.544
0.746
0.473
0.026
0.762
0.568
t value
0.935
1.191
-1.487
0.349
-1.058
-1.309
-3.480 **
SE
0.549
0.750
0.476
0.026
0.767
0.574
t value
1.438
-1.658 *
0.435
-1.187
-1.128
-3.608 **
Panel C: Combined Effect
Variable
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
0.790
-1.244
0.207
-0.031
-0.865
-2.071
Chi-Squared Stat = 550.72737
Significance Level = 0.00000
* and ** indicate that the coefficient is statistically
significant at the 0.05 and 0.10 levels, respectively.
Source: Author's own calculations.
Attention is drawn to the bottom panel of the table which provides the overall marginal effect
of the independent variable on the number of new taxes created. As the table shows, the
regression coefficient for fiscal capacity (FISK) has the anticipated sign (negative) and is
significant at the 0.10 level. This provides at least some support for the particular hypothesis
that the number of taxes and charges created by regional governments is a (decreasing)
function of fiscal capacity and that, in general, the number of new instruments formed by
regions is based on considerations of net fiscal needs. Note, however, that expected staff
expenditure (STAFF) has no apparent effect on the number of taxes created, weakening this
11
latter inference12. In addition, the output reveals that, as expected, geography is an important
determinant of the number of new revenue instruments created; apparently, local
governments on Java-Bali (JAVA) have indeed produced relatively fewer new taxes and
charges than those places in other areas of the country, all things considered. None of the
other variables considered is important in explaining the number of new revenue instruments.
An Estimate of the Total Number of New Taxes and Charges Created
An important reason for specifying and estimating the above model in the context of this
paper is to derive a consistent estimate the mean level of new taxes and charges created by
local governments. The sample selection techniques employed here adjust for the sample’s
non-random character. The method corrects for the ‘truncation bias’ in the distribution of the
number of new taxes and charges that results from the non-random sampling. The methods
provide an estimate of the mean of the truncated distribution, that is, the mean that would
have obtained if the sample had been randomly drawn from the population.
As can be deduced from Table 2 above, the mean number of newly created taxes and charges
for the non-random sample of 231 districts/municipalities is 3.476. The sample selection
methods estimate the mean of the number of new taxes created in the truncated distribution to
be 2.804. This latter estimate would suggest that approximately 942 (2.804 times 336
regions) new taxes and charges might have been created in all districts/municipalities in the
run up and through fiscal year 2001. As such, the information presented in Table 2 can be
revised and augmented as follows.
Table 6: Estimated Number of New Taxes and Charges through FY 2001
Provinces
(30)
Kabupaten/Kota
(336)
Total
Issued Tax and Charge Perda
Perda Reviewed by Center
Perda Canceled by Center
New Taxes and Charges
65
27
10
55
1055
406
113
942
1120
433
123
997
Percent Reviewed of Issued
Percent Canceled of Reviewed
41.5
37.0
38.5
27.8
38.7
28.4
As the table shows, an estimated total of 1,120 new taxes and charge by-laws (Perda) were
issued by these regional governments up through FY 2001, including 65 for provinces and
1,055 for kabupaten/kota. Of these only 433, or about 39 percent of the total, were actually
reviewed by the central government. The remainder were issued directly by regional
governments. Of those reviewed by the center, 123, or 28 percent of the total, were rejected
as unsuitable for one reason or another. In total, through the end of fiscal year 2001, as many
as 997 new taxes and charges may have been created by sub-national governments and not
rejected by the center.
As noted above, the central government has been criticized by many observers for being lax
in its role of reviewing regional by-laws. While it may be true that the center has been either
12
The lack of clear and significant results for these two variables may be at least partly a function of
rather significant collinearty between them.
12
careless or too lenient in its review and evaluation of submitted regional tax and charge bylaws, the more important point would seem to be that the center has not even had the chance
to appraise the majority of newly created regional taxes and charges. Regional governments
have, for the most part, acted unilaterally (and in direct contradiction to law) in creating new
taxes and charges. It would appear that the central government has lost control of the
monitoring process to a rather significant degree.
5.
Revenue Impact of New Taxes and Charges
This section of the paper considers the revenue impact of new taxes and charges. Ideally, this
issue would be explored directly by examining the actual revenue generated by newly created
taxes and charges across regional governments. Unfortunately, comprehensive revenue data
on individual regional tax and charge instruments are not available. So, we are forced to
employ second-best methods. We assess the extent to which the aggregate increase in
regional government own-source revenues between fiscal years 2000 and 2001 is a function
of revenue generated by regional governments which created new taxes and charges.
Table 7 provides information on the number, population, and increases in own-source
revenue (from taxes, charges and other sources) of regional governments which did and did
not create new taxes and charges, respectively. The table shows that provincial governments
that created new taxes and charges, and which account for about 40 percent of the total
population, account for only 14 percent of the total increase in own-source revenues between
the two fiscal years in question. Covered kabupaten/kota that created new taxes and charges,
and which make up about 70 percent of the covered population, account for about two-thirds
of the total increase in covered local government own-source revenues. These figures suggest
that new taxes and charges need not be that important in generating additional revenue.
Moreover, it is clear that any revenue generated by new regional taxes and charges would be
small relative to total regional revenues. Assume for a moment that all revenue increases of
issuing regional governments was a function of new taxes and charges. Under this
implausible assumption, the total new tax and charge revenue would have constituted just
eight percent of issuing provinces’ total budgets and just under three percent of issuing
kabupaten/kota total budgets. Since not all increases are due to new taxes and charges, these
figures exaggerate the importance of new tax and charge revenue. It is hard to escape the
conclusion that the issuance of new taxes and charge probably has not mattered much to the
generation of own-source revenues, either in the aggregate, or in relation to overall regional
government budgets.
The conclusion that new regional taxes and charges don’t produce much revenue is not really
very surprising. As has been noted elsewhere (SMERU, 2001), many of the “new” taxes and
charges created by regions under fiscal decentralization are merely those that existed prior to
the reforms embodied in Law 18 of 1997. It is well known that many of those earlier taxes
and charges generated very little revenue—this was, in fact, one of the arguments
successfully employed in doing away with them in that particular piece of legislation.
