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Local Government Taxation Reform in Tanzania:
Poverty and Social Impact Analysis
Presentation prepared for Workshop on
Ex-ante Poverty Impact Assessment of Macroeconomic Policies,
Washington DC, March 13-16, 2006
Paul Francis, Africa Department, IMF and
Sabine Beddies, Social Development Department, World Bank
The Context
o tax reforms in 2003 and 2004
o abolition of development levy &
“nuisance taxes”
o business licence fees radically reduced
o future financing of local government in
Tanzania
o role of central versus local revenue
o creating tax-service delivery links
Poverty and Social Impact
Analysis (PSIA)
“A PSIA is an assessment of the
distributional impact of specific policy
reforms on the well-being or welfare
of different stakeholder groups, with
particular focus on the poor and
vulnerable.”
Objectives of the Tax Reform PSIA
TO EXAMINE:
o tax burden by social group, before &
after reform
o tax burden by small businesses, before &
after reform
o attitudes of stakeholders
o broader policy initiatives on fiscal policy
in the context of decentralization
Study Methods
o selection of 3 councils: Ilala, Moshi, Kilosa
o complementarity previous REPOA work
o 2 urban, due to future taxable base
o household sample survey 270 HH (90 X 3)
o business sample survey 58 businesses
o each stratified into 3 groups
o key informants in all 3 councils
Limitations & Strengths
LIMITATIONS:
o few sites, not representative
o too soon after reforms, impacts still working out
STRENGTHS:
o
o
o
o
o
good methods, triangulation of results
taxpayer views given prominence
open to new ideas for future taxation options
rapid data collection and processing
probable wider validity of stakeholder attitudes
Results (1):
Changes in Taxes Paid, by HH Income Group
2003-4 %
BetterOff
+14
Middle
Worse0ff
Ave
-2
-34
-0.8
Results (2):
Changes in tax paid, by income group
•
15
•
10
•
•
5
•
0
•
14
•
-5
•
-10
•
-15
•
-20
•
-25
•
-30
•
-35
-2
•
•
Better-Off
•
Middle Income
•
-34
Poorer
Results (3):
Changes in Taxes Paid, by Businesses
2003-4 %
Medium
Small
Micro
Ave
-11
-36
+11
-14
Results (4):
Changes in tax paid, by Business Size
20
10
+11%
0
-11%
-10
- 36%
-20
-30
-40
Medium
Small
Micro
Summary of Distributional Findings
o strong pro-poor benefits at HH level
o apparent no reduction in overall tax paid (sample
households)
o reduction in tax burden business overall
o mixed results across business sizes, small but not
micro businesses benefited most
o all results subject to:
1. early effects soon after reforms
2. respondent confusion during transition
Attitudes and perceptions households
POSITIVE:
o taxes regarded as “fair” (80%), receipts given
(97%), no bribes for services (82-95%)
o delight at abolition development levy (Kilosa)
o high awareness tax-service delivery links
o majority in favour rich paying more than poor
o positive view on more use of property taxes
o service priorities: water, health, education,
garbage removal, roads, sewerage
Attitudes and perceptions households (2)
MIXED:
o variations in quality of services for taxes paid
o lower approval for roads, water services, garbage
o higher approval for education, health
o objections to tax collection methods (mainly, it
seems, referring to pre-reform events)
o property taxes set too high after reform (Moshi)
o mixed views on councils’ performance overall
Attitudes and perceptions - Business
POSITIVE:
o taxes regarded as “fair” (81%), receipts given
(93%), no bribes for services (85-93%)
o majority (62%) in favour of more use of property
taxes, esp. if this got rid of other taxes & fees
MIXED:
o businesses more in favour of user fees for
services than HHs
o businesses have mixed views on service quality:
some claiming they receive no benefits for taxes
paid
Views of Council Officials
MIXED:
o negative on reforms – disempowered by topdown decisions
o in Moshi & Kilosa, revenue shortfalls said to have
impacted negatively on service delivery
o however, recognised problems that led to reforms
o positive views on impact on enterprise start-ups
o in favour of property taxes based on valuation
Principles of Good Taxation
o avoid distorting relative prices
o avoid discouraging start-up enterprise & business
investment
o collection costs low as share tax collected
o taxes perceived as “fair” by society
o transparency amount collected and allocation
between services
o links between tax paid and service delivered
Post-Reforms Position
o considerable progress made with respect to these
principles
o avoidance proliferation of new taxes critical
o in urban areas, property tax as means to avoid or
cancel other taxes
o in rural areas, clarity about the purposes of local
revenue and uses to which it can be put
o complementary role of user fees
Relying More on Property Taxes
“the taxation of real property is the superior route
to creating a stable, predictable and sufficient
revenue stream to provide the local governments
with the bulk of their financial needs. Of all the
options available, it is the most progressive and
assured path.”
McCluskey et al. 2003
Conclusions
o reforms were good for the poor and business
o further reductions in the revenue base of LGs should
be avoided
o further studies: follow-on TZ/UG PSIA tax modeling
work, GoT debates GSU local tax reform
recommendations
o policy dialogue on holistic approach to future LG
financing reform: service delivery expectations,
share of cost between local and central
governments, sustainable local tax regimes - all need
to be jointly determined