ANALYSIS OF THE MUNICIPAL TERNATE FISCAL POLICY

STRATEGY TO INCREASE OWN SOURCE REVENUE AT TERNATE

IN LOCAL TAX SECTOR TO SOLVE FISCAL DEFICIT BUDGET
FISCAL YEAR 2012-2014
(A Case Study At Local Revenue Offices In Ternate)

SULEMAN SAMUDA
Universitas Muhammadiyah Maluku Utara

Abstract
This studys objective is to analyze tax effort and effectiveness of local tax management of
Ternate City in fiscal Years from 2012 to 2014; to analyze intensification strategy to increase
locally derived revenue (PAD) from local tax payment made by local revenue office
(DISPENDA) of municipality Ternate as an instrument to solve fiscal deficit, to analyze and
map constraints of intensification strategy to increase PAD from local tax payments.
Methods used in this study are qualitative methods using descriptive analysis aiming at
exploring a phenomenon or social fact, where classification is based on clarification made by
describing a number of variables relevant to problems.
The results of analysis indicate tax effort and effectiveness of local tax management of
Ternate City from fiscal years 2012 to 2014; it is understood that tax effort for local tax of
Ternate City for 3 years indicates trend of increasing and exists at high level; on the other
hand, effectiveness of local tax management is very effective.
Intensification strategy applied by the local revenue office consists of cross functional
integration strategy as effort to maximize fiskus availability, establishment mechanism
transfer from self assessment to official assessment. Database of local tax is updated using
one day; one object/target strategy. Supervision on the spot and silent operations adopting
intelligent techniques.
Constraints consist of: first, national and local regulations; second, operations concerning
fiskus availability, limited budget and incurrence of local tax for some types of taxes made
by multiple agencies; and third, awareness and obedience of local taxpayers.

Keywords: PAD, Local Tax, tax effort, effectiveness, intensification strategy, Ternate City
A. Introduction
In practical perspective, public budget is main instrument of fiscal policy for
government and it is viewed as continuation between governments revenue, on one hand;
and governments expenditure, on the other hand. Public budget is also reflection of
governments roles in economy and economic development. Public budget in theoretical
perspective is a policy containing economic assumptions generated by political process
between legislatives and executives implemented by the government for revenue and
expenditure to achieve objectives such as economic growth, economy stability and equal
distribution of resources.
There are two main instruments used in fiscal policy, namely, revenue and
expenditure, it signifies that fiscal policy is closely associated with financial targets (such as,
revenue and expenditure) to achieve.
Figure 1.1. Graph of Regional Budget Trend in the whole Indonesia from Fiscal years 2012
to 2014 (in billion Rupiah)

Source: Description and Analysis of APBD 2014

In 2014 and 2014, tendency of governments fiscal policy was to apply deficit policy,
namely, portion of local governments expenditure is higher than portion of revenue,
although allocation of expenditure for public service was low than apparatuss expenditure. It
means that fiscal need is higher, while fiscal capacity is lower and tends to stagnate, so that
there are fiscal gaps in locals. It is seen from 491 districts/cities and 33 provinces in the
whole Indonesia in fiscal year of 2013, 457 of them budgeted deficit in their regional
budgets, increasing from previous year, only 447 locals budgeted deficit. While, in 2014,
average deficit ratio nationally (aggregates of provinces, districts, and cities) was 7.5% with
contribution of SiLPA to cover the deficit of about 91.3%, while contribution of loan earning
and local bond was 5.9% (Description and Analysis of APBD 2014).
 In this context, Ternate City in 3 years from Fiscal years 2012 to 2014 experienced
fiscal deficit; to solve the condition, the government of Ternate City was to find loan (see
Table 1). Structure of municipalty Ternate APBD from Fiscal years 2012 to 2014 in
financing posture always had loan items. Based on the data, the writer assumed that, to solve
the fiscal deficit, the municipalty Ternate tended to prioritize the loan as main alternative to
solve the fiscal deficit, whereas financing of deficit using loan mechanism was not highly
recommended because it caused fiscal discontinuity (Sargent, T and Wallace, N., 1981).
Table 1.1. Summary of municipalty Ternate APBD from fiscal Years 2012 to 2014
(billion Rupiah)

