Local taxation – local government collecting and spending locally revenue from taxes, fees and charges – has until recently received little attention from the national tax agencies, aid agencies, and international organisations that have shaped the tax reform agenda (Moore, 2013). Local governments generally receive most of their funds from central government, but property taxes, business licenses, market fees and user charges can provide substantial and reliable revenue (Fjeldstadt, Chambas & Brun, 2014). Furthermore, local taxation can improve state-society relations, at least at the local level. For example, a Sri Lankan randomised controlled study found that business owners whose firms formalised and paid local taxes showed increased trust in the provincial and municipal governments with whom they interacted during registration, but no change in trust in central government (de Mel et al. 2013).
There is little robust evidence of the impact of local taxation reform on revenue and state-building processes, or of the factors supporting reform efforts. Suggested approaches to reform include: (1) simplifying systems and processes (e.g. property valuation, business licences, fee structures); (2) increasing transparency; (3) improving payment compliance (e.g. of user fees); (4) improving provision of information on taxation and fees; and (5) adopting a more pragmatic approach to local taxation, such as through segmentation (Fjeldstadt et al., 2014; Fjeldstadt & Heggstadt, 2013). It is important to consider the limited capacity of urban councils to undertake valuation and enforcement, and to ensure harmonisation between central and local government so as to avoid double taxation and inconsistent policies (Fjeldstadt et al., 2014; Fjeldstadt & Heggstadt, 2013).
Key reading
Fjeldstad, O-H., Chambas, G. & Brun, J. (2014). Local government taxation in Sub-Saharan Africa: A review and an agenda for research (CMI Working Paper WP 2014:2). Bergen: Chr. Michelsen Institute (CMI).
This literature review on local government revenue systems in Africa concludes that there is a need for consistent domestic tax legislation, a clear boundary between local and central taxation, and the principle of segmentation to be applied in local taxation as it has been at the national level. There is potential to increase local revenues from other types of taxes (e.g. consumption of utilities) and non-tax revenue sources (e.g. fees, levies) but tax legislation must be kept as simple as possible to prevent overburdening local governments. Sharing revenues between local and central government can ensure better service provision but this must not introduce uncertainties for local governments on the amounts they expect and/or on the timing of the transfers.
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Fjeldstad, O-H. & Heggstad, K. (2013). Local Government Revenue Mobilisation in Anglophone Africa (ICTD Research in Brief Issue 5). Brighton: International Centre for Tax and Development (ICTD).
This literature review examines opportunities and constraints facing local revenue mobilisation in Anglophone Africa. The paper finds that local government taxation not only brings in revenue, but can also play an important role in shaping state-society relations because it brings many people into direct contact with public authorities. The main sources of revenue for urban municipalities, other than central government transfers, are usually property taxes, business licenses, market fees and various user charges. For property tax, constraints include weak capacity to implement accurate valuation practices; poor collection; lack of clear ownership titles; and lack of political support for enforcement. Business licenses create high compliance costs due to complex procedures; may not re?ect ability to pay; provide opportunities for rent seeking; and are often poorly administered. User fees may encourage ef?cient use of public sector resources but also suffer from defects including inequitable burdens on low income users, ineffective collection and billing arrangements, poor quality services and persistent resistance to payment.
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Moore, M. (2013). Obstacles to Increasing Tax Revenues in Low Income Countries (ICTD Working Paper 15). Brighton: International Centre for Tax and Development)
Why do the governments of low income countries not raise more tax revenues? This literature review looks at various approaches, particularly highlighting the potential of property taxes, which globally are the dominant form of local taxation. Property taxes do not significantly distort investment decisions, and tend to fall on those better able to pay. They are consistently underused in low-income countries, and have been declining in relative importance even in those countries where they were historically relatively important. There are challenges to implementing property taxes as they tend to fall most on politically active and influential social groups.
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Case Study: (Semi-)autonomous revenue authorities ((S)ARAs): Mixed outcomes
A study on local tax collection in Peru found that municipalities with semi-autonomous revenue agencies (SARAs) collect more revenue than those with conventional tax administrations (von Haldenwang et al., 2014). The results also indicate that local revenue is more stable in municipalities with SARAs, which is good for budget policy and planning.
Evidence, overall on (S)ARAs has been mixed (Fjeldstadt, 2013). While some have made impressive advances, other revenue authorities have seen little progress, or initial progress followed by stagnation. This is attributable to (S)ARAs being quite diverse in terms of revenue authority model; being mostly new and evolving; and having been introduced in part at the urging of aid donors and international financial institutions.
von Haldenwang, C., von Schiller, A., & Garcia, M. (2014). Tax Collection in Developing Countries – New Evidence on Semi-Autonomous Revenue Agencies (SARAs). The Journal of Development Studies, 50(4), 541-555. See full text
Fjeldstad, O-H. (2013). Taxation and development: A review of donor support to strengthen tax systems in developing countries (UNU-WIDER Research Paper WP2013/010). See full text
- Tailoring legislation and administration of tax collection to different segments of the tax base. For example, if the tax base is segmented by firm size, small enterprise tax collection can involve simplifying related legislation and adapting administration to be as cost-effective as possible keeping in mind that revenues are likely to be comparatively small.