Many developing country cities are growing at an unprecedented rate. To respond to this unplanned, rapid expansion, it will be beneficial for city authorities both to expand existing revenue sources and explore new financing options to match higher demand for public services.
In fast-growing developing country cities, efficient and effective service provision is constrained by limited municipal finance. This brief outlines how city authorities can expand local revenue sources, increase the efficiency of local tax collection, and explore untapped revenue sources, namely land and property tax.
Cities like Kampala, Uganda, will triple in size by the year 2050, according to estimates (Collier, 2017). This is due to high population growth rates and large flows of people from rural areas attracted by the opportunities cities offer. As a result, many developing country city authorities around the world are facing increasing financial challenges. A large number of these countries are also undergoing a decentralisation process, with local and city authorities bearing greater responsibilities for public service provision.
Transfers from central governments are not sufficient to fund the infrastructure and public services needed to support urbanisation. And yet, city authorities in developing countries remain overly reliant on these often constrained and unreliable transfers. Taxes and other fees collected locally are very low: approximately 2.3% of gross domestic product (GDP) in developing countries as opposed to 6.4% in the developed world (Bahl, Linnand Wetzel, 2013).
Given that growing cities cannot and should not rely on central government transfers as their primary source of income, municipal authorities need to better understand how they can expand their own revenue base to provide public services and better support rapid urbanisation.
To support these efforts, it would be advantageous for national authorities to endow their local counterparts with the capabilities to manage their own revenues.
- Tapping into diverse, well-administered local sources of revenue can decrease reliance of cities on central government transfers.
When identifying these potential sources of revenue, it is advisable for authorities to prioritise an initial shortlist of options that are within their remit to adjust, while also taking into account administration and compliance costs, to ensure they are both feasible and desirable.
- Reforms in local tax administration can generate large increases in revenues.
The introduction of new technologies and the overall modernisation of municipal revenue administration can lead to substantial increases
in the efficiency and effectiveness of tax collection and thus lead to increases in revenues.
- Land and property tax represent the largest source of untapped revenue for developing country cities.
Although taxing land is more efficient, administrative and political challenges may make taxing land and property more feasible.