Local governments play an important role in the public sector of many developing countries. They are frequently responsible for a wide range of public services, many of which are financed by resources raised locally. Particularly in rapidly growing urban areas, local authorities have been faced with ever-increasing responsibilities, poorly matched by limited and often stagnant resources with which the expanding expenditure requirements. The resulting 'fiscal gap' between expenditure requirements and resource availability for local government can be addressed by reducing public service levels, by increasing nominal tax levels, by increasing tax effort, or by reassigning fiscal responsibility, i.e., shifting responsibility for some expenditure functions away from local governments, increasing local revenue authority, and increasing transfers from higher level governments. This paper explores the question of which revenue sources should be allocated to local governments in developing countries. In doing this, extensive reference is made to actual experience in these countries by providing descriptive evidence and an assessment of the revenue assignments to local governments, particularly in urban areas.