Fiscal decentralization determines the degree of financial autonomy given to sub-national units. Without sufficient financial resources, regional or local authorities will not be able to perform the tasks that are required for political decentralization.

As a result, omitting or delaying fiscal decentralization means that other aspects of decentralization will be ineffective.

There are three main elements to fiscal design in decentralized states:

1. The assignment of responsibility for expenditure—which level of government pays for which expenses.

2. The assignment of responsibility for revenue raising— which level taxes is responsible for collecting taxes

3. Intergovernmental transfers—how different levels of government share revenue and equalize fiscal imbalances between themselves.

To make sure that administrative and political decentralization are effective, the ability to assign tasks and responsibilities must accompany the ability to pay for those tasks and responsibilities. As a result, effective fiscal decentralization requires two conditions:

(1) Revenues assigned to the regional or local governments should suffice to finance all locally provided services that primarily benefit local residents.

(2) The local government should collect sub-national revenues from local residents tied to the benefits received from local services. Ensuring a link between taxes paid and benefits received strengthens the accountability of local officials and the delivery of local government services.