LAND-BASED TAX CAPACITY AND TAX EFFORT OF THE STATE GOVERNMENTS IN PENINSULAR MALAYSIA: A REPRESENTATIVE REVENUE SYSTEM (RRS) APPROACH (Usaha dan kapasiti cukai tanah kerajaan negeri di Semenanjung Malaysia: Kaedah Representative Revenue System (RRS).)

Abstract

The Auditor General Report 2004 revealed that seven out of 13 states in Malaysia are facing dire financialdifficulties to the extent of being qualified as at the verge of bankruptcy. One of the solutions proposedwould be to devolve more tax responsibilities to the state governments. However, some authors haveargued that the Malaysian state governments have not been using their tax base efficiently and thedevolution of more tax responsibilities towards them will only result in more inefficiency. It is thusimportant to gauge the fiscal effort exerted by the state governments before any attempts being madetowards increasing tax responsibilities of the state governments. The main objective of this article is tomeasure the fiscal effort and capacity of the state governments in Peninsular Malaysia. In order to achievethis, we will use the Representative Revenue System (RRS)/ Representative Tax System (RTS) approach.This paper will discuss the preliminary findings of the research using the 2008 data. Our results show thatmore-developed states tend to have higher index of tax effort compared to the less-developed ones. It isalso shown that state governments with high fiscal effort are in a relatively better fiscal position.However, tax arrears do not seem to correlate with the level of tax effort.