13
Table 7: Number, Population, and PAD Increases for Perda Issuing and
Non-Issuing Regional Governments (Rp Bln)
All
Issuing Percent of Non-Issuing Percent of
Provinces Provinces
Total
Provinces
Total
Number
30
14
46.7
16
53.3
Population (000)
203,528.76 83,129.17
40.8 120,399.59
59.2
PAD Inc (FY00-FY01)
4,206.45
608.88
14.5
3,597.56
85.5
Taxes
3,666.25
555.66
15.2
3,110.59
84.8
Charges
163.23
1.12
0.7
162.10
99.3
Other
376.97
52.10
13.8
324.87
86.2
All
Issuing Percent of Non-Issuing Percent of
Kab/Kota Kab/Kota
Total
Kab/Kota
Total
Number
231
160
69.3
71
30.7
Population (000)
151,237.41 105,455.67
69.7 45,781.75
30.3
PAD Inc (FY00-FY01)
1,307.72
874.43
66.9
433.29
33.1
Taxes
437.28
253.22
57.9
184.07
42.1
Charges
403.18
297.29
73.7
105.89
26.3
Other
456.78
322.03
70.5
134.75
29.5
6.
Summary and Conclusions
Regional governments have been criticized for creating too many new taxes and charges
under decentralization. And central government has been taken to task for giving sub-national
governments the authority to create new revenue instruments in the first instance and for
approving the implementation of too many new taxes and charges in the second. Many of the
new regional taxes and charges have been judged as inappropriate by one standard or
another.13
Central government’s overall culpability in the creation of unsuitable regional taxes and
charges is unknown. What is apparent, however, is that the center has only had the chance to
review less than 40 percent of the new taxes and charges that have been created by subnational governments. Regional governments have implemented the bulk of the new revenue
instruments unilaterally. It may be true, of course, that the center has not adequately
evaluated those new taxes and charges it has considered but the larger point would appear to
be that it seems to have lost control of the legal review process itself to a rather significant
degree.
Regional governments have, in fact, created many new instruments. During the run-up to and
through fiscal year 2001, provinces and kabupaten/kota created a total of 55 and (an
13
As noted in the introduction, it has not been the intention of this paper to evaluate the newly created
taxes and charges against typical standards such as equity and efficiency, for example. Such research
is, however, planned for the near future. It is hoped that the research will yield firm evidence (as yet
unavailable) on the broader impact of new taxes and charges and that such evidence will be used to
inform the decision as to whether the authority to create new taxes and charges should be withdrawn
in the revisions to Law 34/00.
14
estimated) 942 new taxes and charges, respectively. For both provinces and kabupaten/kota
the main focus of new taxes and charges has been on primary sector (agriculture, livestock,
fisheries, forestry, and mining) and the evidence offered above indicates that over 40 percent
of the new revenue instruments are levied on goods or factors in that sector. New taxes and
charges in services and the distribution sector (trade and transportation) have been of
secondary importance. New taxation of the secondary sector—manufacturing and
construction and the like—has been relatively insignificant overall.
Whether regional governments have created too many new taxes and charges is, in some
sense, an arbitrary question. In any case, regional governments’ response to this criticism is
that they have created new instruments because they are in need of greater fiscal resources.
The empirical examination carried out in this paper provides only limited support for the
hypothesis that the number of taxes and charges created by local governments is a function of
relative fiscal need. Of course, what is really important is not so much the number of revenue
instruments created but the actual revenue that they generate. The analysis here has abstracted
from issues related to the revenue generation of individual taxes and charges. Regrettably,
lack of data prevent a more in-depth analysis of these questions.
The extent to which new tax and charge instruments have led to meaningful amounts of new
own-source revenues in the aggregate is also less than clear. The vast bulk of the increase in
provincial government own-source revenues under decentralization (through fiscal year
2001) was generated by provinces that had not yet bothered to create new instruments. And
while issuing kabupaten/kota have generated relatively greater amounts of the aggregate
increase in local government own-source revenue, the extent to which the growth is directly
due to new local taxes and charges is far from obvious. Even under the most optimistic of
assumptions, any increase in own-source revenues that may have resulted from the creation
of new taxes and charges would still represent a very small proportion of total regional
budgets.
This latter point suggests the main conclusions relevant for the continuing development for
fiscal decentralization policy in Indonesia. The instruments sub-national governments have at
their disposal—both traditional and new—are inadequate to the task of producing much tax
revenue. Without access to more substantial tax bases, regional governments will necessarily
remain unsuccessful in generating significant amounts of own-source revenue. It is up to
central government, of course, to provide that access.
One obvious solution to this problem for local governments would be to decentralize some
authority over the property tax. For provinces (and also possibly for kabupaten/kota), the idea
of establishing a supplemental tax on personal income has some merit. Proposals for both are
currently being debated inside the Ministry of Finance.14 Experience suggests, however, that
decentralizing the property tax to kabupaten/kota and/or creating a piggy-back income tax for
regional governments will not come easily or quickly. As long as the status quo prevails,
fiscal decentralization in Indonesia will remain an unbalanced affair.
14
This is not the place to examine such proposals. See Lewis (forthcoming) for an analysis of the
property tax in the context of fiscal decentralization. Mark Rider (2002) investigates some aspects of
personal income piggy-back tax in the Indonesian context.
15
References
Alm, J., Aten, R. and Bahl, R. (2001). “Can Indonesia Decentralise Successfully? Plans,
Problems, and Prospects,” Bulletin of Indonesian Economic Studies 37 (1), pp. 83-102.
Cameron, A. and Trivedi, P. (1990). “Regression Based Tests for Overdispersion in the
Poisson Model,” Journal of Econometrics, 46, pp 347-364.
Cameron, A. and Trivedi, P. (1998) The Analysis of Count Data. New York: Cambridge
University Press.
