Fair point and well made, but again I respectfully disagree. etc...
Lol, ok, we can disagree on this rather tangential point. I sense the difference is that I'm considering the entire range of factions, most of which remain quite small (say, 3-4 regions or so), whereas you are thinking in terms of that subset of factions which attain sufficient size for a "tax-exempt" AI capability to matter. I am willing to concede that the proportion of these "medium"-and-larger groups may be higher than I've assessed. I'd have to go through a couple of campaigns bean-counting regions every few turns to come up with some data, but who feels like doing THAT...it's a game. In any case, I agree that ability to tax-exempt a province would indeed help sufficiently large AI factions...if the AI were capable of using this ability in a coherent manner. Currently, I don't see any evidence that the AI has such capacity.

Quibbling over secondary point aside, I believe we are in firm agreement about a much more central and fundamental problem: The AI doesn't build very smart and remains incapable of balancing food/squalor/income. This issue afflicts all AI factions, regardless of the size or configuration of their territory.

I do believe Patch 4 has made some progress, particularly in earlier build decisions. In early game, I've captured a few same-culture settlements to which I made very few changes...and even those only because I had specific ideas about that province's future role in my empire, not because the AI had built it economically unsound up through the Level II buildings it had available. It's when Level III/IV structures introduce squalor and food costs that the AI still goes awry. So my impression is that the AI, with Patch 4, is starting to make better decisions (at least sometimes) about what types of structures to build...but is still incapable of staging them up past Level II in a coordinated manner. The tech tree is the AI's worst enemy. More work to be done, CA!