Revenue or Regulation? Designing Subnational Fiscal Instruments for Aggregate Extraction

Abstract

Subnational taxes on mineral extraction are ordinarily justified and evaluated as revenue instruments. This study argues that one such instrument is better understood as a regulatory device, and that evaluating it by yield would therefore misjudge it. The case is the provincial surcharge introduced by Indonesia's 2022 fiscal relations law on the district tax levied on non-metallic minerals and rocks, a sector in which licensing authority and taxation authority sit at different tiers of government and a published case study records a district lawfully taxing unlicensed extraction. The method is a policy-design analysis that tests the instrument against three candidate rationales — vertical fiscal balance, benefit correspondence, and incentive alignment — using a structured review of public finance research published between 2017 and 2024. Alignment fits best. Comparative evidence supports the underlying mechanism: reducing the local share of mining royalties in Colombia increased unreported mining, and Chinese local governments intensified enforcement on the bases they retained after a revenue-sharing reform. Two qualifications are decisive for design. The evidence concerns revenue and enforcement agencies rather than licensing authorities, so the central step is an extrapolation; and a revenue stake aligns an authority with revenue, which is not identical to accuracy, a distortion documented in the enforcement literature. The study concludes that the instrument should be evaluated against compliance indicators rather than collections, proposes five such indicators, and identifies the distributive risk that improved enforcement falls first on household-scale operators.