The political cost of local revenue mobilisation: Decentralisation of the property tax in Indonesia

Transcription

1 The political cost of local revenue mobilisation: Decentralisation of the property tax in Indonesia 5 th International Workshop on Domestic Revenue Mobilisation Implementing the 2030 Agenda the role of subnational taxation Bonn, September 2016 Christian von Haldenwang

2 Setting the stage (I) International organisations (OECD, IMF) identify property taxes as an important yet underused source of public revenue for developing countries Growing interest with regard to empirical research in developing countries Main research question: What influence do political costs and capacity constraints have on property taxation in Indonesia?

3 Setting the stage (II) Indonesia: a low tax performer Vietnam Thailand Laos Indonesia Philippines Malaysia Source: Haldenwang and Ivanyna (2012)

4 Setting the stage (III) with low levels of revenue decentralisation and little income from property tax 2012 Province Transfers 6% Adjustment & Special Autonomy Fund 7% Other Revenue 1% Local Taxes 5% Local User Charges 2% Other Local Own Revenues 3% Property tax: ca. 2.2% of local revenue Special Allocation Fund (DAK) 6% Revenuesharing Fund (DBH) 12% General Allocation Fund (DAU) 58% ca. 0.6% of total public revenue

5 Setting the stage (IV) : Transfer of the Rural and Urban Land and Building Tax to local governments in Indonesia (Law 28 of 2009) Incremental process: Many cities and most districts started collection only in January No local collection yet Total No. of local governments Objectives: (i) raise more revenue from this source and (ii) increase the fiscal autonomy of local governments Initial evidence points to more dynamic tax collection in the year after decentralisation and to comparatively low growth rates of property tax revenues in the year before decentralisation

6 Research design Case Study Selection: One pilot study, three pairs of cases using the most similar method Field research from February to April 2014 (11 weeks) > 70 semi-structured interviews Co-operation with the Indonesian Ministry of Finance Rokan Hilir Tanjung Pinang Rokan Hulu Banjarmasin Depok Denpasar Lombok Barat

7 Findings Three key findings: Revenue potential from property taxes not fully tapped Instruments available to local decision-makers not fully used out of political considerations Capacity restrictions exist, but not the main bottleneck

8 Findings (I) Three key findings: Revenue potential from property taxes not fully tapped Instruments available to local decision-makers not fully used out of political considerations Capacity restrictions exist, but not the main bottleneck

9 Findings (I) Pattern emerging from the seven case studies: None of the seven governments (and very few of the other local governments in Indonesia) has raised the tax rate to its legal maximum of 0.3% of the assessed property value Few local governments have been engaged in active arrears collection and adjustment of property values to reflect real market values Data cleaning and linking other services to tax payments used more frequently Qualitative evidence points to an underuse of tax potential

10 Findings (I) Instrument Mechanisms Use of approach 1 Tax policy: Setting tax rates and granting exemptions Local council regulation (municipal by-law) low 2 Coverage: Data cleaning Complaints management, visits on site, improving IT systems high 3a Valuation: Area-based assessments Adjustment of zone limits and / or values (zone-specific or across-the-board), adjustment of construction values medium 3b Valuation: Value-based assessments Valuation of individual properties low 4a Collection: Promoting voluntary compliance Awareness-raising and public education campaigns, rewards for timely payments, improving taxpayer services low 4b Collection: Raising the stakes for non-compliance Overdue payment letters, linking other services to tax payments, visits on site medium 4c Collection: Active arrears collection Debt notifications, linking other services to debt payments, improving IT systems, fines, seizure of property low

11 Findings (II) Three key findings: Revenue potential from property taxes not fully tapped Instruments available to local decision-makers not fully used out of political considerations Capacity restrictions exist, but not the main bottleneck

