The Eighth Annual Global Conference on Environmental Taxation
 
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POLICY DESIGN, PUBLIC CHOICE AND GOVERNANCE 
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Workshop 4: Institutional complexity: issues of federal, municipal, local government

EcoTerra Model – application of environmental fiscal reform
in local government financing in Portugal

Joana Calado Araújo Prates, Prof. João Joanaz de Melo, New University of Lisbon, Portugal

Portugal suffers a number of serious dysfunctions regarding land use, such as loss of natural and cultural heritage to heavy development, urban occupation of risk areas, degradation of coasts, inadequate transportation modes, just to name a few.

This is due mainly to absence of tradition both of planning and of citizen participation, dysfunctions are fostered by powerful economic incentives, namely the local financing system: local governments, landowners and developers all stand to gain in the short term with prevailing “mad urbanization”, despite the obvious result of long-term social costs affecting everybody.

Besides better regulations, a change in economics is crucial, especially local government financing, with new criteria benefiting good environmental behaviour.

The general goal of this model is to improve existing and new economic instruments, to foster better land use, applying the concepts of environmental fiscal reform.

The model shall study in-depth the specific problem of local government funding, as related to property taxes that may take environmental constraints into account. We aim at testing a model for these instruments that is both workable (politically, financially and technically), and that produces better land use and environmental performance.

This model begins with analysing the local government financing system and related land use, evaluating the land use planning criteria as related to sources of municipality income and expenditure. Afterwards it will be developed a new model of local government funding and land-use related taxes, including the study of implications on the national budget and the behaviour of interested parties as a function of funding and taxation criteria.


Environmental Policy in a Federation: Issues and Impacts

Prof. Tracy Snoddon, Prof. Randall Wigle, Wilfrid Laurier University, Canada

In response to mounting concerns over the potentially harmful effects of greenhouse gas emissions and climate change, governments across the world are faced with the challenge of how best to address the problem. Policy options include the introduction of green taxes and tax credits, subsidies, regulation and standards, and tradeable emissions permit schemes. In a federal system of government, climate change policies implemented at the federal level can affect provincial economies and provincial government finances via the macroeconomic effects of the policies. Snoddon and Wigle (2007), for example, show that the provincial distribution of the burden of achieving climate change depends on the federal government’s policy package and its method of financing any revenue shortfalls created as a result.

If different levels of government also share tax bases, as is certainly the case in Canada, one government’s choice of how to finance climate change plans can also have a direct impact on the other level of government’s revenues. In Canada, for example, the major tax bases (personal income, corporate income and sales) are shared by both the federal and provincial governments. Federal tax changes on any of these bases affects the size of the tax base in all provinces and, as a result, affects tax revenues in the province. Similarly, vertical tax externalities arise when provinces decide to finance their own climate change plans using taxes on tax bases shared with the federal government. Such intergovernmental interactions are further complicated by the presence of equalization transfers in some federations. Canada’s equalization scheme provides unconditional revenue grants to provinces with low revenue raising ability.  

In this paper, our main interest is to use the results from Snoddon and Wigle (2007) to determine the effects of different federal climate change policies on provincial revenues by major tax base. Using these results and detailed information on Canada’s equalization scheme, we calculate the impact of these revenue changes on equalization entitlements for recipient provinces. As a benchmark, Snoddon and Wigle (2007) assume provinces make the necessary budget adjustments by adjusting transfers to their residents rather than alter tax rates. In this way we isolate the direct impact of the federal policies on provincial revenues and on equalization entitlements. Of particular interest is the question of whether equalization receiving provinces are partially insulated from the costs of climate change because revenue shortfalls are offset by increased equalization payments.

 

Energy Tax, How Far Is It From Idea to Practice?
Lessons learned from its dystocia experience in China

Prof. Tianbao Qin, Wuhan University, China

The introduction of energy tax has been discussed for many years in China. Considering the critical roles of energy tax (fuel tax in particular) in increasing energy efficiency, facilitating clean energy resources, protecting the environment and promote development of auto industry, China has planed to levy fuel tax in place of existing toll charge early in 1994. However, this instrument embodying both equity and efficiency stays on paper and does not come out even more than 10 years after. This situation lies in policymakers’ failure of coordination of different interests in the developing process.

There are at least three categories of stakeholders: (1) Governments, central and local, will receive substantive revenue. (2) Potential taxpayers, who are contributors of fuel tax. (3) Current and future collecting departments. These stakeholders have different interests and their behaviors are often inconsistent, and their interests will be affected greatly once the policy on fuel tax is set forth. Therefore, the process of translating the idea into practice of fuel tax in China becomes games among different stakeholders.

