Financing NEEDS With Tax Revenues: Strategies That Make Sense


This Day

June 26, 2004


Financing NEEDS With Tax Revenues: Strategies That Make Sense
By Ikechi Okorie


As part of reform efforts, developing countries have been under increasing pressure to decentralise their structures of governance. However, for political decentralisation to make sense, local autonomy must be hinged upon the ability to generate own revenues for the provision of the level and quality of services demanded by residents and businesses.

In his Decentralisation of the Socialist State, Robert Bird argues that “to make local government meaningful, sub-national governments need adequate locally controlled revenues”.

Inevitably, property tax has been the most important local tax in the developing world, contributing about 40 per cent of local government finance and 2 percent of total government revenues. Therefore, strategies to make property tax a more stable and buoyant source of local revenues is key to sustained local autonomy. Interestingly, improving property tax revenues has been highlighted as a key financing strategy under Nigeria’s National Economic Empowerment and Development Strategy (NEEDS). In fact, the NEEDS draft document specifically identifies tax reforms as a key strategy for meeting the financing requirements of the programme. By emphasising the improvement in tax collection as a major means of achieving this goal, the tax reforms under NEEDS can understandably be dubbed a “collection-led” tax reform strategy.

A critical review of the tax reforms strategy embedded in the NEEDS draft document highlights two central themes: strengthening the tax collection mechanism, especially in the areas of oil and gas, personal and property taxes; and increase in tax rates.

In sum, tax reform under NEEDS is based on modifying tax rates and improving collection. That these are standard procedures of enhancing tax revenues, which in turn, is a function of the statutory tax rates, the tax base, and extent of tax coverage, valuation ratios and finally collection rates, is not in doubt.

However, what is debatable is whether improvement in collection can indeed provide the kind of quantum increase in tax revenues required to fund NEEDS.

Fortunately, collection-led tax reforms have been tried in many developing countries and the experiences of these countries can provide great learning points for the implementers of the programme. The experience of Indonesia readily comes to mind.

Aptly dubbed a “collection-led” strategy, the Indonesian experience offers important learning points for most developing countries and certainly Nigeria. First, not only is Indonesia a developing country, it also is oil-producing and characterised by multi-ethnic and linguistic cleavages as Nigeria. More importantly, Indonesia’s reform effort was a twin-strategy of not only shoring up revenues of sub-national governments but also strengthening their autonomy while promoting sustainable decentralisation and fiscal responsibility. In many regards, therefore, we can argue that the Indonesian experience is the closest we can get to ours even though one must remain cautious in making broad generalisations.

From my experience working on the Indonesian collection-led tax reform model, I can emphatically assert that such a strategy would not meet the desired objectives as contained within NEEDS.

The collection-led property tax reform strategy was considered a success story in Indonesia as tax-related collections accounted for 2.9 per cent; 3.3 per cent and 4.91 per cent of domestic, tax and non-oil tax revenues. However, while this effort was supported by such mechanisms as the emphasis on delinquent accounts with the ancillary need for strong and workable enforcement procedures, the results cannot be wholly attributable to improved collection efficiency.

In fact, during the reform period 1990/91-2000, collection rates actually stagnated at 79.6 per cent while coverage rates recorded an increase of 55 per cent. Thus, if collection rates stagnated and coverage ratios increased by 55 per cent, to what can this increase be attributed to?

The Indonesian experience points to two focal points: First, the reforms focused on urban properties. The idea was to maximise revenue generation given that (1) urban properties contributed twice more to the tax base than rural properties; (2) urban properties accounted for more than four times tax receipts than did rural properties. Secondly, the reform targeted the mining and forestry sub-sectors of the economy. This strategy was not only necessary, but also very successful for a couple of reasons.

(1) These sectors accounted for a substantial part of urban properties; (2) mining companies all held accounts with the Bank of Indonesia (BOI), thereby making collection easy via direct debit of these accounts for assessed property values by the Ministry of Finance; (3) the non-existence of an efficient judicial and legal system necessary to ensure effective enforcement and compliance.

