Regional Equalization: Do Any Incentives for Regional Development Still Exist?

The study aims to assess how the currently applied methodology for allocating equalization transfers to Russian regions has retained incentives for their economic development. To answer this question, the term "incentive" is defined more precisely, and an indicator is suggested whereby it becomes possible not only to identify the presence or absence of regional economic development incentives, but also to perform their quantitative assessment. That indicator is the degree of compensation for the increased amount of tax and non-tax revenues by a reduction in the amount of equalization grants. It demonstrates how the amount of equalization transfers would change if the tax capacity of each region would have been different. The hypothesis that there still exists a sufficient amount of incentives, while at a first glance contradicting the popular belief about their absence, relies on the review of a broad spectrum of components and specific features of the currently applied methodology for distributing equalization transfers between RF subjects, which contribute to the preservation of such incentives. That hypothesis is confirmed by the study results. In particular, the calculated effects of changes in regions' tax capacities on the amount of equalization transfer received by them over the period 2006-2015 demonstrate that for the majority of regions, less than half of their revenue loss was compensated, which means that there exist significant incentives for the regions to develop their economies and the revenue base of their budgets. This stimulating effect varied depending on whether the initial fiscal capacity of each region prior to the allocation of equalization transfers was below or above 0.6: in the latter case, it was significantly higher. The study also analyses the supplementary factors that are associated with the negative net financial effect of increased revenue capacity on regional budget.