Local Government Revenue Policies Tanzania

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Local Government Revenue Policies - Tanzania

• Wednesday 25 Feb 2009
• Matt Glasser

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Tensions

• Importance of local government revenues
• Sustainability operations and maintenance of
  infrastructure
• Growth needed for infrastructure investment
• Accountability social contract at local level
• Equity local affordability and preferences
• But, local tax systems can be anti-poor
• regressive rate structure e.g. development levy,
  Ugandas G-tax
• Harsh collection methods
• And local tax systems can be anti-business
• Plethora of local taxes
• Variable enforcement and unpredictable changes
• Wheres the quid pro quo?

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WB group has given needlessly confused messages

• Poverty specialists concerned about regressivity
• Private sector concerned about barriers to entry,
  discretion, and cumulative burden
• Urban / local government specialists concerned
  about quantum
• We must get our house in order
• Local tax regimes can be
• Pro-poor
• Pro-business
• Key to sustainable local services and
  infrastructure, at least in urban areas
• TZ model developed with this in mind
• which local taxes are regressive, neutral or
  progressive?
• simple spreadsheet which models relative tax
  incidence (i.e. the shape of tax burden)
• encourage informed decisions on local revenue
  instruments

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Reaching a consensus on local revenue policy
a well designed local revenue system can
reconcile the needs of different stakeholders
Local Government Authorities
Residents
Businesses

• Adequate and buoyant
• Stable and predictable
• Minimizes collection and administration costs
• Revenue autonomy and flexibility
• Politically acceptable

• Transparent and easy to understand
• Fair and equitable in design and administration
• Linked to services
• Minimizes compliance costs

• Fair and equitable in design and administration
• Supports a conducive business environment
• Efficient
• Avoids barriers to enterprise development
• Minimizes compliance costs
• Linked to services

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LGAs and Business Taxes A Healthy Symbiosis
aligning the incentives of LGAs and the private
sector promotes economic growth.

• LGAs should have a stake in the success of local
  business
• This happens when business taxes are buoyantLGAs
  benefit when businesses succeed
• This makes LGAs want to support a healthy
  business environment

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Local Taxation in Tanzania Prior to 2003
The local revenue system was criticized for being
regressive and business unfriendly

• 60 of local revenues came from three sources
• The Development Levy
• Agricultural and livestock taxes
• Licenses and fees (including business licenses)
• Highly fragmented
• Large number of revenue instruments in use
• Regressive and created disincentives for private
  enterprises

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2003-04 Local Government Tax Reforms
Reforms were implemented to improve equity and
enhance the business environment

• Development Levy plus several other local revenue
  instruments (nuisance taxes) abolished
• Abolished local business licenses
• Transition to a closed listLocal Government
  Finance Act was amended to eliminate all taxes
  and fees levied by the local governments except
  those specified in as schedule to the Act

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Impact of Reforms
Reforms resulted in substantial loss of income
and weaker local autonomy over revenue sources

• Substantial loss of LG own revenue
• LGAs intensified collection of taxes that
  remained on the permitted schedule, and some that
  did not.
• Compensation/General Purpose Grant instituted,
  but
• Local autonomy weakened

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Local Government Revenue Sources in Tanzania
2002
2007/08
Source Local Government Fiscal Review
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Trend in Local Government Revenue Collections
Source Local Government Fiscal Review
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Per Capita Local Revenue Collections
Source Local Government Fiscal Review
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Composition of Local Government Finances in
Tanzania
Source Local Government Fiscal Review
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Local Tax Policy Proposals
Property rates and business taxes should be the
two mainstays of the local revenue system

• Property taxes
• Also assign land rents to local government level,
  and ultimately integrate into property tax.
• Betterment levy possibilities
• Rural property taxsimple flat rate on the
  occupancy of land and huts.
• Business taxesUnified Local Business Tax (ULB)
  based on gross turnover
• Supplemented by revenues from licenses and
  permits, local fees and charges, and other
  revenue sources

Source Strategic Framework for the Financing of
Local Governments in TZ (LGRP/GSU, June 2005)
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Local Tax Policy Proposals
LGRP/GSU study also identified three new revenue
sources for local government authorities

• Personal taxes
• Formal Village Development Contribution
• National income tax surcharge
• Excise taxeslocal excise tax on electricity and
  other utilities
• Motor vehicle annual feesassign to local
  government level

Source Strategic Framework for the Financing of
Local Governments in TZ (LGRP/GSU, June 2005)
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Tax Incidence Methodology
We are interested in the statutory incidence of
the tax burden, i.e. Who bears the legal
obligation to pay tax to the government?

• Consumption expenditure is used as a proxy for
  household income
• Households tend to report expenditure more
  accurately
• Households smooth expenditure over time
  (indicative of long-term welfare)

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Regressive Taxes
Taxes are regressive when tax incidence decreases
as incomes rise

• Lower income taxpayers pay a greater percentage
  of their income in tax than higher income
  taxpayers.
• E.g. Flat Head Tax

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Neutral or Proportional Taxes
Taxes are proportional when tax incidence is
constant as incomes rise

• Everyone pays the same percentage of their income
  in tax.

