Publication - Working Paper
Real estate tax is considered to have strong economic efficiency, equity and governance benefits; however, its administrative and political costs prevent it from being used extensively in many developing countries. In Liberia, real estate tax revenues are less than 0.2 percent of GDP, compared to an average of 0.6 percent of GDP in developing countries, suggesting that Liberia may be underutilizing the tax.
In cross-country empirical studies, real estate tax is observed to have a less detrimental impact on growth compared to corporate income and individual income taxes. However, the specific impact in a country depends on the policy design and administrative decisions regarding the implementation of the tax. Liberia has some growth-friendly provisions in its tax code, such as a high tax rate on vacant lands in urban centers; however, these benefits are not always realized due to limitations in enforcement, such as the inability to identify property owners.
To improve real estate tax revenue performance, the Revenue Department of the Ministry of Finance must focus on increasing the coverage ratio (the fraction of total property that is on the tax roll) and the collection ratio (the fraction of total tax liability that is collected). Merging primary data from the 2008 Population and Housing Census with administrative records from the Revenue Department reveals that the coverage ratio of owner-occupied residences is less than 5 percent. An impressive 84 percent of annual tax liabilities are collected as revenue; however, this figure masks the fact that a large proportion of bills are issued upon the request of the taxpayer. In practice, only 37 percent of individuals making payment in one year also make payments in the subsequent year.
The Revenue Department’s current project of creating a property database for Central Monrovia is a promising exercise that will significantly expand the potential for enforcement and collection. However, as many property owners will be receiving their first tax bill in over a decade, great care must be taken to establish a positive compliance culture by using appropriate messaging, providing flexible payment options and demonstrating a willingness to enforce the law to its full extent. This new database presents a valuable opportunity to better understand factors affecting taxpayer compliance and the long-term economic and social impacts of property taxation using rigorous economic research methods.
Real estate tax is envisioned to play a major role as the primary tax base for the proposed decentralized county governments. With careful design and data collection, the ongoing pilot in Buchanan could be used as an opportunity to understand incentives facing local government administrators and staff in revenue collection and public good provision, as well as the corruption risks involved with locally raised revenues. More broadly, the revenue potential of real estate tax in rural counties must be carefully assessed when determining the nature of the functions that will be devolved to them.