Source: Financial Data of Local Government, DJPK

From revenue perspective, contribution of PAD to total revenue was very low for
2011-2014 (see Figure 1.3). It is seen in posture of local derivedrevenue of Ternate City
dominated by balance funds and legal local revenues. During 2011-2014, it seemed that
contribution of PAD was very low, in 2011 it was Rp.29.82 billion; in 2012, Rp.35.905
billion; in 2013, it increased by Rp.41.435 billion; and, in 2014, it was Rp.50.015 billion of
governments total revenue of Ternate City. PAD growth from Fiscal year of 2011 to Fiscal
year of 2013 nominally increased, but, if seen from growth trend, the PAD tended to
decrease. In fiscal Years from 2011 to 2012, the growth was 10% and from Fiscal years 2012
to 2013, the PAD experienced growth by 13%. Growth trend of PAD from 2011 to 2012 was
19% and from 2012 to 2013, it was 13%. It indicates that the effort the municipality Ternate
made did not improve; even, it tended to decrease.
Local Tax is main pillar to support local autonomy in financing a program of local
development; it is complying with Act Number 28/2009 on Local Tax and Local Retribution.
Earnings of local tax must be able to meet need of local government coordination pursuant to
capacity to collect local revenue from local tax payment. Nominally, from year to year,
growth of Local Tax earnings of Ternate City indicates trend of increasing, along with
decision of earning target tending to experience increasing. Capacity to collect Local Tax
reflects on tax ratio.
Ratio of Local Tax earnings for Gross Regional Domestic Product (PDRB) of Ternate
City from 2012 to 2014 ranged from 3.78% to 4.99%. The tax ratio indicates that capacity to
collect Local Tax of Municipality Ternate from tax payment was still very low and existed
far from ideal ratio as ideal measure so far, namely, 11% - 12%. This condition must be
important consideration for SKPD relative to Local Income Service, because Ternate City
cannot depend on revenue source of fund transfer from the central government forever. The
Government of Ternate City must develop its own fiscal capacity, and it is main source of
PAD. Step to optimize tax effort is absolutely required through various effectively applicable
strategies so that it leads to increasing of PAD that will be used as one of instruments to solve
fiscal deficit.

B. Theoretical Framework
B.1. Fiscal Policy
Fiscal policy is a policy associated with finance, revenue, and expenditure. Fiscal
policy is a state instrument in regulating expenditure and revenue of state in terms of state
finance aiming at achieving macro-economic target (Hubbard, et.al., 2012: 408). The
government can change total expenditure with some norms practiced so far, such as,
mechanism of hard budget. Composition of state revenue can be found in tax revenue, bond
issuance and sales to central bank in money printing and bond sales to public (Hubbard, et.al.,
2012: 409). Financing through money printing is combination of fiscal policy and monetary
policy (Marselina, 2014: 49), but, in practice, such policy (money printing) is less used
because it will cause hyper-inflation. While financing through tax will have effect but the
effect is lower than effect of bond issuance.

B.2. Local Original Revenue

In local autonomy perspective, PAD is main financial source beside other revenues
such as transfer of central government (balance fund), local loan and other legal local
revenues complying with valid requirements. Data indicate that PAD is not main revenue
source of local government. PAD is local earnings of local tax payment, local retribution,
results of local government-owned enterprises, results of separable local properties and other
legal PAD forms (Mardiasmo, 2004: 125). Efforts made by the local government to increase
PAD are to: (Mardiasmo, 2004: 152-155):
 a) Make PBB a local tax so that the government will gain great local tax revenues
and it will no longer need to deal with taxes with low values;
b) Improve local taxing systems so that the locals may enjoy revenues from
sufficiently great tax payments;
c) Optimize roles of BUMD (Local-Owned Corporation) and BUMN (State-Owned
Corporation). Roles of private investment and BUMN/BUMD are expected to be
main motivator of local economic growth.
PAD is one part of APBD (Regional Budget). Low or high potential of PAD contribution to
sources of local revenues is reflection on how the local government is able to operate its local
power associated with financial potential for local autonomy in terms of local government
and development financing. Complying with Act Number 33/2004 on Central and Local
Finance Balance; in fact, article 6 regulates PAD. PAD consists of:
1) Local tax;
2) Local retribution;
3) Results of separated Local Management;
4) Other legal PADs.

