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.
Local government institutions (LGIs) are widely recognized as the cornerstone of democratic governance and sustainable local development. In Bangladesh, Union Parishads, Municipalities (Pourashavas), Upazila Parishads, Zila Parishads, and City Corporations play a vital role in delivering public services, promoting participatory governance, and fostering socio-economic development. Despite significant progress in decentralization, the financial autonomy of local governments remains limited due to excessive dependence on central government transfers and grants. The inadequate mobilization of own-source revenue (OSR) restricts the capacity of LGIs to finance infrastructure, maintain essential public services, and respond effectively to local development needs. This conceptual paper examines the relationship between strengthening local government institutions and improving own-source revenue mobilization in Bangladesh. Drawing upon theories of fiscal decentralization, public financial management, and good governance, the paper argues that sustainable local development requires financially autonomous local governments capable of generating, managing, and utilizing local revenues efficiently and transparently. The study identifies key institutional, legal, administrative, technological, and political constraints affecting local revenue collection while proposing policy options to enhance fiscal capacity. The paper further emphasizes that digital transformation, improved tax administration, citizen participation, institutional accountability, and fiscal transparency can significantly strengthen local revenue systems. Effective utilization of locally generated revenue not only improves service delivery but also reinforces public trust and democratic accountability. The findings contribute to the growing literature on decentralization and local public finance by providing a conceptual framework for strengthening local government finance in Bangladesh.