SUCCESSFUL PROPERTY TAX REFORMS: LESSONS LEARNED Roy Kelly Duke University Innovations in Local Revenue Mobilization World Bank Workshop Sponsored by the Tax Policy and Administration and Decentralization Thematic Groups, World Bank Institute and Lincoln Institute of Land Policy June 2003

2 Property Tax Reform Experience Various Environments (political, legal and institutional) Various Reform Objectives: Revenue Equity Efficiency Effectiveness Various Reform Strategies: A combination of Policy and Administration Effective property tax reform must be strategic, cognizant of the political, legal and institutional environment.

3 Policy Variables: What is taxed? [what is included and exempted] How is it taxed? [area based or value based] [capital vs rental value] Rate structure? [uniform, classified, progressive] Policy determination [central, local, discretion level] Administration Variables: Coverage Ratio: [managing property info] Valuation Ratio: [absolute and relative accuracy] Collection Ratio: [assessment, billing, collection, enforcement/compliance, taxpayer service]

4 The Critical Obstacle Although policy can be fine tuned, the primary obstacle to successful local revenue mobilization is: Weak Administration Problems: Lack of citizen credibility Lack of political will Revenue base information: lacking, incomplete, or dated Misclassification Low collections Enforcement: virtually non-existent Major problem is NOT property valuation.

5 Analytical Model for Revenue Mobilization = * * * * Rev Base: Unknown Revenue Base TR: Tax Rate / Fee Structure Revenues $$$ Rev Base TR CR CR: Coverage Ratio VR VR: Valuation / Classification Ratio CLR CLR: Collection / Enforcement Ratio Policy VariablesAdministrative Variables

6 Coverage Ratio CR = recorded revenue base/potential revenue base Problem: Low Coverage Ratio (30-70%) Institutional Constraints (Central or Local) Lack of Incentives (Personal and Institutional) Solutions: Simple fiscal property registers Improve field administration w/ quality control Third party cross checks and public scrutiny Computerization (Rates Administration Management System) Separate property information collection from valuation functions

7 Valuation Ratio VR = recorded valuation/actual valuation Problem: Low Valuation Ratio (30-70%) Typically Single Parcel Valuation Lack of Incentives (Personal and Institutional) Solutions: Shift from individual valuation to mass valuation Ensure supervision and quality control Establish independent appeals process Publicize the registers for quality control Shortened Valuation Cycle (3-5 years)

8 Collection Ratio CLR = total collection / total liability Problem: Low Collection Ratio (20-50%) Lack of Political Will Lack of Stakeholder Understanding Solutions: Improve local services Mobilize political will Reduce compliance and administrative costs Improve taxpayer service and education Use incentives, sanctions, and penalties Improve local financial management

9 PROPERTY TAX OPERATIONS MANAGEMENT SYSTEM PAYMENTS MANAGEMENT COLLECTION CONCILIATION PROCEDURES CASH OFFICE MANAGEMENT BUDGET MONITORING ACCOUNTANCY CUSTOMERS LIABILITIES DATABASE DATABASE MAINTENANCE FIELD DATA COLLECTION INTERNAL DATA COLLECTION DATA ENTRY DATA FILE MAINTENANCE CUSTOMERS DATABASE PERSONNEL TRAINING PUBLIC RELATIONS “CUSTOMER” SERVICES FRONT DESK MANAGEMENT Information; Client Registration; Individual Invoice Replacement Subsystem Bill To Budget Monitoring Subsystem To Customer LIABILITIES ASSESSMENT REGULATORY FRAMEWORK FEES / RATES EXEMPTIONS MASSIVE / INDIVIDUAL APPRAISAL & ASSESSMENT CUSTOMER ACCOUNTS MAINTENANCE COLLECTION REPORTS PRODUCTION COLLECTION MONITORING COLLECTION / ACCOUNTING ENFORCEMENT CRITERIA DEFINITION ENFORCEMENT CASES SELECTION ENFORCEMENT ENFORCEMENT ACTIVITIES Notification; Inspection Visits; Administrative/Judiciary Actions MASSIVE BILL ISSUANCE INDIVIDUAL BILL ISSUANCE BILLING BILL DELIVERY

10 CASH OFFICE MANAGEMENT SUBSYSTEM BUDGET MONITORING SUBSYSTEM FISCAL YEAR 0X - 0Y BUDGET BUSINESS PERMITS MANAGEMENT SUBSYSTEM PROPERTY TAX MANAGEMENT SUBSYSTEM HOUSING & GROUND RENTS MANAGEMENT SUBSYSTEM SANITATION MANAGEMENT SUBSYSTEM MISCELLANEOUS REVENUE MANAGEMENT SUBSYSTEM PAYROLL MANAGEMENT SUBSYSTEM PROCUREMENT MANAGEMENT SUBSYSTEM CREDITORS MONITORING SUBSYSTEM To/From Other Workstations REPORTS MODULE On-Line Reports SUSPENSE ACCOUNTS EXPENSE ACCOUNTS REVENUE ACCOUNTS VOUCHERS RECEIPTS ACCOUNTANCY MODULE Printed Reports Printed Reports INTEGRATED FINANCIAL OPERATIONS MANAGEMENT SYSTEM (IFOMS) To/From Other Workstations

11 Conclusions KEEP YOUR OBJECTIVE CLEAR. Focus on the ultimate objective NOT on the intermediate outputs Intermediate outputs are only a means to an end MOBILIZE POLITICAL, OPERATIONAL AND TAXPAYER SUPPORT Support is necessary for reform enactment but more importantly reform sustainability Capitalize on current reform environment. Launch internal and external stakeholder campaign & service Establish central & local capacity to support the reforms

12 FOCUS ON TAX ADMINISTRATION Simplify policy and operational procedures Key payoff of reform is procedural change Don’t focus exclusively on property valuation Integrate administrative procedures into an Integrated Financial Operations Management System (IFOMS) Introduce appropriate computerization Tailor administration to central and local level advantages CREATE PROPER INCENTIVES Improve local services & expenditure management Keep revenue policy simple to facilitate local administration and to actually realize revenues, equity and efficiency Establish simple administration that can be implemented by local officials

13 THINK COMPREHENSIVELY BUT IMPLEMENT INCREMENTALLY. Identify improvements to increase the coverage (CR), valuation (VR), and collection (CLR) ratios Recognize system limitations to quantity of change Too fast a rate of change can cause the tax department or taxpayers to reject the system. Too slow can cause them to ignore it REFORM IS A CONTINUAL AND INTERACTIVE PROCESS. Prepare to win the war NOT each battle Get fundamentals right and incrementally introduce improvements