B.3. Tax Effort and Effectiveness of Local Tax Management

B.3.1. Tax Effort
Effort is an abstract issue so that it is difficult to measure. When the government has
made efforts to increase earnings, it will feel difficult to measure how far the efforts have
been made, it is caused by effort being amount having no physical quantity (Kun, RY.
Hariwibowo P., 2013: 35-35). Therefore, most possible measurement approach is to use
proxy of the efforts. Where, Tax Effort is value of percentage for relative revenue collection
of revenue capacity (Jhon et.al., 1993: 221).
There are some definitions used in defining Tax Effort. Others use these as indicators
to measure fiscal need with assumption of one local government with higher revenue effort
than owned revenues in order to provide basic service to citizens (Luo. Huaping and Douglas,
1996: 49-50). Tax Effort is also used to identify weak basic local government revenues. Tax
Effort is also seen as ration between tax earnings and indicator of taxable capacity, namely,
Gross Domestic Product (GDP). Lotz and Morss (1967) defined Tax Effort as result of
estimated tax collection of local earnings compared with actual tax collection. Some also
state that Tax Effort is measured by seeing total tax/revenues with collection based on
quantity which should be collected (fiscal capacity) (Ahmad Zafarullah, 2011: 61-63).
 Tax Effort can also be meant as ratio between tax earnings and capacity or ability to
pay for tax in a local (Mardiasmo and Makhfatih, 2000: 5). Indicator commonly used to see
how far societys capacity to pay is gross regional domestic product (PDRB) for local level.
If PDRB of a local increases, then local ability to pay for tax will also increase. Therefore,
Dewas (in Adi, 2006)said that effort to collect tax is comparison of tax earnings divided by
ability to pay for tax. Ability to pay for tax, overall, can be gross regional domestic product
(PDRB). Of some definitions mentioned above, the equation used to measure Tax Effort is:

However, in this study, the writer uses second equation with consideration of limited
secondary data, associated with database of local tax potential owned by Dispenda of Ternate
City. After calculating Tax Effort, furthermore step is to include index changing result of Tax
Effort calculation into decimal number. Index used to determine Tax Effort is if number
approaches 1 or > 1, it is included in high category; whereas, if number approaches 0 or <
1, it is included in low category (Minh, Moreno-Dodson and Bayraktar, 2012: 7).

B.3.2. Effectiveness of Local Tax Management

Effectiveness is a condition as required result (The Liang Gie). Effectiveness is also
meant as measure of success or failure of organization in achieving objective (Mardiasmo,
2004). Concept of Effectiveness, if it is associated with local tax management is how owned
great potential can be realized by various efforts made to apply various strategies such as
intensification, extensification, and mix strategy in order to increase local earnings.
Effectiveness is ratio between input and output, even Effectiveness is often used to see
degree of success of an operation in public sector so that an activity can be found effective if
the activity has great effect on ability to provide public service being a specified target
(Simanjuntak, 2001). In context of local tax, Effectiveness is used to measure correlation
between results of incurring a tax and objective or real potential or target of earnings already
owned by a local (Mardiasmo, 2003). Effectiveness measures correlation between results of
incurrence (realization) of a tax and target and potential associated with following equation
(Devas et.al., 1989: 144):
 Of some definitions on Effectiveness above, it can be concluded that Effectiveness
aims at measuring a ratio of success, namely greater ratio, it will be more effective; minimal
standard success ratio is 100% or 1 (one) where realization is same as a specified target.
Ratio under minimal standard success can be found ineffective.

