The Local Government Revenue Initiative Chair (LoGRI) Wilson Prichard spoke to Vincent Owino, on why property taxes are important for local governments in Africa.
How important are property taxes?
A property tax is one that a landowner is expected to pay on their property annually as a contribution to the upkeep of the city. It is different from rental income tax.
I think it is important for local governments because it is the most reliable and progressive form of financing local governments.
The other revenue sources available to local governments are simply not sufficient to provide adequate funds for local cities.
If you think about the small taxes that a city like Nairobi can raise, in the absence of a strong property tax, it’s very difficult for cities and counties to be more financially independent.
Second, property tax has a lot of untapped revenue potential, as a way of financing local governments.
It is also a relatively progressive tax. It tries to put more of the tax burden on relatively wealthy individuals, who are the ones who own the most valuable properties.
Yet not every government is collecting it well. Why?
First, very often, it’s a problem of politics.
Since property taxes, unlike value-added and income taxes, are very visible, they tend to be unpopular.
For that reason, I think, politicians are often very reluctant to strengthen property taxes, because they worry about the backlash they might get from citizens if they levy increased taxes on property.
But there are other reasons. One is, often the wealthiest people, who own the largest houses are reluctant to pay property taxes, and that can become a barrier to strengthening the taxes if these individuals have an influence in shaping government policy.
Read: Home buyers locked out of property market
Second, it can be technically complex.
Property tax is a data-hungry tax, because to raise them, you first need to map all the properties in a jurisdiction, then figure out how big each of them is, then learn about their characteristics so you can assign a value to them.
In many countries, this administrative process is quite expensive and that has made it difficult to collect property taxes.
Also, property taxes often require effective collaboration between central governments and local governments to help with that process.
I don’t know about Kenya, but in many countries, that collaboration often doesn’t work very smoothly and that becomes an additional barrier to strengthening property taxes.
How do we address these challenges?
In most countries, if you look at their property tax system, the first thing you will find is that many properties are not registered at all.
Apart from that, the value assigned to those properties is often lower than it should be.
The rates are also low and when people don’t pay, there’s often not much penalty for that, so the enforcement method by the tax authorities is often not very effective. Solve these, and the challenges will ease.
But apart from that, citizens are also opposed to the property taxes because they feel they don’t get anything in return.
So, the secret of building more effective property tax systems is first, build something that’s fair, and then show taxpayers that they are getting something in return. We know from other countries, that if governments can demonstrate to citizens what they get in return for property taxes, people are more willing to pay, to support reforms and more effective enforcement.
Read: Property sector hit with 12.5pc tax
How does tax collection affect quality of life for the people?
If you strengthen property taxes, you improve the finances of county governments, hence they can deliver better services to their citizens.
If you don’t own a property, you can still benefit from those services.
In fact, the whole point of property taxes is so that those who have more ability to pay – as measured by the fact that they live in more valuable properties – will contribute more. But those revenues will then be used to provide services to the whole city.
Really strong property taxes have the potential to really revolutionise what county governments can provide to their citizens, by giving them the financial resources they need to deliver.
Some people consider property tax double taxation or punishing success. What’s your view?
I think there are two ways to view property taxes. The first is as a tax on benefits, that is, a tax you pay as a property owner, in return for the services that you get from your local government.
Since the value of your property depends on the quality of the services you get from your government, it is only fair that as it goes up, the local government can tax part of that value to continue strengthening the services of the city.
As the services improve, the property value continues to go up and in the end, everybody wins.
The other way of thinking about them is as a wealth tax. And I think the logic of a wealth tax is simple: it’s a means of bringing more progressiveness into the tax system.
The argument is that if you have been fortunate enough to accumulate all that wealth, then you have the means to contribute more fully to the services of the city and the wellbeing of all citizens.
Indeed, some people do argue that it’s double taxation, but I think it’s just another means of trying to tax progressively.
The dominant way of understanding property taxes should be viewed more as a benefit tax, an appreciation for the services you get from your city and progressiveness rather than double taxation.
Source: The East African