Deuster, P. (2002). “Survey of Recent Developments,” Bulletin of Indonesian Economic
Studies, 38 (1), pp. 5-37.
Devas, N, Kelly, R. (2001). “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 (5): 381-391.
Greene, W. (1998). LIMDEP Version 7 user’s Manual Revised Edition (Plainview, New
York: Econometric Software).
Greene, W., (2000) Econometric Analysis (Upper Saddle River, New Jersey: Prentice Hall
International).
Lewis, B. (2001). “The New Indonesian Equalisation Transfer,” Bulletin of Indonesian
Economic Studies 37(3): 325-43.
Lewis, B. (2002). “Indonesia,” in Intergovernmental Transfers in Asia; Smoke, P (ed.) Asian
Development Bank: Manila; pp137-74.
Lewis, B. (forthcoming). “Property Taxation in Indonesia: Measuring and Explaining
Administrative (Under-) Performance,” Public Administration and Development.
Ministry of Finance (2002), “Fiscal Decentralization: A Ministry of Finance Policy Agenda,”
Draft Paper, Directorate General for Fiscal Balance, Ministry of Finance. Jakarta.
Ray, David (2001), “Inventory of Trade-Distorting Local Regulations,” USAID-PEG Project,
Ministry of Industry and Trade. Jakarta.
Republic of Indonesia (2000), “Law No. 34/2000 regarding the Revision to Law 18/97
regarding Regional Taxes and Charges (Undang-Undang 34/2000 tentang Perubahan atas
Undang-Undang 18/97 tentang Pajak Daerah dan Retribusi Daerah),” Jakarta.
Rider, Mark (2002). “Estimated Revenue Yield of Piggyback Personal Income Tax,” MidTerm Report to the Directorate of Regional Revenue, Ministry of Finance, Republic of
Indonesia. Jakarta.
SMERU (2001). “Regional Autonomy and the Business Climate: Three Kabupaten Case
Studies from North Sumatra.” SMERU Field Report. Jakarta.
16
Some Empirical Evidence on New Regional Taxes and Charges in Indonesia
Blane D. Lewis∗
Research Triangle Institute, North Carolina, USA
Summary: This paper estimates that regional governments created just less than 1,000 new taxes and
charges during the run up to and through fiscal year 2001.The available evidence indicates that about
40 percent of the newly formed revenue instruments were levied on goods or factors in the primary
sector. An estimated 60 percent of the new taxes and charges were implemented directly by regional
governments—that is, without central review and, therefore, in direct contradiction to law. Regional
governments typically argue that they produce new taxes because of fiscal need. The empirical
examination in this paper provides limited support for this claim, although weaknesses in the data
prevent a firm conclusion on the matter. Revenue generated by new taxes and charges would appear
to be negligible; even under the most optimistic of assumptions, any increase in regional own-source
revenues that may have resulted from the creation of new taxes and charges would be very small
relative to overall budgets. The instruments that regional governments have at their disposal—both
traditional and new—are inadequate to the task of producing much tax revenue. Without access to
more substantial tax bases, regional governments will remain unsuccessful in realizing significant
own-source revenues and fiscal decentralization in Indonesia will continue to be an unbalanced affair.
1.
Introduction and Background
It is widely recognized that Indonesia’s two-year-old experiment in fiscal decentralization has
been very uneven in its approach to the assignment of regional expenditures and revenues.
While the decentralization of service responsibility to sub-national governments has been
significant, public revenues remain highly centralized. At the end of fiscal year 2001 (the first
year of program implementation), regional governments accounted for approximately 30
percent of total public expenditures but collected only around five percent of all government
tax revenues (Ministry of Finance, 2002). Although there is almost ways some fiscal
imbalance in the assignment of expenditures and revenues to sub-national units of
governments in the context of decentralization programs, the extent of such in Indonesia
would appear to be quite pronounced.
Among other things, the large fiscal imbalance in Indonesia suggests an important potential
role for intergovernmental transfers. And transfers have indeed become significant in regional
government budgets under decentralization. In the aggregate, various new revenue sharing
and grant programs accounted for over three-quarters of total sub-national government
revenues in fiscal year 2001. Own-source revenues make up most of the residual in regional
budgets, approximately 15 percent of total regional fiscal resources.1
∗
The author is currently senior adviser to the Ministry of Finance (MOF) under a project financed by
the United States Agency for International Development (USAID). The views expressed here are
those of the author and should not be attributed to either MOF or to USAID. The author would like to
thank Paul Smoke for discussions, Mira Kestari and Treena Wu for research assistance, and Regional
Autonomy Watch and the Directorate General of Fiscal Balance/MOF for access to data.
1
See Lewis (2001) and Lewis (2002) for analyses of the current system of intergovernmental transfers
in Indonesia.
Sub-national units of government in Indonesia comprise provinces and districts (rural and
urban local governments—kabupaten and kota). Currently, provinces have at least some
authority over taxes related to motor vehicles, change of title of motor vehicles, fuel, and
ground water extraction and use. Tariffs over these taxes are set at uniform rates across the
country by the central government. Local governments exercise control over taxes concerning
hotels, restaurants, entertainment, advertisement, street lighting, some (“class C”) mineral
exploitation, and parking. Kabupaten and kota governments control the relevant tax tariffs
below centrally specified ceilings.2 Both provinces and kabupaten/kota may collect user
charges and fees of various sorts.
Regarding the recent assignment of regional government revenues, many observers have
taken Indonesian policy-makers to task both for what they did as well as for what they did not
do but should have. On the latter count, most analysts have argued that the center should have
devolved to sub-national units at least a modicum of control over some more significant
source(s) of revenue, such as the property tax and/or the personal income tax (the latter via
the application of a regional supplemental rate on the national tax base), for example (Alm,
Aten, and Bahl, 2001). In the event, control over property tax policy and/or administration
was not decentralized.3 And neither was any other major source of revenue awarded to subnational governments under decentralization. Instead, Indonesian policy-makers opted merely
to expand the bases of some of the regions’ traditional taxes, as listed above4. In addition, and
most importantly for the present purposes, the central government also decided to allow
regional governments to create their own taxes and charges. More specifically, under certain
conditions, provincial governments are now permitted to create new charges and
kabupaten/kota may establish both new taxes and charges. It is this authority to establish new
revenue raising instruments at the regional level that has generated such disapproval among
many analysts.