B.4. Strategies of Intensification and Constraint

B.4.1. Strategy of Intensification
In order to increase Local tax, the Local Government needs to make efforts by
optimizing local potential owned using intensification and extensification of local tax
incurrence local retribution. Intensification in increasing local tax is an effort or action aiming
at increasing local tax made by intensifying activity of strict and accurate incurrence in which
leak rate can be minimized most possibly.
Efforts to intensify made by the local government may consist of (Abubakar in Halim,
2001; Soemitro, 1990: 77; Supramo, 2010:2; K.J. Davey in Kesit Bambang Prakoso, 2003: 2;
Kustiawan, 2010: 40):
a) Aspect of institution. Efforts to intervene in aspect of institution cover:
Apparatuss ability is increased by education and training as to gain
professional fiskus and ability to innovate for increasing PAD from tax
payments.
Improvement of administrative systems, it is conducted by classifying
category of tax object into two categories, namely, self-assessment (value of
tax object is calculated by tax payer) and official assessment *value of tax
object is calculated by the government). Recording of tax/retribution payers is
used to collect accurate data of tax/retribution potential.
Improvement of local taxing systems aims at shortening distance between
taxpayers and fiskus; for example, applying e-government to tax management.
In addition to improve distance, online tax can decrease leaks of revenues.
Application of online tax can increase earnings from tax payments because
value of tax reported approaches original value to minimize complication of
bureaucracy and taxing systems.
b) Aspect of Sanction
Efforts made to increase earnings of PAD is to incur administrative and criminal
sanctions to taxpayers and fiskus.
 c) Aspect of Regulation
Effort made is to increase earnings of PAD:
To revise local regulations associated with earnings of PAD inconsistent with
current condition necessarily to revise, namely, tax and retribution rates need
to review.
Local tax and retribution rationalization of provinces and districts/cities. For
example, deciding distribution of percentage of tax and retribution incurrence
results between provinces and districts/cities, in order that uniformity and
equality can be met in order to realize heavy point of autonomy to
districts/cities.
d) Aspect of Socialization and Information
Socialization of local rules on local tax or retribution to public.
Information to retribution payers to grow awareness and obedience of
taxpayers on duty to pay for local tax and retribution for services given by the
local government. According to K.J. Davey. Optimization of tax and
retribution potentials is affected by awareness of taxpayers to pay for tax.
e) Aspect of Earning Target
Effort to intervene made is to decide target of earnings and obligation of minimal
payment (wamin) to SKPD for each type of local tax and retribution.

B.4.2. Constraint of Strategy

Constraint facing the local government in increasing PAD as found in some studies
ever conducted are studies by Suhaini in research on strategy of Manado city government in
increasing PAD from tax payments. Constraint facing the Manado city government was
found, namely, less awareness of people as taxpayers to pay for tax, less adequate support
systems such as low quality human resources of governmental apparatus in managing sources
of local revenues of tax payments (Suhaini, Faisal). Then, research conducted by Elfianti,
with location of research in Sijunjung district. There were constraints; it indicated that
management of local tax and retribution was not optimal for main sources of PAD because:
(1) database of object, potential and tax mapping as well as local retribution were found;
therefore, amount of tax and retribution, process of incurrence have not been based on
potential data which should be realized; (2) effect of economic performance which has not
been able to increase PDRB and PAD (Elfianti, Lis).
 The findings are confirmed by K.J. Davey (Elfianti, Lis), suggesting that optimization
of tax potential is affected by awareness and obedience of taxpayers, integrity of tax
apparatus being honesty, firmness, politeness and friendly service, availability of fiskus
human resources, need of data support, instruments and infrastructures as to collect data and
revenues incurred by tax. Furthermore, Mahi (2000), Kaho (1997) and Basrie (1995)
suggested that constraints in making efforts to .increase PAD are caused by some of the
following factors:
1) Administrative ability of incurrence is still low. It can be seen from
implementation or apparatus in incurring which might not have orderly
administration.
2) Weak planning and controlling.
3) Low capacity and capability of apparatus.
4) Weak systems and mechanism of incurrence.
There are some studies researching potential of tax earnings conducted by Tanzi and
Davoodi (1997) and Gupta (2007) (in Javid, Attiya Y. and Arif Umaima, 2012: 266). This
study concludes that qualities of institution and administration are constraints and factors
affecting tax collection and tachycardia earnings potential. These factors are responsible for
low tax collection in developing countries. Bad tax administration enables avoidance and
blackout of tax and fiscal intensives such as discount of tax with inconsistent target. This
study also confirms main requirements that must be fulfilled to collect potential tax are
responsive agencies to legal regulation, control of corruption and development of
bureaucratic human resources in order to have quality (Ghura, 1998; Bird, Martinez-Vazquez,
and Torgler, 2004).

