Economy Grows, Local Taxes Fall: Indonesia's 2025 Fiscal Paradox

Imagine you are a regional head reading the quarterly report. Gross regional domestic product (GRDP) is up, investment is flowing in, factories are running, mines are producing. But when you turn the page to local tax receipts, the figures are in the red. And not just in one or two provinces — five of Indonesia's six regions saw their local taxes contract over the course of 2025.

Java, normally the engine of the economy, fell the hardest with a contraction of −8.44% (yoy), followed by Kalimantan at −2.96%, Maluku-Papua at −2.68%, Sulawesi at −2.58%, and Bali-Nusa Tenggara at −2.25%. Only Sumatra held on in the green, growing 2.92% (TERC Brief, 2026). The question is simple but unsettling: if the economy is growing, why are regional coffers running dry?

When Tax Theory Meets Conditions on the Ground

There are three basic concepts for reading local tax performance: tax capacity (how large the economic base available to be taxed is), tax effort (how seriously a region collects), and tax assignment (whether the types of taxes assigned to regions actually match the structure of their economies). Bird and Bahl (2008) and Fisher (2018) warned long ago that when these three dimensions fall out of sync, economic growth can pass straight through without ever stopping at the regional treasury.

That is precisely what happened last year.

The HKPD Law and the Opsen Surcharge

In early 2025, Law No. 1 of 2022 on Fiscal Relations between the Central and Regional Governments (HKPD) took full effect (Republic of Indonesia, 2022). One of its biggest impacts is that the Motor Vehicle Tax (PKB) and the Vehicle Title Transfer Fee (BBNKB) are now collected through an opsen (surcharge) scheme, under which provinces and regencies/cities must share a single tax base via a split-payment system (Kompas.com, 2025).

On paper, this is a healthy reform. On the ground, the transition was bloody. Administrative systems were not yet synchronized, taxpayers were still confused, and provinces panicked at the short-term loss of revenue. The solution? Sweeping discounts. East Java lost Rp4.2 trillion in locally-generated revenue (PAD) because of the governor's decision to grant PKB relief (Bapenda East Java, 2024). Central Java offered a 13.94% discount on PKB and 24.70% on BBNKB (BPK Central Java Representative Office, 2025). West Java applied a similar discount coefficient (Bapenda West Java, 2025). Banten went more aggressive, cutting BBNKB by 37.25%, and Bali also granted a 14.35% PKB discount for motorcycles under 200cc (Bumenredja Abadi, 2025).

Growth That Goes to the Wrong Address

The second factor is more structural. Not all economic growth is "local-tax-friendly." Agriculture, primary mining, and the informal sector certainly drive GRDP, but they are practically out of reach of local tax instruments with narrow bases such as PKB, BBNKB, the Rural and Urban Land and Building Tax (PBB-P2), the Land and Building Title Transfer Duty (BPHTB), and the Specific Goods and Services Tax (PBJT). This is why Sumatra was spared: its economy is diversified, its automotive market is not yet saturated, and BBNKB on new vehicles is still buoyant (iNews, 2024). Kalimantan and Sulawesi, by contrast, grew 4.79% and 6.23% respectively, but their growth engines are coal, palm oil, and the nickel-downstreaming boom — taxes on which flow almost entirely to the center through Corporate Income Tax, royalty-based non-tax state revenue (PNBP), and export duties. Regions receive only a share through the Revenue Sharing Fund and the mineral-and-rock (MBLB) tax, whose portion is a mere 1% of the national tax target (Ministry of Finance, 2025). Worse still, the Coal Reference Price kept sliding from US$128.24/ton in March to US$103.75/ton in November (DDTCNews, 2025a, 2025b), and the knock-on effects spread: mining corporations' turnover fell, workers' purchasing power weakened, and hotel and restaurant taxes collapsed along with it (Prokal, 2026).

Other cases speak to policy choices and institutional limits. Bali took the pragmatic route: even though the PBJT rate on entertainment is now set at 40-75% following the HKPD Law (Pajak.com, 2024), the provincial government granted fiscal incentives to keep tourism viable, so collection fell short of its potential. East Nusa Tenggara (NTT) and West Nusa Tenggara (NTB) face a simpler problem: their economies are dominated by agriculture and fisheries, which are structurally hard to tax. Maluku-Papua reflects the tax effort dimension. North Maluku posted the highest collection rate in the country (65.3%) thanks to nickel, but many Papuan provinces are still rebuilding their tax administration after the creation of new administrative regions, with a narrow, subsistence-based economy. The most surprising case is Java, where four factors piled up at once: massive PKB-BBNKB relief, weakening purchasing power for new vehicles (Central Java's BBNKB collection came to just Rp1.74 trillion against a Rp2.5 trillion target) (Kompas.com, 2026), and a stagnant property market that squeezed BPHTB and PBB-P2.

The big lesson of 2025 is not that fiscal decentralization has failed. On the contrary, it worked exactly as designed — balancing collection efficiency at the center with equity across regions through transfers. The problem is that we sometimes forget the current tax assignment framework was never designed to maximize revenue at every level of government. Regional economic growth and regional fiscal capacity are two different things; they can move hand in hand, but they can also drift far apart, depending on sectoral composition, the quality of administration, policy choices, and the design of fiscal transfers across levels of government.

Perhaps the more apt question is not "why do local taxes fall when the economy rises?" but "do we still believe local taxes are the primary measure of a region's fiscal health?" In an era of opsen surcharges, downstreaming, and ever-more-sophisticated central transfers, the answer may not be that simple.