By law, regional governments must persuade their citizens and parliaments that the new taxes
and/or charges that they wish to establish are needed before they can be formally adopted.5
And sub-national units must also convince the central government that the new revenue
instruments satisfy certain “good tax” criteria. Central government provided the regions with
such standards in the context of the law that gave the latter the authority to create new
revenue instruments in the first instance. In addition, the law requires regional governments
to submit their newly established taxes and charges to the center for formal review within a
period of 15 days after the tax or charge has been ratified by regional by-law.6 The central
government has the right to cancel any new revenue instrument that it judges unsatisfactory
vis-à-vis the stated criteria; if the center decides to reject a particular new tax or charge it
2
By law, provinces must share 30 percent of the motor vehicle-based taxes and 70 percent of the fuel
and ground water taxes with kabupaten/kota. The latter must share 10 percent of their total ownsource tax revenues with villages.
3
See Lewis (forthcoming) for an overview of the property tax in Indonesia and an examination of the
central government’s performance in administering the tax.
4
In addition, the tax on ground and surface water extraction and use was re-assigned from local
governments to provinces. The only ostensibly new source of revenue for sub-national governments is
the kabupaten/kota parking tax; this tax was, however, already being levied by many local
governments before current law came into effect..
5
Law No. 34/2000 regarding the Revision to Law 18/97 regarding Regional Taxes and Charges.
6
The central government monitoring and review team comprises officials from the Ministries of
Home Affairs and Finance.
2
must do so within a period of one month after it has received the by-law from the regional
government in question.
What has been the effect of regions’ recently awarded authority to establish new taxes and
charges? The conventional wisdom in Indonesia appears to be that regional governments
have responded rather too aggressively in creating new tax and charge instruments. And the
central government has also been roundly blamed for being lax in its review of the new
instruments and for allowing an excessive number of such to stand. Many observers have
argued that the newly created revenues are mostly inappropriate and that they have had a
significant and harmful effect in one respect or another (Ray, 2001; SMERU, 2001).
In response to criticisms regarding their alleged overly assertive formation of new taxes and
charges, regional governments have mostly argued that they established the new revenues
simply to assist in meeting new expenditure requirements under decentralization. Many
regional officials in Indonesia complain that basic own-source revenues and
intergovernmental transfers together have proved inadequate in amount to fund their now
augmented service responsibilities. Thus, regional governments claim that their motivation
for creating new taxes and charges is a legitimate one of fiscal need.7
Of course, whether the new taxes and charges have actually resulted in substantial increases
in regional own-source revenues is an altogether different question. Many analysts have
noticed that own-source revenues have indeed increased under decentralization. And at least
a few have posited that this increase in regional revenues is a direct result of newly formed
taxes and charges. Obviously, this need not necessarily be the case; the rise in regional ownrevenues might just as well have resulted, in part or in full, from a more intensive use of
traditional own-sources.
This paper examines some of the issues raised above regarding newly created regional taxes
and charges in Indonesia. The investigation has three specific purposes. First, the paper
assesses the evidence regarding the number and kind of new taxes and charges established by
regional governments. Second, the paper examines regional governments’ claim that fiscal
need is a primary motivating force behind the creation of new revenue instruments. And
third, the paper attempts to determine the revenue impact of the newly created regional taxes
and charges.
The paper does not address equity and efficiency concerns related to new regional taxes and
charges. Such issues merit investigation, of course. But an examination of the incidence or
allocative effects of the new regional revenue instruments is beyond the scope of this
analysis. We leave these important questions to future research.
The rest of the paper proceeds as follows. First, a general profile of regional government
revenues before and after decentralization is presented. Second, the data employed in the
paper are described and some preliminary information on the number and type of newly
created regional taxes and charges is provided. Third, a simple econometric model for count
data is developed and used to explore the extent to which the establishment of new local taxes
7
Regional government officials in Indonesia have mostly not contended that their new taxes and
charges were established for regulatory purposes. Devas and Kelly (2002) examine the sometimes
conflicting objectives of revenue raising and regulation for sub-national governments in developing
countries, with a special focus on Kenya.
3
and charges is a function of fiscal need, among other possible determinants. In addition, this
section of the paper derives a consistent estimate of the total number of new sub-national
taxes created across all of Indonesia. Fourth, some empirical evidence regarding the revenue
impact of new local taxes and charges is offered. Finally, the paper summarizes the results
and derives some conclusions relevant for the continuing development of fiscal
decentralization policy in Indonesia.
2.
Regional Government Revenues Before and After Decentralization
Table 1 provides a snapshot of regional government revenues just before and after fiscal
decentralization began implementation. Apparently, both provinces and kabupaten/kota have
realized quite significant increases in revenues under the government’s decentralization
program. Provincial revenues rose by 56 percent while those for kabupaten and kota
increased by 103 percent. For provinces, additions to own-source revenues were most
significant while increases in transfers played the most important role for kabupaten and kota.
As the table shows, provincial own-source revenues increased by 76 percent and transfers
grew by 26 percent. Kabupaten and kota own-source revenues and transfers expanded by 46
and 108 percent, respectively. The relevant point in the current context is that both provinces
and kabupaten/kota experienced noteworthy additions to their own-source revenues under
decentralization. An important question considered below is the extent to which newly
created taxes and charges contributed to those increases.
