Posted October 22nd 2014 at 1:50 pm by
in Financing Resilient Development

How do local government taxes affect climate change action?

Sea wallA Sea Wall in the UK.

The previous two posts in this series briefly examined some expenditure and revenue dimensions of climate change at the metropolitan scale. This post will consider the nature of the relationship between local taxation and urban governance and the implications of this relationship for urban climate adaptation. Scholars and analysts often point to the low quality of governance in developing countries as a major impediment to efficient and inclusive solutions to the challenges of climate change. It is not a coincidence that in countries in which local governance systems are weak or underdeveloped, local governments struggle to tax their citizens to invest in high quality infrastructure and other public services. In principle, taxation is a critical government function that draws elected officials and local residents into a closer relationship. Taxation opens up opportunities for political engagement that otherwise would be lacking. Citizens comply with taxes in exchange for services they value. Or, as a form of political protest, they can organize interest groups to influence the direction of taxes or public investment policy or even withhold tax payment to register dissatisfaction with government performance.

In practice, the type of tax assigned to local governments can influence the range of policy choices available while structuring behavioral incentives for elected officials. For instance, a heavy reliance on property taxes is thought to encourage local governments to make investments that increase the value of local property. On the other hand, dependence on natural resource rents or foreign aid for revenues does not incentivize accountable behavior by elected officials because governments do not have to convince taxpayers that they are receiving valuable services in exchange for a portion of their income. Property taxes are appropriate local taxes but nearly universally generate less revenue than sales and income taxes, two taxes that are usually reserved for state and national governments. Consequently, the mix of local taxes and fees constrains the scope of local government action, particularly the mix of spending on administration, capital investments, and debt service levels. For instance, research on local taxation in Tanzania and Zambia found that local governments that were more dependent on tax revenue spent more on infrastructure investments while local governments that were more dependent on intergovernmental transfers spent more on personnel and administration.

Though the local government revenue base might be overwhelmed by capital investment needs, an alternative pathway for cities is to focus on “soft” adaptation options. Soft adaptation includes the development of early warning systems, land-use planning, and community outreach, among other actions that enhance levels of social capital within communities. This is an area where local governments, embedded in the local context and therefore familiar with the social, economic, and cultural specificities of the metropolitan city, have a comparative advantage over national governments. In relation to the uncertainty of local climate impacts, soft adaptation options can be more flexible than hard infrastructure investments with large sunk costs. Moreover, investment in soft adaptation options is likely to also generate some positive governance dividends. Notwithstanding the visibility of benefits from installing sea walls, it is difficult to link relatively “hidden” infrastructure investments to climate adaptation benefits. However, this is not the case for land use planning that is sensitive to flooding risks, or early warning systems that can instantly convey, for example, valuable information regarding the presence of vector-born diseases in the city.

Tax compliance studies have demonstrated that support for taxes is highest when taxpayers perceive governments to be operating on their behalf. Though no empirical research exists examining the issue in the context of urban climate adaptation, one could surmise that highly visible soft adaptation measures targeted to the distinct needs of different communities has the the potential to improve perceptions that government is acting in favor of local residents; thereby contributing to increasing tax compliance levels. Research suggests that even regressive forms of taxation that fall on the poor can spur more responsiveness to the unique expenditure needs of the poor.

Tax compliance studies have demonstrated that support for taxes is highest when taxpayers perceive governments to be operating on their behalf. Though no empirical research exists examining the issue in the context of urban climate adaptation, one could surmise that highly visible soft adaptation measures targeted to the distinct needs of different communities has the the potential to improve perceptions that government is acting in favor of local residents; thereby contributing to increasing tax compliance levels. Research suggests that even regressive forms of taxation that fall on the poor can spur more responsiveness to the unique expenditure needs of the poor.

Post by Mitchell Cook . Photo Credit: Flickr/Blue Square Thing.

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