In accordance with the Law on Local Government Systems, most local government revenues in Taiwan come from three sources: their own taxes, the Tax Redistribution Fund, and central government subsidies. Under the Law Governing the Allocation of Government Revenues and Expenditures, the lion's share of taxes collected by local governments goes to the central government. This naturally makes local governments very reliant upon, and vulnerable to control by, the central government.

Although the actual amount of the tax redistribution is limited, local governments have to shoulder most of the burden of maintaining infrastructure, social services, education, cultural activities, and more. Local finances are very strained as a result.

Taiwan once pursued a policy of relying on cities to spur development in their surrounding areas, but the policy was not adequately thought out, and ended up widening the gap between urban and rural areas. Rural population drained continually to the cities, and with the industrial structure undergoing change, rural areas declined as development projects and enterprises became increasingly concentrated in large cities, especially Taipei. Just how big is the gap between Taipei and the rest of Taiwan?

The rich get richer?

Medical care is a case in point. Huang Sheng-hsiung, president of Mennonite Christian Hospital in Hualien, points out that the National Health Insurance Bureau pays out average insurance benefits of over NT$5,000 per day for Taipei residents, but less than NT$3,000 for residents of Hualien County. According to Hsu Chuan-sheng, director of the Taichung County Bureau of Social Policy, the city of Taipei has the money to pay out all sorts of benefits, "but Taichung County has trouble meeting its payroll obligations, and it sometimes gets several months behind in delivering basic welfare payments to disabled persons."

Indeed, they say that Taipei gets the best of everything. Consider the fact that it depends on the central government for less than 10% of its revenues, while the average for Taiwan's local governments as a whole stands at about 50%. Taipei City can almost make ends meet through its own tax revenues, but other cities are heavily reliant on the central government, and they are trapped in a vicious cycle in which slow economic development makes it difficult for them to broaden their tax base no matter hard they try. Liu Shih-fang, deputy commissioner of Taichung County, notes that "local governments collect a capital gains tax on land, for example, but the more rural you are, the fewer capital gains there are to tax."

After the new administration came to power it adopted a policy objective of reducing the development gap between city and countryside, as well as between northern and southern Taiwan. This was the thinking behind the government's decision to reduce by four percentage points the proportion of the Tax Redistribution Fund earmarked for Taiwan's special municipalities. In so doing, the administration earned the strong displeasure of Taipei City, but it didn't necessarily win kudos from the counties and county-level cities either, even though the percentage going to the latter rose from 35% to 39%. Commissioner Su Tseng-chang of Taipei County stated, "I'm not satisfied with how they've decided to split up the Tax Redistribution Fund. In fact, I'm furious with it, but what can I do?" The leaders of 23 local governments signed a petition demanding that the central government allocate still more of the Tax Redistribution Fund to them. "The petition was immediately supported by everyone, regardless of party affiliation, and regardless of whether they were on Taiwan proper or its outlying islands."

County Commissioner Su further pointed out that the Tax Redistribution Fund was conceived as a subsidy to reduce the gap in wealth between different local governments, so it is only natural that the rich localities should receive less and the poorer ones more. Although the special municipalities had their share reduced by four percentage points to 43%, that is still too high in Su's opinion. Su notes that even though Taipei County has eight times more land area than Taipei City and 900,000 more residents, "we only get 1.41% of the Tax Redistribution Fund. That's just a fraction of what they get in Taipei City." Taichung City is worse off still, receiving only 0.64%! Leaders from Taichung recently joined with colleagues from the other four county-level cities in demanding a larger share of funds from the central government. Their protest activities included a joint trip by local administrators to Taipei to press their case.

Equals in poverty

So what division of the pie would prove satisfactory all around? The elected heads of Taipei County, Taichung City, Tainan City, Ilan County, and other local governments around Taiwan are in virtually unanimous agreement that "the central government should completely re-think its revenue sharing philosophy and formulate consistent criteria for determining a fair distribution. Such criteria might include population, land area, and degree of need."

Taipei mayor Ma Ying-jeou has stated repeatedly: "The Tax Redistribution Fund should never be a cause for dispute among local governments. The crux of the problem lies with the central government." He calls upon the government to resolve the controversy by making the pie itself bigger, and notes that Taipei City pays more taxes to the central government than any other local government. "Taipei City has been using taxes all along to reduce the gap between urban and rural areas," says Ma, who adds that other local governments receive another category of central government subsidies that Taipei doesn't get at all. "People shouldn't focus solely on the Tax Redistribution Fund."

The money in the Tax Redistribution Fund actually comes from tax revenues collected by local governments in the first place. These governments take taxes that they collect and forward a fixed percentage of certain categories to the central government. The latter then turns around and redistributes these funds to the various local governments. So why is all this rigmarole necessary?

It is necessary because within a single nation, different local governments take in different amounts of revenue due to their unique geographic, environmental, and economic conditions. The central government cannot sit idly by while people in certain areas are unable to enjoy basic government services, so it uses various means to alleviate revenue shortfalls where they exist. The Tax Redistribution Fund is one such method. Central government subsidies are another important allocation that the central government delivers to the different counties in accordance with their tax base and the projects they are carrying out. Because Taipei City has a very strong tax base, it does not receive central government subsidies.

Rethinking from square one

According to Tseng Chu-wei, a professor of public finance at National Chengchi University, Taiwan has long lacked a fair and transparent formula for determining how tax revenues should be redistributed to local governments, and the Law Governing the Allocation of Government Revenues and Expenditures has only been made relatively reasonable in the last three or four years. The 47% share previously allotted to Taipei and Kaohsiung was decided upon last year after the government canceled a plan to abolish all local sales taxes and replace them with a single national sales tax. Now that this share has been lowered to 43%, the other cities and counties have seen their combined share go up to 39%, with each local government's individual share calculated on the basis of population, land area, and other factors.

In Professor Tseng's opinion, "It's not easy to create a more transparent formula. Due to current political realities, the proportion of the Tax Redistribution Fund allocated to the wealthier local governments can't be cut too drastically. Disputes are inevitable, but if this constant arguing yields a better system, then it will have been worth the trouble."

Professor Tseng further argues that taking funds from the central government subsidy program and shifting them to the Tax Redistribution Fund might be one way to increase the size of the pie. But even more importantly: "The central government must allow local governments a greater degree of control over their tax revenues, grant them greater discretionary authority to go out and find ways to increase such revenues, and let them take responsibility for their own finances."

It appears that the controversy over the Tax Redistribution Fund is just the tip of a much bigger iceberg-an ongoing tug-of-war over how to divvy up overall resources. If we are to come up with a true resolution to the problem at hand, we must improve the Law on Local Government Systems and the Law Governing the Allocation of Government Revenues and Expenditures in order to establish true local autonomy. We must make it so that local governments have the money and the authority to take true responsibility for their own financial situation. And we must formulate more effective development policies targeted to the needs of different local areas. If we fail to do this, freeing up a bit of the resources that now go to the special municipalities of Taipei and Kaohsiung will do little to help Taiwan's financially strapped local governments. It will only stir up discord among them.

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Taipei County commissioner Su Tseng-chang gets hot under the collar when talk turns to the Tax Redistribution Fund and the huge gap in the proportion of the fund going to Taipei City and Taipei County.

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Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get."

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".

Tainan mayor George Chang is not satisfied with his city's share of the Tax Redistribution Fund. Says Chang resignedly: "I'm not at all happy about it, but you have to take what you can get.".