Table 1: Regional Government Revenues (Rp Bln)
FY 2000*
Percent
FY 2001 Increase
Provinces
Own-Source Revenues
Taxes
Charges
BUMD
Other
Transfers
Other
Total
5,733
4,793
323
159
459
11,342
1,714
18,790
9,924
8,459
486
144
836
14,331
5,024
29,279
73.1
76.5
50.5
-9.5
82.2
26.3
193.1
55.8
Kabupaten/Kota
Own-Source Revenues
Taxes
Charges
BUMD
Other
Transfers
Other
Total
3,596
1,812
1,269
96
408
33,381
2,218
39,195
5,233
2,269
1,750
110
1,105
69,280
4,940
79,453
45.5
25.2
37.9
14.0
170.7
107.5
122.7
102.7
* Nine month fiscal year; figures have been annualized.
4
3.
Data Sources and Some Preliminary Results
We draw on two main sources of information for this analysis. The first is a data set compiled
by Regional Autonomy Watch (Komite Pemantauan Pelaksanaan Otonomi Daerah—
KPPOD). The KPPOD data focus on sub-national government by-laws that have some
relevance to the business and economic environment, including those related to regional
taxation, among other things. The by-laws included in the data set were issued, for the most
part, during the period from FY 2000 through mid-FY 2002. In total, the data set comprises
3,068 entries and covers all 30 provinces and 231 kabupaten/kota.
The second information source is a comprehensive Ministry of Finance listing of regional
government tax and charge by-laws reviewed by the central government over the same
period. The central government data set includes by-laws related to both positive-list taxes
(i.e. provincial and kabupaten/kota “traditional” taxes, as itemized in the introduction above)
as well as newly created taxes and charges. The number of regional government by-laws
enumerated in the MOF data set is 1,354. This list also provides information on the outcome
of the review process, that is, whether or not the particular revenue instrument under
consideration was canceled or allowed to stand.
The above two sets of information were used to produce an inventory of all new (as opposed
to traditional) tax and charge by-laws issued during the run up to and through FY 2001. Each
entry in the data set includes the name of the by-law, the issuing regional government, the
date of issuance, whether or not it was reviewed by the central government, and, if it was
reviewed by the center, whether it was canceled or approved. These data cover all 30
provinces 231 kabupaten/kota8. Table 2 summarizes the pertinent information.
Table 2 Summary of KPPOD and Ministry of Finance Data
Issued Tax and Charge Perda
Perda Reviewed by Center
Perda Canceled by Center
New Taxes and Charges
Provinces
(30)
Kabupaten/Kota
(231)
65
27
10
55
916
406
113
803
The figures in Table 2 mask a significant amount of variation across regional governments, of
course. At the provincial level, sixteen governments did not create any new taxes and charges
at all; of the fourteen that did, the number created ranged from one to 10. Among the 231
kabupaten and kota covered, 71 places issued no new tax and charge by-laws. Of the 160
local governments in the sample that created at least one new revenue instrument, the total
number produced ranged from one to 32. The complete size distribution of newly created
taxes and charges for provinces can be found in Figure 1 and that for the sample of
kabupaten/kota is shown in Figure 2.
8
The geographic coverage of the KPPOD data set subsumes that of the Ministry of Finance data.
5
Figure 1: Size Distribution of New Provincial Taxes and Charges,
FY 2000-FY 2001 (30 Provinces)
20
10
0
0
1
2
3
4
5
6
7
8
9
10
Number of New Taxes and Charges
Figure 2: Size Distribution of New Kabupaten and Kota Taxes
and Charges, FY 2000-FY 2001 (231 Kabupaten/Kota)
80
60
40
20
0
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
Number of New Taxes and Charges
Table 3 presents the evidence regarding newly created taxes and charges by location. As the
table shows, provinces and kabupaten/kota on Sumatera have created the largest number of
new revenue instruments at both the provincial and kabupaten/kota level. The relative
importance of other places for the two types of sub-national governments can be seen in the
table.
6
Table 3: New Taxes and Charges by Location
(30 Provinces and 231 Kabupaten/Kota)
Propinsi Percent
Number of Total
Kab/Kota Percent
Number of Total
Sumatera
Java-Bali
Kalimantan
Sulawesi
Eastern
20
8
6
12
9
36.4
14.5
10.9
21.8
16.4
301
244
71
125
62
37.5
30.4
8.8
15.6
7.7
Total
55
100.0
803
100.0
We consider two different typologies of newly created taxes and charges. The first relates to
whether the new revenue instrument is a tax or a charge (or something else). Table 4 provides
some information on the tax or charge nature of new revenue instruments created by
(covered) regional governments during the first year of fiscal decentralization. As noted
above, provincial governments were by law only allowed to create new charges. As such, not
surprisingly, all new revenue instruments of provinces are charges. Kabupaten/kota are
allowed to create both new taxes and charges. As the table shows, the vast majority of new
revenue instruments created by kabupaten and kota were charges—90 percent of the total.
Only 49, or six percent of the total, were taxes. Another 29, or four percent, were “other”.
These are mostly “contributions”—essentially forced payments to local governments by
businesses of one type or another. In general, care should be taken in interpreting these
figures. Experience shows that sometimes revenues identified as charges by local
governments are really taxes.
The second categorization scheme employed here concerns the economic sector of the taxed
good or factor. We consider six different sectors: primary (agriculture, livestock, fisheries,
forestry, mining), secondary (manufacturing and construction), distribution (trade and
transportation), services, government administration, and other. Table 4 provides the details.
As the table shows, the primary sector is the principal focus of new taxes and charges by both
provinces (42 percent of the total) and sampled kabupaten/kota (41 percent of the total). For
provinces, the service sector is the next most important (20 percent), followed by distribution
(18 percent), government administration (11 percent), and other (nine percent). Note that
provincial governments did not create any new taxes and charges in the secondary sector.
For local governments, services is also the second most important sector (21 percent),
followed by distribution (12 percent), the secondary sector and government administration
(both at 11 percent), and other (five percent).
