SUCCESSFUL PROPERTY TAX REFORMS:
LESSONS LEARNED
Roy 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
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.
2
Policy Variables:
What is taxed?
How is it taxed?
Rate structure?
Policy determination
[what is included and exempted]
[area based or value based]
[capital vs rental value]
[uniform, classified, progressive]
[central, local, discretion level]
Administration Variables:
Coverage Ratio:
Valuation Ratio:
Collection Ratio:
[managing property info]
[absolute and relative accuracy]
[assessment, billing, collection,
enforcement/compliance,
taxpayer service]
3
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.
4
Analytical Model for Revenue Mobilization
Policy Variables
Revenues
$$$
Rev
=
*
Base
TR
Administrative Variables
*
CR
*
VR
*
CLR
Rev Base: Unknown Revenue Base
TR: Tax Rate / Fee Structure
CR: Coverage Ratio
VR: Valuation / Classification Ratio
CLR: Collection / Enforcement Ratio
5
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
6
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)
7
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
8
PROPERTY TAX OPERATIONS MANAGEMENT SYSTEM
BILLING
DATABASE MAINTENANCE
FIELD
DATA
COLLECTION
INTERNAL
DATA
COLLECTION
DATA
ENTRY
MAINTENANCE
MASSIVE
BILL
ISSUANCE
INDIVIDUAL
BILL
ISSUANCE
To Customer
Subsystem
Bill
BILL
DELIVERY
DATA FILE
COLLECTION MONITORING
LIABILITIES ASSESSMENT
CASH OFFICE MANAGEMENT
REGULATORY
FRAMEWORK
FEES / RATES
EXEMPTIONS
CUSTOMERS
DATABASE
MASSIVE / INDIVIDUAL
APPRAISAL & ASSESSMENT
CUSTOMER
ACCOUNTS
MAINTENANCE
COLLECTION
REPORTS
PRODUCTION
COLLECTION /
ACCOUNTING
CUSTOMERS
LIABILITIES
DATABASE
PAYMENTS
MANAGEMENT
COLLECTION
CONCILIATION
PROCEDURES
BUDGET MONITORING
ACCOUNTANCY
ENFORCEMENT
“CUSTOMER” SERVICES
PERSONNEL
TRAINING
PUBLIC
RELATIONS
ENFORCEMENT ENFORCEMENT
CRITERIA
CASES
DEFINITION
SELECTION
To Budget Monitoring Subsystem
ENFORCEMENT ACTIVITIES
FRONT DESK MANAGEMENT
Information; Client Registration;
Individual Invoice Replacement
Notification; Inspection Visits;
Administrative/Judiciary Actions
9
INTEGRATED FINANCIAL OPERATIONS MANAGEMENT SYSTEM (IFOMS)
PROPERTY TAX
FISCAL
YEAR
0X - 0Y
MANAGEMENT
SUBSYSTEM
PAYROLL
BUDGET
MANAGEMENT
SUBSYSTEM
BUSINESS
PERMITS
MANAGEMENT
SUBSYSTEM
CASH
OFFICE
MANAGEMENT
SUBSYSTEM
PROCUREMENT
BUDGET
MONITORING
MANAGEMENT
SUBSYSTEM
SUBSYSTEM
HOUSING &
GROUND RENTS
CREDITORS
MONITORING
MANAGEMENT
SUBSYSTEM
REVENUE
ACCOUNTS
SUBSYSTEM
RECEIPTS
EXPENSE
ACCOUNTS
SANITATION
VOUCHERS
SUSPENSE
ACCOUNTS
MANAGEMENT
SUBSYSTEM
Printed
Reports
REPORTS
ACCOUNTANCY
MODULE
MODULE
Printed
Reports
MISCELLANEOUS
REVENUE
MANAGEMENT
SUBSYSTEM
To/From Other Workstations
To/From Other Workstations
On-Line
Reports
10
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
11
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
12
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
13