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Progressive Taxes
Taxes are progressive when incidence increases as
incomes rise

• Higher income taxpayers pay a greater percentage
  of their income in tax than lower income
  taxpayers.
• E.g. National Income Tax

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Data Sources and Limitations
Data collection was carried out by DAI Europe on
behalf of the World Bank
Local Tax Instruments Current local taxes,
including average rates and charges Proposed
local taxes
Tax Base Information for Households e.g. number
of adults, household income, value of land and
property, number of vehicles etc.
Tax Base Information for Enterprises e.g.
business turnover, value of land and property,
number of vehicles, etc.

• Rural and urban LGAs were visited to get a sense
  of instruments and rates being used

• Tanzania Household Budget Survey 2000/2001
• Nationally-representative sample of 22,178
  households
• Households ranked by consumption per adult
  equivalent

• World Bank Enterprise Survey
• TRA data on formal enterprises ?
• TBS informal enterprise data ?

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Menu of Personal Taxes

• Flat Head or Poll Tax. A uniform, fixed amount
  per individual.
• Graduated Tax. A fixed amount per individual,
  varying across income bands and/or professions.
• Surcharge on National Income Tax. Percentage of
  national income tax or national income tax base.

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Personal Tax Modeling Options

• Who is required to pay the tax?
• All adults (definition of adults can vary)
• All heads of households
• All adult men
• All adult men and employed women
• All professions, trades and salaried persons

• Who is exempted from paying the tax?
• Individuals whose income falls below a certain
  threshold
• Elderly
• Full time students
• Differential rates?
• Employed in formal vs. informal sector

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Personal Tax Illustrations

• Possible scenarios of a Formalized Village
  Contribution
• Lets compare introducing a village level head
  tax of TSh 500 per adult with a household head
  tax of TSh 1500
• Impact of a Surcharge on National Income Tax
• Lets look at the incidence of the surcharge on
  national income tax, compared with a graduated
  head tax
• How can the model help us improve the equity of
  local tax instruments?

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Scenarios of a Formalized Village Contribution
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Scenarios of a Formalized Village Contribution
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Impact of Doubling the Tax?
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Impact of Doubling the Tax?
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Surcharge on National Income Tax
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Surcharge on National Income Tax
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Improving the Equity of the Graduated Tax
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Improving the Equity of the Graduated Tax
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Improving the Equity of the Graduated Tax
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Improving the Equity of the Graduated Tax
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Menu of land and Property Taxes

• Flat Tax. A flat amount per building with
  possible adjustment for size, location and use of
  plot.
• Annual Rental Value. Tax applied to gross rental
  value of the property less an allowance for
  costs.
• Land or Site Value. Tax applied to value of
  unimproved land only.
• Capital Value of Improvements. Tax applied to
  value of buildings only.
• Capital Improved Value. Tax applied to value of
  both land and buildings.

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Property Tax Modeling Options

• Rates
• Flat amount
• Uniform percentage / Ad Valorem
• Progressive rates
• First TSh X of value tax exempt
• Minimum tax rates

• Differentiated by
• Rural vs. urban
• Owner-occupied vs. rental
• Permanent vs. impermanent
• Land vs. improvements
• Possible exemptions
• Low value properties or low-income families
• Vacant property

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Property Tax Illustrations

• Flat Property Tax
• Ad Valorem Tax on Capital Improvements
• Lets examine the incidence of an ad valorem tax
  on capital improvements.
• What is the impact of an exemption for low value
  properties, compared with an exemption for the
  first TSh X of value?
• Land Tax

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Flat Property Tax
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Flat Property Tax
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Ad Valorem Property Tax / Capital Improvements
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Land Tax
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Menu of Automotive Taxes

• Tax on Vehicle Registration or Ownership
• Parking Fees

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Automotive Tax Modeling Options

• Tax Base
• Vehicle ownership
• First registration
• Purchase or transfer of vehicle

• Rates
• Flat annual tax (differentiated by type of
  vehicle, use)
• Progressive tax, i.e. increases with vehicle value

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Automotive Taxes
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Automotive Taxes
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Preliminary Conclusion

• Within each class of possible revenues, it is
  possible to design a revenue instrument to be
  more or less progressive/regressive
• To the extent that we can control the incidence
  in the selection and design of local revenue
  instrumentsto what degree is this preventing
  reform?

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Business Taxes Work in Progress

• Formal and informal enterprise data incomplete
• World Bank Enterprise Survey (276 manufacturing
  firms)
• TRA Data (turnover only / incomplete?)
• Central Registry of Establishments (no. of
  employees)
• Integrated Labour Force Survey (informal
  enterprise ownership)
• Model
• Business turnover tax
• Property taxes
• Automotive taxes
• Other?