7
Table 4: Number of New Taxes and Charges by Type
(30 Provinces and 231 Kabupaten/Kota)
Provinces
Percent
Kab/Kota
Percent
Taxes
Charges
Other
Total
0
55
0
55
0.0
100.0
0.0
100.0
49
725
29
803
6.1
90.3
3.6
100.0
Primary
Secondary
Distribution
Services
Govt Admin
Other
Total
23
0
10
11
6
5
55
41.8
0.0
18.2
20.0
10.9
9.1
100.0
327
87
95
168
87
39
803
40.7
10.8
11.8
20.9
10.8
4.9
100.0
It may be useful to stress the point that while the data presented above cover all provinces in
Indonesia, the figures for districts and municipalities are based just on the sample of 231
places. Clearly, this sample of local governments was not randomly drawn. As such, the
results presented above may not be representative of districts and municipalities, in general.
A method that may be used to adjust for the non-random nature of the data is considered next.
4.
Explaining and Estimating the Number of New Taxes and Charges
A Simple Empirical Model to Explain the Number of New Taxes and Charges
The nature of the questions explored in this paper regarding the number of new taxes and
charges suggests the use of an empirical model for count data. The Poisson model is the
standard technique for analyzing such data.9 The most basic Poisson model is often criticized
for its assumption that the mean and variance of the dependent variable under consideration
(i.e. the count) are equal. A standard test for “overdispersion” indicates that this assumption
is indeed weak in the current case.10 Below, we employ a Poisson model with “normal
heterogeneity” to account for the evident overdispersion. In addition, we must also adjust for
the fact that the sample of kabupaten/kota used in the analysis has not been drawn in a
random manner. We use a “sample selection” model in order to make the necessary
corrections. See Greene (2000) for a description of the basic methods.
As noted above, regional governments typically argue that they create new taxes and charges
because they possess insufficient revenues to cover required expenditures. If this were true,
then one might expect that the number of taxes and charges that regional governments create
would be positively related to their expenditure requirements and/or negatively related to the
resources that they have at their disposal, all other things being equal11. More specifically, it
9
See Cameron and Trivedi (1998) for a recent review of econometric models based on count data.
There are a number of such tests. The one used here is based on simple regression techniques. See
Cameron and Trivedi (1990) and Greene (1998) for a description of the method.
11
Of course, what is of real importance to local governments in meeting needs is the amount of
revenue generated by new taxes and charges. In this sense, the number of new instruments formed is
10
8
might be argued that the number of new revenue instruments that various regional
governments formed in the run up to and during fiscal year 2001 might be positively related
to their relative expected expenditure requirements and negatively related to their relative
expected revenues for the fiscal year.
Of particular concern to regional governments are expenditures on staff. As such, expected
staff expenditures for FY 2001 are used to proxy expected expenditure requirements in the
model here. Actual salary expenditures for FY 2001 were pretty well known to local
governments before the fiscal year started (at least before increases in basic civil servant
salaries were mandated) and therefore expected staff expenditure is defined to be equal to
actual staff expenditure for the year. It is anticipated that, all other things being equal, larger
expected staff expenditure requirements would lead to a greater number of new taxes and
charges.
Local revenues comprise those from own-sources and transfers. Local governments typically
base expectations regarding the amount of own-source revenues available in any fiscal year
as a function of last year’s revenues. So their expected own-source revenues for FY 2001
would have been based on such revenues from FY 2000. Actual revenues from transfers for
FY 2001 were known in approximate amount at least somewhat in advance. Therefore, total
expected local government revenue is defined to be equal to (annualized) own-source
revenues from FY 2000 (plus an extra 10 %, as per common local government practice) plus
actual FY 2001 transfers. It is hypothesized that local governments create relatively fewer
new taxes and charges as expected revenue increases, all other things being equal.
Other variables used as regressors in the model include those for gross regional development
product and poverty. It is expected that places with relatively larger gross regional output
might create a greater number of new taxes and charges, ceteris paribus. And it is anticipated
that local governments with relatively higher levels of poverty might create a smaller number
of taxes and charges, all other things being equal.
In addition to the above, dummy variables for municipality status (KOTA) and for
geographic region are included in the regression. Many observers in Indonesia seem to
believe that municipalities have been more aggressive in creating new taxes and charges than
kabupaten have been and that hypothesis is tested here. Regarding geographic region, a
dummy variable is included to indicate whether the districts/municipalities is on Java-Bali
(JAVA = 1) or not (JAVA = 0). Local governments in the sampled places on Java-Bali
appear to have produced a fewer number of new taxes and charges than other sub-national
governments (in per capita terms). The hypothesis that this holds in the more comprehensive
model is considered here.
The variables described above are entered into the simple sample selection model for counts
described above. Per capita log forms are used for expected staff expenditures (STAFF),
not the most interesting measure to examine. Still, the number of new taxes and charges created in
response to need might be relevant if individual instruments produce small, approximately equal
amounts of revenue across places (in per capita terms), such as might be the case with nuisance taxes,
for example. In any case, there are no data, as of yet, on the amount of revenue produced by
individual sub-national tax instruments for fiscal year 2001.The analysis here is forced to abstract
from issues related to the revenue generation of individual taxes and charges.
9
expected fiscal capacity (FISK), and gross regional development product (GRDP) and the
poverty variable is operationalized as the incidence of poverty (POVERTY). Dummy
variables are entered into the model as described above. The model can be consistently
estimated either by two-step non-linear least squares procedures as in Terza (1994) and
Greene (1994) or via full information maximum likelihood (FIML) techniques as in Greene
(1998). All three estimating techniques were tried here with reasonably similar outcomes,
although FIML estimation of the model seems to produce a somewhat better fit. The results
reported just below are those based on the FIML methods.
Table 5 shows the relevant regression output. The three panels of the table show the
parameters for the (probit) selection equation, the Poisson probability model, and the
combined effect of the two, respectively. For each of the independent variables discussed
above, the table provides the estimated coefficient, the standard error, the t statistic, and an
indication of the statistical significance of the coefficient. The chi-square statistic is provided
at the bottom of the table along with its level of significance.