Firstly, although governments are the main impetus to introduction of fuel tax, the interests of central government and those of local governments are not necessarily coherent. The application of fuel tax will limit the authority of the local governments in using the construction and maintaining fund for local highways. Hence, local governments are repugnant to the initiative from the government.

Secondly, the new fuel tax will be collected revenues at all levels. In contrast, the departments of communications have to give up their authority to collect toll charge which can bring hundred billion RMB every year. Besides, the latter must rearranges the employment of more than 270000 toll charge collectors .Obviously, they will object strongly to the transform of toll charge into fuel tax.

Thirdly, attitudes to the future fuel tax vary among multiplex auto-users. Taxi-drivers will face more heavy pressures because the fuel tax will increase their costs significantly, and be against the plan. On the contrary, most private auto-owners welcome and support uncompromisingly this proposal

Unfortunately, China has failed to coordinate relations and balance interests among various stakeholders, and is unable to set forward and apply the equitable and cost-efficient economic instrument. This, in turn, made china have to pay incalculable environmental, economic and even time costs. These are painful lessons that China and other countries in similar situations must learn in the future.

 

The integration of ecological aspects into the fiscal transfer system
for municipalities in Germany - learning from the Brazilian ICMS-E

Dr. Herwig Unnerstall, Dr. Irene Ring, Helmholtz-Centre for Environmental Research, Germany

In Germany municipalities often object to the establishment of protected areas for the purpose of nature conservation or other ecosystem services, as they fear disadvantages regarding their economic development and their revenues based on this development. The integration of ecological aspects into the fiscal transfer systems is intended to influence this attitude and the decisions of municipalities on land use options that take into account more the (nationwide) ecological functions and values of the area, and/or to compensate them for local disadvantages they suffer from analogous decisions on higher administrative levels, they can hardly influence. This instrument is embedded into the whole of nature conservation policies and the system of financing municipalities. The presentation analyzes the options and requirements for a transfer of the Brazilian ICMS-E model to Germany, including legal options and requirements.

This requires a close investigation of the nature conservation system and system of municipality financing in Brazil to identify the relevant options for actions of the municipalities in the field of their financing and nature conservation/environmental protection policies. Brazil is a federal state with 27 states. Each state has an elected government with revenue-raising powers. The tax called ICMS (Imposto sobre Circulação de Mercadorias e Serviços) represents the largest source of state revenues in Brazil with approximately 90% of overall state tax revenues. It also constitutes an important source of revenue for local governments. The ICMS is a tax on goods and services, similar to the value-added taxes in other countries. The Brazilian Ecological ICMS or ICMS-E is a complex instrument, in terms of legislation as well as regarding the application. State tax income is transferred back to the municipal level of government based on several indicators, with the state of Paraná having introduced and improved the commonly called “ecological value-added tax” since 1992 (May et al. 2002; Ring 2004). The main environmental indicator is represented by “conservation units”. Conservation units are registered conservation areas within the territory of a municipality, including totally protected and restricted sustainable use areas that can be publicly managed (federal, state or municipal level), privately owned or managed by public-private partnerships. Several states in Brazil gained substantial experiences with this innovative fiscal instrument for biodiversity conservation.

A basic potential for transfer of the Brazilian ICMS-E exists for those federal systems where public revenues such as taxes are redistributed by way of intergovernmental fiscal transfers from a central or state level to the local level of government. It is necessary to investigate the type of present indicators used for redistribution and whether the respective constitution and laws allow for future consideration of ecological indicators. Germany is also a federal system with vertical fiscal relations between the states (Länder) and the local level of government, regulated in 13 fiscal equalisation laws (Kommunaler Finanzausgleich). These transfers also represent an important source of local income. More than 50% of average local income in eastern Germany is gained from fiscal equalisation at the local level. In West Germany, own revenues are higher, but grants from fiscal equalisation still represent almost 30% of average local income. So far ecological public functions and respective indicators are rarely considered in fiscal transfers to the local level (Ring 2002).

Therefore, a similar analysis on the nature conservation law and municipality financing law will be carried out for federal states in Germany to identify structural equivalences, differences and gaps to the Brazilian systems. Legislative competencies, administrative duties and responsibilities in Germany are divided between the Federation and the federal states in the field of nature conservation. Legislative competencies on municipality financing is situated at the federal states with few constitutional restrictions by the Basic Law (guarantee of self-administration of municipalities on matters of the local community, prohibition of arbitrariness) and some restriction on federal states constitutional law level (e. g. principle of connectivity) (Unnerstall 2004). On this basis the options for an integration of ecological elements into the fiscal transfer system for municipalities similar to the ICMS-E are evaluated and proposals for the possible legal design for this integration will be developed.

 

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