Tax Effort and Regional Fiscal Independence: The Mediating Role of Fiscal Space in Indonesian Provinces

Abstract

Fiscal decentralization has become a crucial policy framework for strengthening regional governance and improving the capacity of local governments to finance development independently. However, many regions, including provinces in Indonesia, continue to experience high dependence on central government transfers due to differences in revenue-generating capacity and fiscal management effectiveness. This study aims to examine the effect of tax effort on regional fiscal independence and investigate the mediating role of fiscal space in the relationship between tax effort and fiscal independence in Indonesian provinces. A quantitative approach was employed using balanced panel data from 34 Indonesian provinces during the period 2019–2024. Secondary data were obtained from the Directorate General of Fiscal Balance of the Ministry of Finance and Statistics Indonesia. The data were analyzed using panel data regression with the Fixed Effects Model (FEM), while the mediation effect was tested using the Sobel test. The results indicate that tax effort has a positive and significant effect on regional fiscal independence and fiscal space. Fiscal space also positively influences fiscal independence when examined independently. Furthermore, the mediation analysis confirms that fiscal space significantly mediates the relationship between tax effort and regional fiscal independence. These findings indicate that strengthening local taxation capacity alone is insufficient; effective fiscal management is required to transform additional revenue into greater fiscal flexibility. This study concludes that sustainable regional fiscal independence requires an integrated strategy combining optimal tax mobilization and efficient utilization of fiscal resources. The findings contribute to fiscal decentralization literature and provide practical implications for policymakers in designing strategies to enhance regional fiscal autonomy.