10
Table 5: Regression Results
Panel A: Parameters of Probit Selection Model
Variable
Constant
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
0.209
0.141
-0.134
0.042
-0.004
0.132
-0.095
SE
0.613
0.069
0.064
0.041
0.002
0.081
0.065
t value
0.341
2.060 **
-2.099 **
1.022
-1.991 **
1.622
-1.460
Panel B: Parameters of the Poisson Probability
Variable
Constant
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
5.733
0.648
-1.110
0.165
-0.027
-0.997
-1.975
SE
6.135
0.544
0.746
0.473
0.026
0.762
0.568
t value
0.935
1.191
-1.487
0.349
-1.058
-1.309
-3.480 **
SE
0.549
0.750
0.476
0.026
0.767
0.574
t value
1.438
-1.658 *
0.435
-1.187
-1.128
-3.608 **
Panel C: Combined Effect
Variable
STAFF
FISK
GRDP
POVERTY
KOTA
JAVA
Coefficient
0.790
-1.244
0.207
-0.031
-0.865
-2.071
Chi-Squared Stat = 550.72737
Significance Level = 0.00000
* and ** indicate that the coefficient is statistically
significant at the 0.05 and 0.10 levels, respectively.
Source: Author's own calculations.
Attention is drawn to the bottom panel of the table which provides the overall marginal effect
of the independent variable on the number of new taxes created. As the table shows, the
regression coefficient for fiscal capacity (FISK) has the anticipated sign (negative) and is
significant at the 0.10 level. This provides at least some support for the particular hypothesis
that the number of taxes and charges created by regional governments is a (decreasing)
function of fiscal capacity and that, in general, the number of new instruments formed by
regions is based on considerations of net fiscal needs. Note, however, that expected staff
expenditure (STAFF) has no apparent effect on the number of taxes created, weakening this
11
latter inference12. In addition, the output reveals that, as expected, geography is an important
determinant of the number of new revenue instruments created; apparently, local
governments on Java-Bali (JAVA) have indeed produced relatively fewer new taxes and
charges than those places in other areas of the country, all things considered. None of the
other variables considered is important in explaining the number of new revenue instruments.
An Estimate of the Total Number of New Taxes and Charges Created
An important reason for specifying and estimating the above model in the context of this
paper is to derive a consistent estimate the mean level of new taxes and charges created by
local governments. The sample selection techniques employed here adjust for the sample’s
non-random character. The method corrects for the ‘truncation bias’ in the distribution of the
number of new taxes and charges that results from the non-random sampling. The methods
provide an estimate of the mean of the truncated distribution, that is, the mean that would
have obtained if the sample had been randomly drawn from the population.
As can be deduced from Table 2 above, the mean number of newly created taxes and charges
for the non-random sample of 231 districts/municipalities is 3.476. The sample selection
methods estimate the mean of the number of new taxes created in the truncated distribution to
be 2.804. This latter estimate would suggest that approximately 942 (2.804 times 336
regions) new taxes and charges might have been created in all districts/municipalities in the
run up and through fiscal year 2001. As such, the information presented in Table 2 can be
revised and augmented as follows.
Table 6: Estimated Number of New Taxes and Charges through FY 2001
Provinces
(30)
Kabupaten/Kota
(336)
Total
Issued Tax and Charge Perda
Perda Reviewed by Center
Perda Canceled by Center
New Taxes and Charges
65
27
10
55
1055
406
113
942
1120
433
123
997
Percent Reviewed of Issued
Percent Canceled of Reviewed
41.5
37.0
38.5
27.8
38.7
28.4
As the table shows, an estimated total of 1,120 new taxes and charge by-laws (Perda) were
issued by these regional governments up through FY 2001, including 65 for provinces and
1,055 for kabupaten/kota. Of these only 433, or about 39 percent of the total, were actually
reviewed by the central government. The remainder were issued directly by regional
governments. Of those reviewed by the center, 123, or 28 percent of the total, were rejected
as unsuitable for one reason or another. In total, through the end of fiscal year 2001, as many
as 997 new taxes and charges may have been created by sub-national governments and not
rejected by the center.
As noted above, the central government has been criticized by many observers for being lax
in its role of reviewing regional by-laws. While it may be true that the center has been either
12
The lack of clear and significant results for these two variables may be at least partly a function of
rather significant collinearty between them.
12
careless or too lenient in its review and evaluation of submitted regional tax and charge bylaws, the more important point would seem to be that the center has not even had the chance
to appraise the majority of newly created regional taxes and charges. Regional governments
have, for the most part, acted unilaterally (and in direct contradiction to law) in creating new
taxes and charges. It would appear that the central government has lost control of the
monitoring process to a rather significant degree.
5.
Revenue Impact of New Taxes and Charges
This section of the paper considers the revenue impact of new taxes and charges. Ideally, this
issue would be explored directly by examining the actual revenue generated by newly created
taxes and charges across regional governments. Unfortunately, comprehensive revenue data
on individual regional tax and charge instruments are not available. So, we are forced to
employ second-best methods. We assess the extent to which the aggregate increase in
regional government own-source revenues between fiscal years 2000 and 2001 is a function
of revenue generated by regional governments which created new taxes and charges.
Table 7 provides information on the number, population, and increases in own-source
revenue (from taxes, charges and other sources) of regional governments which did and did
not create new taxes and charges, respectively. The table shows that provincial governments
that created new taxes and charges, and which account for about 40 percent of the total
population, account for only 14 percent of the total increase in own-source revenues between
the two fiscal years in question. Covered kabupaten/kota that created new taxes and charges,
and which make up about 70 percent of the covered population, account for about two-thirds
of the total increase in covered local government own-source revenues. These figures suggest
that new taxes and charges need not be that important in generating additional revenue.
Moreover, it is clear that any revenue generated by new regional taxes and charges would be
small relative to total regional revenues. Assume for a moment that all revenue increases of
issuing regional governments was a function of new taxes and charges. Under this
implausible assumption, the total new tax and charge revenue would have constituted just
eight percent of issuing provinces’ total budgets and just under three percent of issuing
kabupaten/kota total budgets. Since not all increases are due to new taxes and charges, these
figures exaggerate the importance of new tax and charge revenue. It is hard to escape the
conclusion that the issuance of new taxes and charge probably has not mattered much to the
generation of own-source revenues, either in the aggregate, or in relation to overall regional
government budgets.
