Tag Archives | Public Finance

To keep the money where you raise it

Tax Increment Financing is amongst the many public financing methods that the cities in India need to explore further.

The City of Chicago, the third biggest city in United Sates of America, evidently requires a large revenue source to maintain the needs of a growing population of two million plus. It is in this attempt that there are various innovative financing methods used by the Chicago government to raise revenue. One of the methods that stands out is the Tax Increment Financing (TIF) method. It refers to a funding tool that allows the extra property tax to be used in the region itself.

TIF is generally used for a given region, whereby the taxes collected in the region are called base revenue and any amount collected above the base revenue is captured by the region itself. The taxes above the base revenue, incremental revenue, is used for economic development in the region earmarked under the TIF. It is usually spent on the public work or to attract private businesses in the region. TIF is usually used in regions that are declared “underdeveloped” and are considered to be dependent on the public expenditure for growth.

This method of funding have been supported by experts in urban planning like Donald C Shoup. The basic argument being that the citizens tend to pay more taxes if they can see tangible changes from their contributions. In his paper The High Cost of Free Parking, Shoup makes the case that the curb side parking revenue could be used to fund the Business Improvement Districts just like TIF is used for redevelopment projects from the increases in property tax revenues. TIF, therefore, acts as a pool of fund that can be used by the given region to attract business and economic opportunities based on the contributions by the population directly benefitting from it.

Although it may sound like a good idea, TIF has been severely criticised for being biased towards the business units and acting like a subsidy for the rich businesses. In their attempt to attract higher private investments, the regions tends to give large subsidies to the businesses. Thereby, diverging money away from the basic requirements like improving and maintaining infrastructure in the region.

The other major complaint regarding TIF is that it leads to development in the regions that do not need it as much. As TIF is collected from the funding made over and above the basic property tax, it is inevitable that regions with high income populations tends to collect higher funding as compared to poorer neighbourhood. Hence, TIF tends to limits the distribution of resources in a given region rather than help distribute it.

Having said that, TIF is an interesting tool that can be used to raise the local revenue and to incentivise higher tax collection in various wards in the city. The ward members can be made responsible for the use of the amount raised. The representatives being elected from each ward  will ensure that the members are directly accountable to the local population.

With Indian cities still struggling to find sources to raise revenue, TIF is at least a good option to explore.

Image: http://indypolitics.org/wp-content/uploads/2016/02/TIFS.jpg

Devika Kher is the Program Manger of Takshashila’s Graduate Certificate in Public Policy course and a policy analyst at Takshashila Institution. Her twitter handle is @DevikaKher.

Comments { 0 }

Starting off on the right foot

Increase in capital outlay in the 2016—17 Karnataka budget is a good sign for the state

by Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas)

[Note: This article first appeared in the Kannada newspaper Prajavani on 19th March 2016]

The 2016—17 Karnataka state budget was much awaited for two reasons. One, in 2015—16, Karnataka and other states had little time to respond to several important changes affected by the 14th Finance Commission recommendations. These changes had resulted in a 61% increase in unconditional transfers to Karnataka on one hand, and a decrease of nearly 50% in grants for centrally sponsored schemes on the other. Since these changes happened very close to the budget date, Karnataka could only make incremental changes last year.

Secondly, 2016—17 is the only election-free year for Karnataka. The three previous years had elections at state, union and important local government bodies respectively while next year’s budget will have to factor in the 2018 state elections. An election-free year means that the government can afford to depart from marginal changes and take decisions that might not be populist, but are nonetheless necessary for long term welfare.

So, given the importance of this budget, how did the Karnataka government fare on important areas this year? This article analyses the budget in the backdrop of this unique opportunity.

How did Karnataka’s earnings change?

The Finance Minister accounted for an increase of 11 percent in Karnataka’s own tax collections, which primarily come from taxes on sale of goods (VAT), alcohol and land duties. There was also an increase of 12 percent in Karnataka’s share of taxes collected by the union, taking the unconditional transfers received from the union to a total of 26,978 crores. Note that this number had already increased by 61% last year, as a result of 14th Finance Commission recommendations.

A big change this year was that Karnataka has budgeted for a significant increase in the loans to be borrowed from markets. This was made possible, without any change in the fiscal deficit because of a change in methodology for estimating the state’s GSDP, abruptly changing it from 7.36 lakh crores in 2015-16 to 12.13 lakh crores in 2016-17. The new methodology gives higher weightage to the IT sector’s contribution, a sector that Karnataka excels in. Since the permissible borrowing limit is calculated as a fixed percentage of the GSDP, a higher GSDP allowed the government to borrow more from the open market.

But aren’t loans always bad? Not necessarily, it depends on what purpose the loaned amount is spent on. Generally, deploying borrowed money towards long-term asset creation can have a positive impact.  

How did Karnataka’s spending change?

On the spending side, there was a 21 percent increase in the capital expenditure (money spent on asset creation) at Rs. 26,341 crores and an 11 percent increase in the revenue expenditure (money spent to meet short term expenses such as salaries) amounting to Rs. 1,30,236 crores. The areas of urban development, irrigation & flood control, police, and crop husbandry saw major increases in allotments.

The continued increase on capital and revenue expenditures for irrigation and flood control shows us that agriculture continues to be the priority area for this government and that it is willing to focus on both long-term asset creation and meeting short-term expenses in this area. Second, there is an increase in expenditure outlay for water supply and sanitation but most of this increase is towards meeting running expenses with only a small jump of about 10 percent towards capital expenditure. Third, there is a doubling of capital expenditure on social security and welfare. Finally, there seems to be a new found focus on urban development with an increased capital outlay of 1886 crores compared to 365 crores last year.

It is heartening to see that significant portions of the increased borrowing  has been utilised for long-term asset creation. At the same time, it was disappointing that only marginal changes were made in allocations towards health and education — essential services for a state like Karnataka that aspires to reap the demographic dividend.

Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas) are researchers with the Takshashila Institution.

Comments { 0 }