SUCCESSFUL PROPERTY TAX REFORMS: LESSONS LEARNED Roy Kelly Duke University <roykelly@duke>

1. SUCCESSFUL PROPERTY TAX REFORMS: LESSONS LEARNEDRoy Kelly Duke University<roykelly@duke.edu> 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 23-24 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. CR VR CLR CR: Coverage Ratio VR: Valuation / Classification Ratio CLR: Collection / Enforcement Ratio Analytical Model for Revenue Mobilization Policy Variables Administrative Variables Revenues $$$ Rev Base TR = * * * * Rev Base: Unknown Revenue Base TR: Tax Rate / Fee Structure

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

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