ANALYSIS: How counties can raise revenues without upsetting the people

Narok, Machakos, Mombasa, Nairobi, Kericho and Nakuru are among some of the few counties that have reported significant amounts of locally generated revenue. One of the main reasons for this is that a number of counties do not enjoy the kind of economic activity that is easy to profitably tax. Another reason is that counties have not yet won the trust and respect of their people – in some cases because they have not even tried.

So far, the counties have made a number of mistakes in their attempts to tax. Too many county governments have raised taxes before persuading people that the taxes are needed. Almost every day there is talk of another county thinking up ways to impose a new tax, or increasing an established one, from chicken rearing to planting trees and back again.

Kenyans are understandably suspicious at the new range of levies. After all, local governments in Kenya have a history of corruption, inefficiency and incompetency. We have therefore seen protests from the public and business community against “double taxation” in cases where county–level taxes appear to duplicate national-level ones, such as the plans by Mombasa County Assembly to introduce a new charge on port cargo.

To address these challenges, the National Treasury on behalf of the Intergovermental Budget and Economic Council (IEBC) in collaboration with the United Nations Development Programme (UNDP), International Monetary Fund (IMF), and World Bank organized a Natioanl Conference on County Own Source Revenue Enhancement in Naivasha.

The conference was opened by Deputy President Mr William Ruto. Mr Ruto said tremendous progress has been made in the implementation of the constitution particularly on devolution and the transformation of the country through the 47 counties.

Mr Ruto praised the counties, saying they are competitive and results oriented, promoted closer supervision, accountability and participation. He added that counties have eliminated the phenomenon of ghost workers and other concerns at the grassroots level which had remained unaddressed in the past.

The Deputy President said the provision of health services are being provided in the counties effectively and will be strengthened according to the constitution. “Health is at the right place, the county governments and will be strengthened according to the constitution,” said Mr Ruto.

He noted that the discussions on enhancement of revenue collection at the county level is in the right direction and borrowing in the counties should be managed very well.

The Deputy President said cash transfers from the national to the county governments will be streamlined and he urged counties to learn more from South Africa case so as to improve their revenue collection and stop over-reliance on national government resources.

The National Treasury Cabinet Secretary Mr Henry Rotich, commended development partners support in strengthening county taxation, constitutional implementation and revenue collection.

Mr Rotich said the National Treasury will continue to provide capacity building to the counties especially training on financial management.

Dr Kamau Thugge, the National Treasury Principal Secretary, said citizens engagement and public participation will be improved to accelerate good working relations and minimize conflicts in county taxation and revenue collection, legislation and business.

Dr Thugge said the national and county governments are in the right economic path. He said we need to do more on enhancement of business activities, investment, revenue collection and generation and then focus more on development and low cost energy among others.

Other experts who made presentations on county taxation, revenue generation and governance were governors Mr Wycliffe Oparanya (Kakamega), Professor Paul Chepkwony (Kericho), Mr Kinuthia Mbugua (Nakuru) and Mr Daniel Waithaka (Nyandarua).

Others were Prof. William McCluskey, African Tax Institute (Pretoria), Prof. Paul M. Syagga, University of Nairobi, Prof. David Solomon, African Tax Institute (Pretoria), Mr Micah Cheserem, Chair, Commission on Revenue Allocation, Dr Geoffrey Mwau, Director General, Budget, Fiscal and Economic Affairs, the National Treasury, Mr Martin Grote, Senior Economist, Fiscal Affairs Department, IMF, Associate Prof. Nic Cheeseman, University of Oxford, and Armando Morales, Resident Representative, IMF.

Prof. Cheeseman presented an indepth paper on Citizen Engagement and Public Participation. Other topical areas discussed indepth in the conference were property taxation, single business permit, double charges/taxation, other taxes, fees and charges collected by counties.

Prof Cheeseman said counties often complain that the public does not appreciate how many services they are responsible for providing, with implication being that if there were higher awareness people would be more willing to pay tax. This is a fair point, and one that has been demonstrated by research on the Lagos State Government, which has managed to simultaneously increase revenues and popular support over the last decade.

