Approximately 30 percent of all local government revenues in Serbia come from shared sales taxes. In the immediate future, the Government will have to replace sales taxes with a value added tax in order to meet EU norms. This will require a fundamental overhaul of Serbia’s intergovernmental finance system because unlike sales tax, the VAT cannot be shared on an origin basis. This paper outlines the origins of Serbia’s current intergovernmental finance system, summarizes its strengths and weaknesses, and then, in light of the necessity of change, sketches a set of reform proposals. These include creating a formula-based equalization grant funded by a fixed percentage of national budget revenues; introducing the legal possibility for block grants, categorical grants, and grants for delegated functions to fund the devolution of new responsibilities to local governments and to support specific (investment) programs; and restoring local government control over Serbia’s ad valorem property tax. *This paper could not have been written without the painstaking groundwork laid by Mr. Branisilav Stipanovic, and his endless patience in explaining to me the operation of the Serbian intergovernmental finance system. For this I am sincerely grateful. I would also like to the Local Government and Public Service Initiative of the Open Society Institute for supporting his work, and the PALGO Center for organizing many aspects of this endeavor. Throughout the process, I received critical logistical and analytical support from the members of the Serbian Local Government Reform Project’s Policy Reform Unit, Tatijana Pavlovic-Krizanic, Milica Milosevic, and above all Team Leader, Dusan Vasiljevic. Finally, I would like to thank Mark Birnbaum for his assistance in data analysis and presentation as well as for his invaluable editorial help. Obviously, however, all mistakes are my own.