Taxing Property in Africa: A Tool for Progressive Fiscal Recovery

Andrew Wainer

Andrew Wainer is director, policy research, for Save the Children USA in Washington.

In this article, the author explains the need for — and challenges to — property taxation reform in Africa, focusing on the example of Kenya.

The Biden administration has made it abundantly clear that it intends to pay for its proposed $2.3 trillion infrastructure package by asking wealthier Americans to pony up a larger share of their wealth.¹

While most of the proposed increase would be funded by higher taxes on upper-income earners and an increase in corporate tax rates, it also includes property tax measures.²

Across developed countries, including the United States, property tax is the workhorse of local revenue generation. The International Center for Tax and Development (ICTD) finds that property tax amounts to about 2.2 percent of GDP in advanced economy countries.³ Importantly — in terms of the Biden administration’s economic agenda — property tax tends to be progressive, with most of it generated by society’s wealthier economic strata.

Taxing Property in Africa

Just as the Biden administration is seeking to boost American health, education, and economic growth through the American Jobs Plan, African countries are searching for how to finance their own recoveries from the COVID-19 pandemic. In sub-Saharan Africa,⁴ employment fell by about 8.5 percent in 2020 and more than 32 million people fell into poverty.

While governments globally have spent $16 trillion⁵ in response to the COVID-19 pandemic — the United States alone has spent about $4 trillion⁶ — African countries face more limited fiscal space in part because of debt loads that were already too large before the pandemic hit. Even with debt relief⁷ from the G-20 and other creditor nations, tax and budget policy⁸ will be central to supporting African nations’ ability to rebound from the pandemic, fund basic services, and support citizens who have been cast into poverty.

If African governments are seeking progressive taxation to support their recovery, then property tax is a good place to focus. It is a revenue source with major potential for improvement. Research has found that African countries undertax property, losing out on a source of local, progressively raised, development revenue. For example, the ICTD estimates that on average, property tax accounts for just 0.38 percent of GDP in Africa,⁹ a small fraction of the amount collected in developed economies.

In Kenya — the economic hub of East Africa — this is particularly true. Between 2015 and 2019 Kenya boasted one of the fastest-growing economies in Africa, expanding at an average of 5.7 percent.¹⁰ But even during this period of robust economic growth, Kenya ran a fiscal deficit because of a shortfall in revenue generation.¹¹

Analysis shows that much of this shortfall was the result of a lack of local revenue generation¹² by Kenya’s 47 counties — in particular a lack of coherent property taxes. This means that despite devolution, county governments remain highly dependent on transfers from the central government, with counties raising an average of only about 12 percent¹³ of their revenue locally. The rest comes from donors and national transfers.

Analysis by Adam Smith International¹⁴ on behalf of the World Bank found local revenue gaps ranging between 35 and 94 percent. According to this analysis, Kenyan counties are falling short in terms of local revenue generation to the tune of up to more than $1.5 billion,¹⁵ about 2.6 percent of GDP. It is financing that could be crucial in terms of helping citizens affected by the pandemic.

Property tax has the largest potential¹⁶ for closing Kenya’s local revenue gap. The Adam Smith International report has a variety of property tax recommendations for Kenyan counties including:

• simplifying valuation methods and more frequent updating;

• letting counties set their own rates; and

• strengthening compliance.

The Kenya Case

For more than a decade Save the Children has worked on subnational budget and tax in Kenya. In recent years, we have focused our tax work in Wajir and Bungoma counties supporting citizen engagement¹⁷ in subnational tax policy and administration through the Addis Tax Initiative framework.

Historically, both counties — like all counties in Kenya — relied heavily on transfers from the national treasury to sustain their operations. What little percentage of local revenue collected has traditionally relied on regressive consumption taxes and fees from small-scale traders. Property tax, on the other hand, which is more likely to affect upper-income residents, has been negligible. This means that subnational revenue falls disproportionately on lower-income households. Property tax has the potential to create a more progressive and gender-responsive subnational tax base because men are more likely to own property than women in these jurisdictions.

Political challenges are perhaps the primary block to property taxes because local elites can stymie efforts to broaden the tax base. Within this context, Save the Children has been working with community organizations and the private sector in Bungoma County to ensure that citizens’ voices are being heard in the formulation of local revenue generation through advocacy on county fiscal strategy papers and county integrated development plans, among other local fiscal policy structures.

Save the Children has also facilitated discussion among property owners, business leaders, and county government leaders on implementing property tax to boost local revenue and make county tax policies more progressive. In addition to political challenges, property taxes also face technical challenges, but we’ve started awareness-raising sessions with the Bungoma Chamber of Commerce on the importance of tax revenue for delivering local services. In Wajir, a marginalized county bordering Somalia, progress has been slower, but we’ve helped establish dialogue between the county department of revenue and local business interests.

