While increasing demands are being placed on cities to address the current crisis and plan for resilience in the future, key sources of city government revenues are drying up. Taxes based on the value of land and/or property offer extraordinary potential for cities in financing urban recovery, but crucial to this is raising tax morale through visible investments in infrastructure and citizen engagement.
Cities represent both the greatest threat and the most promising opportunity for recovery from the recent COVID-19 pandemic. All of the last 30 major global epidemics, including the current pandemic, began and spread rapidly in urban areas. The concentration of people in cities makes them hotbeds for rapid transmission of the virus, particularly in dense informal settlements with limited access to water and sanitation services. At the same time, the sharing of ideas between a closely connected urban population is likely to drive innovations in technology and health that will help to mitigate the effects of COVID-19 and other diseases.
As such, urban policymakers are now tasked with limiting the spread of infection while enabling the spread of ideas. Short-run interventions such as improving emergency handwashing facilities, as has been recently done in South Africa, Kigali, and Freetown, can help combat the transmission of the virus in dense informal settlements. In tandem, ensuring households’ continued access to essential goods and services is crucial in maintaining lives and livelihoods.
In the longer-term, increased investments in infrastructure in developing cities will be crucial in limiting contagion from diseases in future. There is an abundance of evidence, for example, that the benefits of investing in water and sanitation infrastructure in this respect far exceed the costs. Policies to promote better quality housing and transportation can also reduce infection rates caused by cramped living conditions and overcrowded buses.
Beyond infrastructure, cities will also need to think creatively about how to further invest in the creation and sustainability of small businesses upon which many lower-income populations depend.
Implementing these investments, however, is expensive - in the US, for example, at the turn of the 20th Century, cities and towns were spending more on water alone than the federal government was spending on everything other than the post office and the army.
Where is the revenue going to come from?
The challenge facing developing city governments is that while increasing demands are being placed on these institutions to address the current crisis and plan for resilience in the future, key sources of city government revenues are drying up. Revenues from major municipal finance sources such as business licenses and parking fees have dipped with the downturn in economic activity and containment measures implemented by governments in response to the pandemic. In the last quarter, the Kampala Capital City Authority, for example, has registered an 83% decline in tax collection, while Freetown has also lost over 70% of its revenue. The World Bank estimates that local governments will have 15 – 25% less revenue overall by 2021.
Furthermore, increasing revenues during the time of crisis needs to be carefully weighed against the ability of taxpayers to pay – current estimates predict that as a result of the crisis, up to 60 million people – 27 million in Africa alone – have been pushed into extreme poverty. In this context, taxation policy will need to be designed in such a way that it does not choke already struggling businesses and households.
The potential of property tax in times of crisis
Taxes based on the value of land and/or property offer extraordinary potential for cities in helping to finance urban development. If well-designed and effectively administered, these taxes offer a self-sustaining source of revenue, providing funds for public investments which drive up property values in a city. During an economic crisis like the one we are currently facing, city revenues based on the value of assets such as land and property may be less dramatically affected than taxes based on income.
However, it may be increasingly difficult to try to enforce such a tax on citizens who are more cash-strapped than ever, with prevailing economic conditions affecting income sources for property owners. In normal times, property taxes are subject to intense political resistance – during crisis, implementation is likely to be even less feasible.
In principle, one might think that property taxes based on rental income may be easier to implement – in times of economic crisis, if rental incomes fall, tax liabilities may decline as well. However, while such a system may be less burdensome on taxpayers, it also means lower revenues for city governments to provide essential services. More fundamentally, property taxes based on rental income distort the purpose of these taxes as a fair and efficient charge paid by citizens for local public services and infrastructure that, through no effort of their own, raise the value of their assets. Recognising this, in many cities rental income is intended as a proxy for property values and as such, anomalies in income do not affect tax liabilities.
A focus on tax morale
Instead, the current crisis offers an opportunity for governments to address the challenges above by raising tax morale in cities. This can be done through:
- Visibly linking property tax payments to the provision of essential services that help urban citizens weather the pandemic. In Khyber Pakhtunkhwa province in Pakistan, for example, the government is considering shifting expenditure from property tax revenues away from staff salaries and towards immediate services and COVID-19 equipment in a direct effort to improve tax collections.
- Improving relationships with taxpayers by addressing any issues that arise with property tax payments because of affordability. This could include allowing for temporary deferrals, waiving late payment penalties and interest on deferred payments where necessary. Treating the taxpayer as a client in this way, has been a cornerstone of the Kampala Capital City Authority’s revenue reform strategy.
In doing so, cities can provide taxpayers with better value for money that can raise compliance to help finance recovery.
However, it is important to note that own-source revenues alone will likely not be sufficient to address the urgent demands of cities. Leveraging national redistribution policies to offset losses in municipal income for cities is likely to be necessary in the short run, and to this end it is imperative that the voices of cities be heard at every level of planning. For example, in Canada, the Ontario government is supporting municipalities cover public health and social service costs. Ensuring that cities can effectively address the threat of contagion of COVID-19 is a critical national pandemic management strategy. It is important that such redistribution programmes are time-bound and targeted to limit the possibility of long-running and wasteful transfers that, once implemented, often prove difficult to remove.
Crises like the one we are facing put cities at the centre, given their critical role in communicating and delivering services to dense populations. Doing this well and providing citizens value for money from their property tax payments can have a lasting effect on tax morale and payments. Acting decisively now is likely to have long-term effects on how citizens view these taxes and the city government that charges them.
This blog is part of a series curated by the Cities that Work initiative exploring topics on cities and the ongoing COVID-19 pandemic. Read more.
Disclaimer: The views expressed in this post are those of the authors based on their experience and on prior research and do not necessarily reflect the views of the IGC.