Enhancing County Governments Own Source Revenue
The power to raise revenue both at the national and county government is enshrined in the 2010 Constitution of Kenya. The establishment of a two-tier system of government has seen fiscal decentralization as spelt out in Schedule IV of the Constitution. The Constitution defines the responsibilities of national and county governments in revenue collection and in the sharing of revenue collected by the national government in its role to redistribute national resources and maintain economic stability.
The Constitution authorizes the national government to impose income tax, value added tax, custom duties and excise taxes. On the other hand, county governments are explicitly assigned the power to impose such taxes as property rates and entertainment taxes, while any other type of taxes may only be imposed by county government with the clear sanction of Parliament. Additional sources of own revenue for the counties are user fees such as parking fees, market fees, game park fees, house rents, infrastructure maintenance fees, water and sewerage fees and trade licenses also known as “Single Business Permit” (SBP) fees. Furthermore, both levels of government are empowered to impose charges for the services they provide.
In seeking to generate adequate revenue to sustain their administrative obligations to the citizens, county governments must avoid compromising economic activity that generates the same revenue. When the first county governments took office in 2013, various revenue measures were imposed, with some eliciting varied reactions concerning their formulation, application, and sustainability as they were viewed to be punitive, with the potential to stifle economic activity.
For instance, Kwale County Government, through its County Finance Act, imposed a mining levy of Ksh 5,000 on titanium per ton, which was rejected by the national government, citing mining as a national government function. Mining firms remit 2.5 per cent of their revenues to the national government as royalties.
Similar attempts by Kakamega County to raise revenue by proposing levies on domestic animal owners, Ksh 5,000 per horse, Ksh 1,000 for every dog, Ksh 500 per livestock and Ksh 20 per chicken, were rejected vehemently by the locals. In central Kenya, Kiambu County Government’s proposal to tax residence burial fees between Ksh 2,500 to Ksh 4,500, depending on age, was annulled by the court after being challenged on the basis of lack of public participation as envisaged in the Constitution. It was also argued that the intent would have resulted in more burden to the poor. Introduction of levies (Ksh 10,000) on open air crusades in Nyeri County was equally met with resistance from the stakeholders, putting in question the participatory approach adopted by the county governments in introducing these levies.
County governments enjoy legislative authority in imposing property rates based on area rating/size, site value rate, or a site value plus improvement rate. Possessing an immobile tax base, property rates are suitable for county governments as they have an automatic localization. Therefore, with effective tax administration, property rates have the potential to guarantee county governments a steady stream of revenue to supplement budgetary allocations from the national government.
For example, before the establishment of a devolved system of government, revenue generated from property rates contributed an annual average of 22.49 per cent of total own source revenue, equivalent to 0.15 per cent of GDP. In the first three years of devolution, county governments raised 14 per cent of their own source revenue from property rates, equivalent to 0.08 per cent of GDP. Globally, property taxes typically account for 40 to 80 per cent of own-source revenues for county governments or 0.5-3.0 per cent of GDP. For instance, South Africa’s property tax revenue was estimated at 1.4 per cent of GDP in 2014.
Several factors, though, could curtail exploiting the full potential of revenue collection from property rates. These include the complexity in property registration, transfer and valuation, and the lack of buoyancy as property rates are not adjusted for inflation and expenditure costs. Similarly, delays in passing legislation underpinning property taxes, lags in updating valuation rolls, ineffective tax administration as well as the costly and difficult legal process to prosecute property rate defaulters could hinder exploiting property rate potential.
To improve efficiency in administration of property tax, the Government, using the National Land Information Management System, has embarked on completing the land registration process and digitizing paper records within the land registries. This is viewed as a fundamental building block in gathering, collating and making available key data on land. The county governments are also engaging the Kenya Revenue Authority (KRA) in collecting arrears on property taxes.
Entertainment taxes include taxes on admission to theaters, movies, nightclubs, amusement parks, festivals, music shows, casinos, restaurants and hotels, television services, radio broadcasting services, and also betting and other forms of gambling. In 2017, the Government raised taxes for betting, lottery, gaming and competition from 7.5 per cent, 5 per cent, 12 per cent and 15 per cent, respectively, to a uniform tax rate of 35 per cent for all categories. However, the administration of entertainment taxes in Kenya lacks a clear legislative framework to separate the role of the county and national government. In South Africa, for example, collection of entertainment tax is entirely a function of the provincial administration.
Whereas a tax is imposed for the common benefit conferred by the Government on all tax payers, fee payment is made for some special benefit enjoyed by an individual payee. User fees are imposed and collected with a narrow compliance gap as they are based on the benefit principle. They are aimed at encouraging efficient use of resources and not necessarily raising revenue. However, county governments impose them primarily to raise revenue, without essential anchorage to policy and legislation or linking with service provision, which reduces compliance. Compliance is also a problem when fees and charges are not commensurate with services. For example, water charges are levied even when there is no guarantee of uninterrupted supply of clean water. Parking fees are often charged in the absence of clearly designated or secure parking spaces. Outdated fees schedule and lack of proper information on structure of fees/charges also inhibit implementation of some user fees.
For county governments to fully exploit the potential for enhancing own source revenue, there is need to develop appropriate legislative and policy frameworks that are inclusive in anchoring the taxes, fees and charges. The frameworks should be simple to induce efficiency in mapping out tax payers and revenue generating areas to ensure revenue certainty. This can be achieved through effective public participation during preparation of fiscal policies and financial bills as envisioned in the Constitution, to enhance compliance and avoid litigation.
Automation of revenue collection will also serve to reduce revenue leakages and evasion. In addition, engaging the expertise of KRA would lower tax administration costs, enhance tax revenue as well as ensure enforcement of uniform standards and compilation of reliable data on county tax revenues.
County governments can widen the tax base for property rates through digitalization of all land parcels to facilitate updating of valuation rolls to reflect current market prices. They can also explore provisioning of utilities such as clean water; refuse collection, improved health care services, and agricultural extension services as an alternative source of revenue. Moreover, those endowed with natural resources can lobby for a fair share of royalties paid to national government as provided for in the Mining Bill of 2014. Such initiatives would increase local revenues without unduly increasing the tax burden on local businesses and residents.
Author: Diana Lukalo, Young Professional, Trade and Foreign Policy Division, KIPPRA
Photo: Courtesy of Kenya Broadcasting Corporation