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Earmarking tax, the concept of specific expenditure allocated from particular taxes, has been debatable. In Indonesia, the policy of earmarking tax is regulated in the Law of 28/ 2009 concerning Local Tax and Local Charges for Motor Vehicle Tax, Cigarette Tax and Street Lighting Tax. This study discusses the urgency, implementation, and theoretical reconstruction of earmarking tax on Local Tax in relation to fiscal legitimacy and budget flexibility. Theoretical reconstruction is made since there are only a few studies accommodating the three concepts in a single study, although there have been a number of studies on earmarking tax and fiscal legitimacy or earmarking tax and budget flexibility. This research uses constructivist paradigm with qualitative approach and an illustrative method for qualitative data analysis. Research was conducted in Daerah Istimewa Yogyakarta Province and Batu City, East Java. Results of the study reveals three urgencies of earmarking tax policy: accommodation of benefit principle in the policy of local tax and expenditure, fund’s availability for particular spending, and promoting local government’s expenditure accountability. The implementation of earmarking tax policy has frequently faced up dilemma between the desire to promote government’s fiscal legitimacy and the necessity to maintain budget flexibility. This study initiated dual pro earmarking tax that accommodating the concepts of fiscal legitimacy and budget flexibility at the same time. Therefore, earmarking tax can serve as an instrument to improve tax compliance as well as welfare of taxpayers.     Keywords: earmarking tax, budget flexibility, fiscal legitimacy, dual pro earmarking tax.

Earmarking Tax Policy on Local Taxation in Indonesia: Towards Pro Fiscal Legitimacy and Budget Flexibility Policy