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Local Government Revenue Policies Tanzania

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Title: Local Government Revenue Policies Tanzania


1
Local Government Revenue Policies - Tanzania
  • Wednesday 25 Feb 2009
  • Matt Glasser

2
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?

3
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

4
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

5
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

6
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

7
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

8
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

9
Local Government Revenue Sources in Tanzania
2002
2007/08
Source Local Government Fiscal Review
10
Trend in Local Government Revenue Collections
Source Local Government Fiscal Review
11
Per Capita Local Revenue Collections
Source Local Government Fiscal Review
12
Composition of Local Government Finances in
Tanzania
Source Local Government Fiscal Review
13
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)
14
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)
15
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)

16
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

17
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.

18
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

19
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 ?

20
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.

21
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

22
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?

23
Scenarios of a Formalized Village Contribution
24
Scenarios of a Formalized Village Contribution
25
Impact of Doubling the Tax?
26
Impact of Doubling the Tax?
27
Surcharge on National Income Tax
28
Surcharge on National Income Tax
29
Improving the Equity of the Graduated Tax
30
Improving the Equity of the Graduated Tax
31
Improving the Equity of the Graduated Tax
32
Improving the Equity of the Graduated Tax
33
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.

34
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

35
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

36
Flat Property Tax
37
Flat Property Tax
38
Ad Valorem Property Tax / Capital Improvements
39
Ad Valorem Property Tax / Capital Improvements
40
Ad Valorem Property Tax / Capital Improvements
41
Ad Valorem Property Tax / Capital Improvements
42
Ad Valorem Property Tax / Capital Improvements
43
Ad Valorem Property Tax / Capital Improvements
44
Ad Valorem Property Tax / Capital Improvements
45
Land Tax
46
Menu of Automotive Taxes
  • Tax on Vehicle Registration or Ownership
  • Parking Fees

47
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

48
Automotive Taxes
49
Automotive Taxes
50
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?

51
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?
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