12 Findings (II) Political Costs = expected loss of political support Indicators for the assessment of political costs: Number of voters: The larger the share of voters affected by a given tax policy, the larger the potential for increased opposition Political influence: Social, political and economic resources controlled by affected taxpayers shape their reactions to adverse reforms Impact of the measure: The higher and the more immediate the impact of a policy on the disposable income of taxpayers, the higher the level of expected opposition Visibility of the measure: Individual administrative acts are normally less visible than legislative processes involving many stakeholders over an extended period of time

13 Findings (II) 1 Instrument No. of voters Political influence Impact Visibility Total political cost Use of approach Tax policy: Setting tax rates, granting exemptions + + +/- + high low 2 Coverage: Data cleaning - - +/- - low high 3a 3b 4a 4b 4c Valuation: Area-based assessments +/- +/- +/- +/- medium medium Valuation: Value-based assessments medium low Collection: Promoting voluntary compliance medium low Collection: Raising the stakes for non-compliance medium medium Collection: Active arrears collection medium low

14 Findings (III) Three key findings: Revenue potential from property taxes not fully tapped Instruments available to local decision-makers not fully used out of political considerations Capacity restrictions exist, but not the main bottleneck

15 Findings (III) Administrative capacity Staff Number of public employees engaged in tax collection Technical capability and capacity to perform specific functions Infrastructure Physical infrastructure: buildings, cars, IT systems, registers, payment points Financial infrastructure and investment capacities Capacity development Training facilities and support by central government and donors

16 Findings (III) 1 Instrument Tax policy: Setting tax rates, granting exemptions No. of voters Political influence Impact Visibility Total political cost Required admin. capacity Use of approach + + +/- + high low low 2 Coverage: Data cleaning - - +/- - low medium high 3a 3b 4a 4b 4c Valuation: Area-based assessments +/- +/- +/- +/- medium medium medium Valuation: Value-based assessments medium high low Collection: Promoting voluntary compliance medium low low Collection: Raising the stakes for noncompliance medium low medium Collection: Active arrears collection medium high low

17 Findings (III) Why are capacity restrictions not a key bottleneck? Basic Allocation: part of the transfer scheme, covers most of local expenditure on human resources Subcontracting: Some local governments hire external consultants to provide services with higher capacity requirements (value assessments, data management) Fiscal space: In recent years, most cities and districts have experienced sustained growth in transfers and own revenue Support: Some support (above all, training) provided by central government, even though in a rather uniform fashion

18 To sum up Initial evidence suggests that Indonesia as a whole collects more property tax after decentralisation But evidence from the case studies clearly indicates that local governments do not use the competences they have to their fullest potential Most importantly, local governments avoid using measures associated with higher political costs even if these measures would lead to immediate revenue gains

19 Thank you!

20 Annex: Overview case study selection Hypotheses Variable of interest Factors of control Cases (A) Pilot Study No variable of interest Innovation, high performer City Depok (B) Political Costs Share of transfers in total income Local GDP per capita Start date of tax collection: 2013 Population density City Denpasar City Banjarmasin (C) Capacity Restrictions Local GDP per capita Share of transfer in total income Start date of tax collection: 2013 Population density District Lombok Barat City Tanjung Pinang (D) Plantations Local GDP per capita Additional factor of control: High share of palm oil activities (more than 25% of palm oil cultivation area in total area) District Rokan Hulu District Rokan Hilir

21 Annex: Indicators for case study selection Start date of tax collection Local GDP per capita (in Mio. IDR) Share of transfer in total income (in per cent) Population density (inhabitants per km²) Palm oil land area to total land mass (in per cent) City Depok City Denpasar City Banjarmasin District Lombok Barat City Tanjung Pinang District Rokan Hulu District Rokan Hilir , , , , Note: Cell shaded grey = variable of interest 21

22 Findings (I) Initial evidence points to more dynamic tax collection in the year after decentralisation and to comparatively low growth rates of property tax revenues in the year before decentralisation Median (1 LG) (17 LG) (104 LG) (6 LG)* (334 LG) No local regulation (35 LG) * Data from six local governments : Banjarmasin, Denpasar, Lombok Barat, Rokan Hilir, Rokan Hulu, Tanjung Pinang = Decentralised property tax collection