C. Discussion
C.1. Measuring Tax Effort and Effectiveness of Tax Collection
Referring to the results of analysis on Tax Effort and Effectiveness of local tax
management of Ternate City from 2012 to 2014, it is understood that Tax Effort for local tax
of Ternate City in 3 years (Fiscal years from 2012 to 2014) indicates trend of increasing; on
the other hand, Effectiveness of local tax management also moves to positive, it means that
Effectiveness of local tax management is very effective, it is shown by degree of
Effectiveness existing in figure more than 100%. If seen from PDRB of Ternate City and
effort made, realization of earnings should be more than achievement so far.
 Table 2. Tax Effort and Effectiveness of Tax Management
from fiscal year 2012 to 2014
Local Tax Realization of
No B.Y PDRB Tax Effort Effectiveness
target (Rp) Local tax (Rp)
(1) (2) (3) (4) (5) (7) (8) (9) (10)

2 2012 4757770000 17,230,000,000 17,987,070,701 3,78 High 104,39% Very effective

21,586,741,654 Very effective
3 2013 5422280000 20,500,000,000 3,98 High 105,30%
31,160,603,565 Very effective
4 2014 6235200000 25,400,000,000 4,99 High 122,68%
Rata-rata 5,471,750,000 21,043,333,333 23,578,138,640 4,25 High 110,79% Very effective
Source: Processed from secondary data

Tax Effort in 2014 existed in 3.78 or included in high category, and degree of
Effectiveness existed in 104.39% or very effective. It indicates that Tax Effort conducted was
maximum and very effective. Then, results of analysis of Tax Effort and Effectiveness of local
tax management of Ternate City in 2013 indicated that Tax Effort of local tax existed in 3.98,
increasing from previous year and included in high category, performance of local tax
management effort in same year indicated trend of increasing but insignificant, degree of
Effectiveness existed in 105.30%, performance was very effective. Thus, Tax Effort made was
maximum and very effective.
Generally, results of analysis of Tax Effort and Effectiveness of local tax management
of Ternate City in 2014 indicated trend of increasing both in Tax Effort and performance of
local tax management effort. Tax Effort of local tax of Ternate City in 2014 existed in 4.99,
increasing from previous year and included in high category, performance of local tax
management effort in same year, degree of Effectiveness existed in 122.68%, the performance
was very effective.

