Key message 2 – Reforms in local tax administration can generate large increases in revenues.
There are large gains to be made from changing the ways taxes are administered. Efficient and effective tax administration is as important as overall tax policy when it comes to raising revenues (Kopanyi, 2015b). The key elements of a successful tax administration scheme include transparency; good communication between the taxpayer and collection authority; reliable and up-to-date databases; and easy registration, filing, and payment for taxpayers.
Improvements are both possible and needed in this area – evidence shows tax collection efficiency in developing countries is below 70%, compared to more than 95% in developed countries (Freire and Garzon, 2014).1
The basic steps for improving revenue administration include:
- Identification of the local tax base – i.e., who is required to pay tax;
- Assessment of their payment obligation – i.e., when and how much they are required to pay;
- Billing and collection – i.e., receiving the required payment from them;
- Enforcement – i.e., imposing penalties and fines should payment not occur;
- Encouraging voluntary compliance – i.e., explaining how the tax will help city residents, of the city, and that it is unfair if some do not pay.
To carry out any of these steps efficiently, it is necessary to establish street addresses. This is also important for land and property taxes, as addresses tell you where the potential taxpayer is, and the characteristics of their area and property. In light of this, many cities in developing countries, including Dakar in Senegal and Niamey in Niger, are undergoing or have recently undergone exercises to allocate or formalise street addresses (Farvacque-Vitkovic, 2005).
Modernisation and the introduction of new technologies are also allowing for more efficient and effective administration and collection of taxes. The first step is for a city to move its fiscal cadastres – the official registry of taxable land and/or properties – from paper to digital files. In addition, there are now various technologies that support mass valuations for land and property, including geographic information system (GIS) mapping, satellite data, and computer-aided mass valuation systems (CAMA).
In Lithuania, CAMA was introduced for land valuation in 2001, and following its success, was expanded to real estate valuation (Bagdona-Vicius and Deveikis, 2010). Although some of these technologies require up-front capital investments, these can usually be recouped in the first few years thanks to the substantial increase in taxes collected.
Establishing dedicated entities within municipal and local authorities whose responsibility it is to administer local taxes can also improve tax administration. The level of these tax entities’ involvement will vary by country depending on national legislation and government structures. However, evidence has shown that the greater their involvement and the more substantial their responsibilities, the stronger local ownership over financing will become. This in turn substantially improves planning, execution, and overall management of revenues at the city level (Muwonge and Ebel, 2014).
Institutionalising local tax reforms
The Kampala Capital City Authority (KCCA) is one example of how local tax administration can support increases in revenue. In 2011, the agency established a dedicated Directorate for Revenue Collection (DRC), which was staffed with a qualified team mostly drawn from the national revenue authority. The DRC introduced a number of measures that made it easier for taxpayers to submit their payments to the KCCA, such as online filing and submission, updating of databases, and an overall simplification of the tax payment process. It also improved communication by educating taxpayers on how their taxes were being spent on public services and establishing a help centre for taxpayers.
As a result of these reforms, the DRC managed to more than double revenues from
the city’s own sources (Kopanyi, 2015b). Although administrative reforms are usually
one-off changes, institutionalising them within a dedicated directorate can ensure a sustained revenue stream for the future.