Subnational governments are usually responsible for the direct provision of services to the population. However, the extent to which they can collect revenues depends on the distribution of fiscal responsibilities and powers between different levels of government. In countries where subnational governments face constraints on tax collecting, their primary revenue source is often transfers from the central government, typically earmarked in the central budget.
Countries in Latin America and the Caribbean (LAC) have traditionally been relatively highly centralised with subnational governments generating limited resources. As a result, state and local governments are largely dependent on transfers from the centre, constraining their autonomy over their finances. Although the optimal level of revenue allocation between government levels depends on the context and varies among countries, some evidence suggests more decentralised government could bring social and economic benefits (Kim and Dougherty, 2018).
On average, 71.8% of total general government revenues were collected at the central level across LAC countries in 2021, compared to 52.5% across OECD countries. All LAC countries are above the OECD average on this, but Chile stands out with 92.6% of revenues collected at the central level. However, in Chile, as well as Brazil and Colombia, social security funds are included in the central revenue figures. LAC countries collect 18.9% of revenues at state level on average, and 7.6% at local level. Conversely, Colombia stands out with 13.4% of government revenues collected at the local level (Figure 10.6), following decentralisation reforms over the past three decades (OECD, 2019). The comparatively low levels of subnational revenue collection in LAC countries reflect their limited tax jurisdiction, typically involving property taxes, motor-vehicle licences, taxes on specific services and municipal fees (OECD et al., 2023).
The pattern of changes in the distribution of revenue collection between 2019 and 2021 is mixed. On average, revenue at the central government level decreased by 0.8 percentage points (p.p.) during this period in LAC. This was largely driven by changes in Brazil, where the share of revenues at the central government level decreased by 1.7 p.p. However, in most LAC countries, the COVID-19 crisis impacted subnational revenue, leading to declines in subnational nominal tax revenues in 2020, which also highlights the limited sources of own revenues at this level of government (OECD et al., 2023). Central government’s share of revenue grew particularly strongly in El Salvador (2.5 p.p.) and Ecuador (1.9 p.p.), with comparative revenue decreases in the share of social security funds (-3.5 p.p. in El Salvador and -1.3 p.p. in Ecuador). In Chile and Costa Rica, the shift in the relative weight of revenues shifted from the local level of government to the central level (Figure 10.7).