In addition to Bungoma and Wajir counties, Save the Children recently conducted in-depth research on subnational tax and budgeting in Makueni and Nyeri counties. The resulting report¹⁸ examined the challenges — political and technical — to implementing property tax as a source for sustainable finance and COVID-19 pandemic recovery.

Kenya is a particularly illustrative case because despite having bustling metropolitan areas with growing economies such as Nairobi and Mombasa, the local property tax revenue remains woefully low.

Taxing Elites

A major challenge to property tax in Kenya is the political disincentive to raise taxes on the powerful local interests who are more likely to own property. “County governors are especially risk averse when it comes to taxation, especially since 95 percent or so of their budget comes as a grant [from the national government] that they don’t have to pester their local taxpayers about,” said Jamie Boex, senior fellow at Duke University’s Center for International Development.

In Save the Children’s own county-level work throughout Kenya, we have encountered the challenge of political patronage and county governors fearing a loss of political support if property taxation is enforced. In some cases, the threat of property taxes to county leaders strikes even closer to home, with some governors on lists of property owners who are not up to date on their tax payments, making the political disincentive to enforce property tax particularly stark.

This is why broadly integrating the voices of citizens into tax policy discussions is important. Otherwise, subnational fiscal policies can be captured by local elites, depriving counties of revenue that could be spent educating and sustaining the health of children. Save the Children helps ensure broader citizen input into tax policy through its long-standing child rights networks in Bungoma and Wajir counties. There are growing efforts elsewhere in Kenya.

County-level government staff are increasingly aware of the importance and challenges of citizen engagement and education in ensuring fair taxation and compliance. Connecting taxes to local services, including services for children, is key. “It’s important that [citizens] see how taxes are used so people know that taxes are not lost to corruption,” said Francis Kirira, Nyeri County chief officer of economic planning.¹⁹

Sometimes technical enhancements lead to reductions in corruption and affect fiscal politics. To reduce corruption, Nyeri County has digitized its revenue collection. It was previously done by hand. Nelson Maina, Nyeri fiscal advocacy civil society leader, said that the modernization of the county’s revenue system is reducing “leakage,” resulting in more tax income for local government. “We are seeing an upsurge in own-source revenue, about a million dollars by year increase,” Maina said. “And it’s being channeled toward health, part of it, so there’s an improvement in the health budget.”

Technical Challenges

The legal, policy, and technical challenges to property tax start with Kenya’s property tax legal framework. Legally, counties are entitled to collect “land rates,” but taxes on sales of property fall under the jurisdiction of the national government. The World Bank recommends a new national legal framework for property tax that includes “counties setting their own rates, bands and discounts in relation to their fiscal objectives.”²⁰

Technical challenges have affected Makueni County’s local revenue generation. Despite a partnership with the World Bank on participatory budgeting, on the revenue side Makueni has lagged, with only about 4 percent of total revenue generated at the county level, according to Eliud Ngela, county chief officer of planning, budgeting, and revenue.

Ngela said he is working to increase the county’s total income and property tax is at the top of the list for reform, but challenges remain. “Theoretically . . . that [property tax] is an area that is supposed to be worth a lot of money,” he said. “But it also means a lot of effort in terms of the [property] recording. . . . It’s a labor-intensive activity.”²¹

Ngela said the technical challenges to collecting property tax result in most counties falling short despite the desire to raise more local revenue. Nevertheless, Makueni County is working through the challenges. “We have done our valuation roll,” he said. “Initially we were levying the properties according to the size, [but] once you have the valuation rolls, you levy according to the value of the property, which is one of the best practices in property taxation.”

The county is working with a consultant — a land value expert — to verify property ownership records. He said all this foundational work on property tax is part of the county’s goal of locally raising 10 percent of revenue.

The Role for Donors

International donors including the U.S. Agency for International Development, the Millennium Challenge Corp., and the U.S. Treasury Department’s Office of Technical Assistance play an important role in helping lower- and middle-income countries achieve financial self-reliance through building the capacity of revenue authorities at the subnational and national levels. But too often this includes only government-to-government technical assistance, improving information technology systems, and other more technical enhancements.

While these are undoubtedly needed, donors can also play a role enhancing local governance by drawing in civil society actors and the private sector as part of their efforts to make subnational tax more effective. Donors such as the Norwegian Agency for Development Cooperation and other Scandinavian development agencies have led the way integrating civil society outreach as part of their overseas technical assistance for tax policy and administration reform.

USAID and others donors, including the Bill and Melinda Gates Foundation and the Transparency and Accountability Initiative, are supporting research to build an evidence base on how civil society in low- and middle-income countries can best contribute to tax policy so that it represents the voice of society rather than an entrenched elite. Other groups that are leading research on this issue include ID Insight and the International Budget Partnership.

This is a hopeful direction for USAID and U.S. development agencies. Generally, it could help ensure progressive tax policy and foster inclusive and sustained finance for development. As USAID and other donors pursue this agenda, helping developing nations reform property tax should be at the top of their list.