However, one of the reasons for the low level of public awareness is that county governments have not told them. To date, remarkably little public relations work has been carried out by the counties to explain to the public what their jobs are, and to make the case for bigger revenue collection.

For example, very few counties have targeted “easy wins” that could be achieved relatively quickly to demonstrate what county governments can do for their communities. Similarly, almost no counties have developed a clear and effective branch so that the people can see which services are being provided at the county level. It is therefore hardly surprising that Kenyans are reluctant to part with their hard earned cash.

Mr Armando Morales of IMF said there are more revenue generation opportunities in the counties. What is required is public participation, policy debate, resource mobilization, investment and citizens support in the whole process of resources devolution.

Kakamega Governor Mr Oparanya said taxes imposition and charges for provision of services are constitutional obligations. He called for development of a better framework to come up with a legislation to guide collection of taxes and revenue, enhance public participation in budget making and legislation.

Although counties have made a slow start, all is not lost. We are only two years in the devolution experiment and there is ample time to turn things around – but this change has to begin now.

The good news is that Kenya has a long history of local cooperation to provide development. Harambee spirit harnessed local talents and spirits to meet development challenges. What Kenyan counties need to do is to harness the original sentiment that underpinned harambee: To bring people from the community together to identify local priorities, and to work together to decide how they should be financed. Doing this will require counties to engage in far more public participation and communication – a topic for a future analysis.

Property taxes are one of the main sources of revenue available to the government. But it is easy to see why not everyone understands this point. The fourth schedule of the constitution provides for the ‘general principles of land planning’ to be organised at the national level. Indeed, Section 66 explains this power unequivocally: “The state may regulate the use of any land, or any interest in or right over any land.”

A little acknowledgment caveat, however, is that the constitution’s fourth schedule also allows counties to engage in ‘land survey and mapping; and section 209 (3) (a) explicitly gives developed governments the power to impose taxes. What the constitution therefore put in place was therefore a subtle difference between political land management (part of the national debate), and economic questions of the setting and collecting of property taxes (a legal right of county governments).

Why have counties not made better use of this provision to raise revenue? First, it is important to recognise that we lack good data on this question – the office of the Controller of Budget’s report for the first full year of devolved governments’ (2013/14) provided no information on how much property tax was collected by counties.

This means we are not in a position to identify bad cases that can be used to understand where things are going wrong, or good cases that can be used to see how they can be put right.

Indeed, successful property tax collection is all about clear and transparent valuations – this is the only way that counties will get the revenue they are due without losing public support. For example, property tax in Nairobi is paid only according to the land held, and the last valuation of the land was conducted in 1980. As a result, the Nairobi County Government has had to levy a 34 per cent tax rate as a way of generating revenue from land that is in some cases valued at less than 10 per cent of its worth.

In turn, this appears to be illegitimate to people – but the county would be able to conduct an effective revaluation. As it stands, the county will have to raise the tax rate every year to compensate for the fact that every increasing property values are not reflected in official calculations.

Land revaluation is so hard because it turns out to be a rather complex legal process that needs to be simplified. Another is that influential landholders have raised political and legal barriers because they know they are paying less tax than they should be, and want to sustain this situation for as long as possible. Such behaviour is not only self-serving and unfair, but goes against the spirit of the constitution and must be challenged.

Despite some teething problems, the vast majority of Kenyans remain supportive of devolution and funds in the counties. However, the people are suspicious about levying higher taxes if they cannot prove that they are providing more and better services. Counties need to respond to this by increasing the quality and quantity of public participation and communication.

At the same time, we must ensure that some of the country’s economic elite does not use public skepticism about county – level taxation as a cover to avoid paying taxes. Counties have the constitutional right to collect property taxes, and to do this effectively they need to be able to re-value land. If vested economic and political interests prevent this from happening, it may undermine the long-term viability of devolution itself.