Can this strategy be applicable to the Nigerian case? The initial conditions appear similar. After all, we are all witnesses to the inability of the legal process to fairly adjudicate matters and protect individual and property rights. But what is however lacking in our case is the existence of a detailed fiscal cadastre. Only with a detailed and periodically updated cadastre can we adequately ensure that all taxable properties are included in the tax rolls. A regularly updated fiscal cadastre can also facilitate the monitoring of property values. It is informative at this stage to highlight the fact that concentrating on collection without adequate attention to coverage and valuation would not result in any meaningful improvement in property tax revenues.

If the designers of the NEEDS document have done their homework – which I believe is the case – then they must realise that financing the programme in part through tax revenues via increases in tax rates and a focus on collection would certainly not do. Why? There hasn’t been a case in which increases in collection ratios matched by stagnant valuation ratios and low coverage ratios have led to sustainable increases in tax revenues. What normally occurs is a rate-driven tax revenue increase. It is my belief that this government would not want to adopt the socially-controversial rate-driven strategy, given the recurring tax burdens borne by the citizenry in the name of economic reforms.

Where focus on collection has led to increases in tax revenues, as the Indonesian experience suggests, it has been characterised by a sophisticated strategy that highlights a deep understanding of the economy and a focus on the most buoyant sectors. More importantly, the reform effort has followed a defined objective while its success has been assessed by the ability to meet stated objectives.

A valid question at this time would be what are the objectives of the tax reform effort under NEEDS? Are we particularly interested in generating revenues to finance NEEDS? Would this narrow focus on collection result in sustainable tax receipts over the life of the programme: Is this strategy consistent with the preachments and sermonisations on decentralisation of governance and sustained autonomy at the local levels of government? These questions are salient in other not to create conflicting objectives and to give direction to the NEEDS programme whilst simultaneously providing indicators for assessing performance.

Many tax experts agree with Jay Rosengard’s six guidelines for tax reforms in developing countries. Interestingly, guideline 1 focuses on the purpose of reform and the need to ensure that reforms guarantee long-term generation of adequate and discretionary revenues. Notwithstanding that the NEEDS document is still in its “draft and for discussion purposes only”, one cannot but wonder how its designers intend to meet Rosengard’s “long term sustainability test” with a narrowly focused tax reform strategy.

Given the inadequacies evident in current NEED-induced tax reform plan, this paper hopes to contribute to the “on-going” consultations on strategies by proposing that greater attention be given to updating the fiscal cadastre and improving the valuation rolls as an essential step in guaranteeing sustainable revenues in the long term. Thus far, the efforts by the FCT Minister, Malam Nasir El’Rufai in forcing all property owners to register are surely a step in this direction. Other states and local governments can emulate this step. I strongly believe that funding agencies would support similar initiatives as the US$27 million funding from the Asian Development Bank (ADB) and the World Bank in support of the Indonesian property tax reform highlights. The cost effectiveness of these efforts, however, requires a more sophisticated analysis with a consideration for the time value of money and a simulation of the revenue effects of the reform process into perpetuity.

Is it realistic and practicable to push for a comprehensive tax reform, given present resource and capacity constraints? This is hard to tell. Focusing on any one of the administrative ratios would probably cause the others to lag behind. Going forward, therefore, reformers must define the goals and objectives of the reform effort and identify strategies best able to deliver on those objectives. If reforming property taxes as a means of increasing discretionary revenues is the goal, then the strategy of improving collection rates must be pursued simultaneously with either increased coverage or better property valuation. In the case of Indonesia, valuation was isolated as a major component requiring improvement. If we choose to walk this route, a major problem will definitely be how to ensure that properties are valued as close to market rates as possible.

·  Okorie writes from Lagos





  1. Cadastre – an official register of the quantity, value, and ownership of real estate used in apportioning taxes [Merriam-Wesbster]


  1. Jay K. Rosengard; International Tax Program, Havard University, Kluwer Academic Publishers; 1st edition (December 1, 1997)


  1. For a good review of property tax reform in Indonesia, see:

       “Property Taxation in Indonesia: Challenges from Decentralization” by Roy Kelly (2003); Lincoln Institute of Land  (Working Paper)


4.  For the NEEDS official (unfolding) document, please see:

       National Empowerment and Development Strategy (NEEDS)







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