Tax & Accounting Blog

Adopting Holistic Measures of Tax Performance

Aumentum September 27, 2012

Implementation of the real property tax in emerging economies can be difficult if it is viewed simply as an assessment performance exercise. Careful consideration of billing and collection performance, as well as overall administrative efficiencies, will most often lead to improved procedures, structures and enhanced tax collection.

Administrative Costs vs. Revenues

Governments are charged with managing total administrative efficiency. Outdated budgeting systems may limit the ability to compare administrative expenses to collect tax revenues. In an extreme example, a country had a property assessment department with 50,000 employees who assigned property values. Over time, the department outgrew the government’s ability to raise revenues and its payroll was found to exceed total revenue collected by tens of millions of dollars. This budgetary hole was hidden because departmental revenues and expenses were never reported together. Largely because of this discrepancy, the government extended the property tax to newer and more affluent communities in order to align the revenues to the expenses. Thus, even if budgetary procedures don’t require it, it is wise to annually compare actual administrative costs and collected revenues.

Time is Money

Oftentimes, assessment offices operate on very limited budgets and therefore function inefficiently. For example, municipalities in one Balkan country adopted the practice of printing tax bills in-house only when funds were available to buy toner. As a result, taxpayers never knew when to expect tax bills and the collector was unable to systematically enforce collections because of the multiple billing dates. However, when the total costs of incremental in-house billing were eventually compared to reduced costs of outsourcing one-time printing of all bills (not to mention the ease of enforcing a single billing date), most municipalities quickly contracted printing services and in turn realized improved cash flow. This is a great example of partnering with the private sector to realize administrative savings and to benefit the public.

Monitor Tax Year Collections

In many former planned economies, performance is often based against budgeted amounts and not on total billings. Even when collections meet or exceed their targets, large gaps in collection may still exist. Several reviews of Caribbean and Balkan property tax systems found annual collection rates as low as 5% of annual billings. These low rates were hidden by windfall payments made on long-overdue bills. The property tax had effectively become a second transfer tax. In one Balkan country, enhanced tax collection reporting allowed receipts to be tracked by year of billing and allowed the tax office to separate current receipts from past-due bills. As a result, year-on-year collections steadily increased and began to approach a 75% collection rate.

The Big Picture

As governments face ever-tighter budget constraints, they may look to the real property tax for additional revenues. Tax departments will increasingly be called to justify not only what they raise but how effectively and efficiently they collect revenues. This requires not just tax equity, but increased overall efficiencies and enhanced collection effectiveness.

Alan Ferguson is a local governance professional with over 25 years experience supporting local public administration and financial management systems around the world. Through his experience in post conflict environments, he has led numerous successful local revenue enhancement efforts including drafting and implementing new legislation and improved procedures.

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