Assessment of the fiscal autonomy of local governments in Armenia

Abstract

Fiscal decentralization is a key component of effective economic governance, enhancing the role of local governments and promoting more efficient allocation of public resources. A central dimension of fiscal decentralization involves the distribution of tax revenues across different levels of government. The purpose of this study is to assess the level of fiscal autonomy of local governments in the Republic of Armenia using the OECD methodology and tax autonomy as a measure of local government taxing powers. By comparing Armenia with OECD unitary states through cluster analysis, the analysis identifies an optimal structure for local tax revenue systems. Armenia exhibits a low level of tax autonomy comparable to the weakest cluster of OECD unitary countries, which includes Estonia, Ireland, Israel, Lithuania, New Zealand, and the UK. The findings suggest that increasing local government revenues by deducting from existing indirect taxes, such as excise duty and VAT, is challenging due to administrative inefficiencies and difficulties in accurately estimating the tax base. Due to their narrow and centralized nature, excise taxes are poorly suited to local use, while the complexity of VAT and its allocation of revenue to customs authorities limits its effectiveness at the local level. In light of its findings, the study recommends shifting the focus toward direct taxes to improve local revenue more effectively and sustainably.