Can Rural Property Tax Generate Revenue?

Abstract

There is agreement in policy circles that governments in Sub-Saharan Africa–and governments of developing countries more generally–need to increase their share of “own source” revenue. How should governments in Sub-Saharan Africa do this? This report explores the potential for local governments to raise revenue through property taxation in rural areas.

In many contexts, the primary variable cost associated with rural tax collection is the tax collector’s transportation costs. Using property taxation in rural Sierra Leone (Kono District) as my case, I start by measuring village-level collection costs, obtaining quotes from motorbike drivers on the travel cost between a tax collector’s residence and the set of villages for which a given collector is responsible. I estimate village level potential revenue with data on the number and type of building structures in each village. I then use simulation exercises to investigate net potential revenue under different assumptions regarding (1) compliance rates; (2) collector travel behavior; (3) whether collectors are compensated via a pay-for-performance model (i.e., tax farming) or with a flat salary.

I find that property taxation in poor, sparsely populated, rural areas can generate positive net revenues. While these gains are modest–maximum net revenue under full compliance is $94,171 in my baseline model–they can provide a meaningful source of local government revenue in a context where incomes are near the bottom of the global distribution and where there are potentially large returns to government spending. Simulations also illuminate several characteristics of rural taxation that have policy implications. First, to increase net revenue, policymakers should prioritize increasing compliance over reducing collection costs. Second, I show that much of the revenue generated from rural taxation is likely to come from a small subset of the total villages, both because the tax base is concentrated and because collectors have less incentive to visit small villages. Third, I highlight several trade-offs between salary-based and pay-for-performance (PFP) models of tax collector compensation. I conclude by situating these results in a policymakers broader calculus for taxing rural areas, where efficiently extracting resources may be only one of several motivations for taxation.