The conclusion that new regional taxes and charges don’t produce much revenue is not really
very surprising. As has been noted elsewhere (SMERU, 2001), many of the “new” taxes and
charges created by regions under fiscal decentralization are merely those that existed prior to
the reforms embodied in Law 18 of 1997. It is well known that many of those earlier taxes
and charges generated very little revenue—this was, in fact, one of the arguments
successfully employed in doing away with them in that particular piece of legislation.
13
Table 7: Number, Population, and PAD Increases for Perda Issuing and
Non-Issuing Regional Governments (Rp Bln)
All
Issuing Percent of Non-Issuing Percent of
Provinces Provinces
Total
Provinces
Total
Number
30
14
46.7
16
53.3
Population (000)
203,528.76 83,129.17
40.8 120,399.59
59.2
PAD Inc (FY00-FY01)
4,206.45
608.88
14.5
3,597.56
85.5
Taxes
3,666.25
555.66
15.2
3,110.59
84.8
Charges
163.23
1.12
0.7
162.10
99.3
Other
376.97
52.10
13.8
324.87
86.2
All
Issuing Percent of Non-Issuing Percent of
Kab/Kota Kab/Kota
Total
Kab/Kota
Total
Number
231
160
69.3
71
30.7
Population (000)
151,237.41 105,455.67
69.7 45,781.75
30.3
PAD Inc (FY00-FY01)
1,307.72
874.43
66.9
433.29
33.1
Taxes
437.28
253.22
57.9
184.07
42.1
Charges
403.18
297.29
73.7
105.89
26.3
Other
456.78
322.03
70.5
134.75
29.5
6.
Summary and Conclusions
Regional governments have been criticized for creating too many new taxes and charges
under decentralization. And central government has been taken to task for giving sub-national
governments the authority to create new revenue instruments in the first instance and for
approving the implementation of too many new taxes and charges in the second. Many of the
new regional taxes and charges have been judged as inappropriate by one standard or
another.13
Central government’s overall culpability in the creation of unsuitable regional taxes and
charges is unknown. What is apparent, however, is that the center has only had the chance to
review less than 40 percent of the new taxes and charges that have been created by subnational governments. Regional governments have implemented the bulk of the new revenue
instruments unilaterally. It may be true, of course, that the center has not adequately
evaluated those new taxes and charges it has considered but the larger point would appear to
be that it seems to have lost control of the legal review process itself to a rather significant
degree.
Regional governments have, in fact, created many new instruments. During the run-up to and
through fiscal year 2001, provinces and kabupaten/kota created a total of 55 and (an
13
As noted in the introduction, it has not been the intention of this paper to evaluate the newly created
taxes and charges against typical standards such as equity and efficiency, for example. Such research
is, however, planned for the near future. It is hoped that the research will yield firm evidence (as yet
unavailable) on the broader impact of new taxes and charges and that such evidence will be used to
inform the decision as to whether the authority to create new taxes and charges should be withdrawn
in the revisions to Law 34/00.
14
estimated) 942 new taxes and charges, respectively. For both provinces and kabupaten/kota
the main focus of new taxes and charges has been on primary sector (agriculture, livestock,
fisheries, forestry, and mining) and the evidence offered above indicates that over 40 percent
of the new revenue instruments are levied on goods or factors in that sector. New taxes and
charges in services and the distribution sector (trade and transportation) have been of
secondary importance. New taxation of the secondary sector—manufacturing and
construction and the like—has been relatively insignificant overall.
Whether regional governments have created too many new taxes and charges is, in some
sense, an arbitrary question. In any case, regional governments’ response to this criticism is
that they have created new instruments because they are in need of greater fiscal resources.
The empirical examination carried out in this paper provides only limited support for the
hypothesis that the number of taxes and charges created by local governments is a function of
relative fiscal need. Of course, what is really important is not so much the number of revenue
instruments created but the actual revenue that they generate. The analysis here has abstracted
from issues related to the revenue generation of individual taxes and charges. Regrettably,
lack of data prevent a more in-depth analysis of these questions.
The extent to which new tax and charge instruments have led to meaningful amounts of new
own-source revenues in the aggregate is also less than clear. The vast bulk of the increase in
provincial government own-source revenues under decentralization (through fiscal year
2001) was generated by provinces that had not yet bothered to create new instruments. And
while issuing kabupaten/kota have generated relatively greater amounts of the aggregate
increase in local government own-source revenue, the extent to which the growth is directly
due to new local taxes and charges is far from obvious. Even under the most optimistic of
assumptions, any increase in own-source revenues that may have resulted from the creation
of new taxes and charges would still represent a very small proportion of total regional
budgets.
This latter point suggests the main conclusions relevant for the continuing development for
fiscal decentralization policy in Indonesia. The instruments sub-national governments have at
their disposal—both traditional and new—are inadequate to the task of producing much tax
revenue. Without access to more substantial tax bases, regional governments will necessarily
remain unsuccessful in generating significant amounts of own-source revenue. It is up to
central government, of course, to provide that access.
One obvious solution to this problem for local governments would be to decentralize some
authority over the property tax. For provinces (and also possibly for kabupaten/kota), the idea
of establishing a supplemental tax on personal income has some merit. Proposals for both are
currently being debated inside the Ministry of Finance.14 Experience suggests, however, that
decentralizing the property tax to kabupaten/kota and/or creating a piggy-back income tax for
regional governments will not come easily or quickly. As long as the status quo prevails,
fiscal decentralization in Indonesia will remain an unbalanced affair.
14
This is not the place to examine such proposals. See Lewis (forthcoming) for an analysis of the
property tax in the context of fiscal decentralization. Mark Rider (2002) investigates some aspects of
personal income piggy-back tax in the Indonesian context.
15
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16