C.2. Strategy of Intensification

In seeing application of intensification strategy, this study investigates 5 aspect as
follows: aspects of institution consisting of fiskus human resources and administrative
systems of local tax management; aspect of sanction; aspect of regulation; aspect of
socialization and aspect of Target Application.
a. Aspect of Institution
In general, limited fiskus quantitatively and qualitatively does not affect
achievement of PAD target of local tax payments defined for Dispenda of Ternate
City, where there is trend of increasing revenues and realization of target is always
higher than 100%. Administrative systems of local tax management developed by
 Dispenda of Ternate City in order to apply iff strategy consists of some scenarios
as follows: first, to form coordinator of each local tax type; second, collection
involves government at village level; third, transfer of establishment mechanism
from self-assessment to official assessment; and fourth, routine evaluation.
Formation of local tax coordinator is a follow-up of cross functional integration
strategy as effort to maximize availability of fiskus.
b. Aspect of Sanction
Effort to enforce law made by Dispenda of Ternate City cannot be maximal
and it results in leery effect for WPD, if sanction given is only administrative
sanction, absence of support apparatus is distinctive constraint in enforcing rules.
c. Aspect of Regulation
For Ternate City alone, application of intensification strategy in aspect of
regulation is not made specifically, but it is existential because of rejection of
people. Adjustment of local tax rate was newly enforced in 2015. Adjustment of
rate was conducted for hotel tax of dormitory category, discounted from 10% to
5%. Adjustment of rate enforcement was based on claim of people. Adjustment of
rate has direct impact on increasing the total WPD paying for hotel tax of
dormitory category.
d. Aspect of Socialization
Pattern developed by Dispenda in enforcing socialization was conducted
collectively than based on local tax type. Limited budget makes socialization not
executable periodically and sustainably. Applied participatory pattern is still
conventional, collecting WPD in one of hotels, and then presenting information on
rights and duties of WPD, and socialization uses information media such as mass
media. Repressive socialization pattern emphasizes on enforcement of rule more
possibly to make taxpayers aware and obedient to tax payment. Enforcement of
rule is administrative sanction (interest and fine) and criminal sanction.
e. Aspect of Target Decision
Decision of recording target is begun by consolidating database associated
with local tax potential making database of local taxpayers and local tax potential
in applying recording target uses one day, one object/target strategy considering
limited recording aspect.
 Target of application aspect more emphasizes on tax type using self-assessment
mechanism in applying amount of tax contribution which must be paid by transferring
decision mechanism from self-assessment to official assessment. Whereas, decision of
collection target more prioritizes local tax applying official assessment.
Control is conducted directly through sudden inspection, on the spot or fiskus is
directly put and silent operations by adopting intelligent techniques. Parameters or criteria in
determining control target are based on data of transaction and turnover reported by WPD
(local taxpayers) and recommending silent operations. Parameters or indicators classified
into two, namely, honesty and dishonesty.

C.3. Constraint of Intensification Strategy

Implementation of local tax collection conducted by Dispenda of Ternate City is still
facing problems of taxpayers relatively lower awareness as to need roles and efforts of tax
collection apparatus (fiskus). On the other hand, limited fiskus quantitatively and
qualitatively is still problem having no solution yet. So, minimum budget allocation makes it
worse. Generally, constraint is classified into some aspects of strategies1) Administration
of Collection, (2) availability of fiskus, (3) obedience and awareness of taxpayers.
Constraint also faces operational administration associated with cross-aspect and
cross-SKPD coordination. It is seen clearly in advertisement tax management between
Dispenda and One Roof Service Unit (SINTAP). Whereas theoretically, it is very clear that
policy implemented by single agency has higher opportunity of success than policy
implemented by more than one organization called multiple agencies.

D. Conclusions
The conclusions of this study are:
1. Referring to results of analysis on Tax Effort and Effectiveness of local tax
management of Ternate City from 2012 to 2014, it is understood that index of Tax
Effort for local tax of Ternate City in 3 years (from 2012 to 2014) indicates trend
of increasing and exists at high level; on the other hand, Effectiveness of local
tax management also moves to positive, it means that Effectiveness of local tax
management is very effective, it is shown by degree of Effectiveness existing at
figure higher than 100%. High index of Tax Effort and support of very effective
management performance may have significant impact on local earnings from tax
payments, it is shown by realization of local tax earnings exceeding 100%.
 Realization of local tax earnings in 2013 was 105.30% and, in 2014, it was
122.68%.
2. Results of analysis indicate that priority of intensification strategy is based on the
following aspects: (1) database of local tax; (2) increasing of control; (3)
reinforcement of collection process; and (4) flexibility of decision mechanism.
3. Constraints facing application of strategy are: (1) administration of collection; (2)
availability of fiskus; (3) obedience and awareness of taxpayers.
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