How Can Local Taxation Strengthen Domestic Revenues? Uganda Offers an Example

Before the COVID-19 pandemic, the International Monetary Fund estimated that low-income countries would, on average, need to collect an amount equal to at least 5 percent of their GDP in additional revenue by 2030 to achieve the Sustainable Development Goals (SDGs) in five key areas. For many sub-Saharan African countries, where tax collection is generally low, the need for increased revenue is even greater. In the aftermath of the pandemic, theses resource needs have only increased; economic scarring, rising debt burdens, and weak revenue collections, as well as the war in Ukraine and increased demand for service delivery, fuel the need for additional resources. Finding new ways to garner more revenues has become increasingly vital. As we explain in this blog post, Uganda’s recent experience with increasing domestic resource mobilization through property taxes may hold insights for other low-income countries.

Uganda’s tax performance measured by its tax-to-GDP ratio, has been weak compared with other countries in Eastern and Southern Africa (Figure 1). Between 2011 and 2020, it hovered between 10 and 12 percent, compared with 17 and 19 percent in Eastern and Southern Africa. As a result, Uganda has lacked fiscal capacity to expand its social programs to meet the SDGs. Insufficient social spending is also reflected in Uganda’s worsening income inequality, with pre-tax Gini rising from 0.39 in 1996 to 0.43 in 2019—a 10 percent increase in 20 years.
 

Figure 1. Tax revenue (% of GDP)

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Scope of property taxes

Local revenues are critical for sustainable and equitable revenue growth and enhanced service delivery in Uganda and elsewhere in sub-Saharan Africa, and property taxes can provide fiscal space to fund local services. On average, low-income countries generate about 0.3 percent of GDP from property taxes; these consist mostly of annual taxes on immovable property (houses, commercial buildings) and the sale of property. In contrast, property taxes represent around 2-3 percent of GDP in OECD member states.

There are several impediments to mobilizing property taxes in African countries, including Uganda:

• high tax rates at the time property is transferred
• outdated tax base
• erosion of the tax base through numerous exclusions and exemptions granted under the law as well as loopholes on owner-occupied properties and new constructions
•  existing laws that require valuations by experts whereas tax authorities lack valuation skills and capacity
•  unclear billing and collection practices that lead to weak enforcement of laws.

Property taxes in Uganda—some initial success

The USAID Uganda Domestic Revenue Mobilization for Development project, implemented by Nathan Associates, sought to strengthen local revenues in 10 cities in Uganda, including Fort Portal, Mbarara, and Gulu. The primary revenue source for these cities is property taxes.

The first stage of the project was to build political support for a new system of valuations for properties. This was accomplished through three steps:

1. Streamlining communication between the political authorities and local revenue authorities. The mistrust and poor communication between political and technical leaders was seen as a factor hindering the efficiency of revenue operations. To address this gap, the project designed and delivered training, including on the management of revenue collection, to assist politicians and technocrats to better understand the roles and responsibilities in mobilizing domestic resources and developing a link between revenue collection and improved service delivery.
2. Supporting the 10 cities to design and implement domestic revenue improvement plans. Reform plans were set up in 10 cities for introducing new methods for improving tax compliance. These plans met with varying degrees of success in terms of formal approval by local councils, but all succeeded in identifying detailed strategies for enhancing local revenues. First, they designed and implemented systematic property valuation databases to increase local revenues. Second, they designed measures to institute transparency in local budgeting. Third, they improved service delivery by allocating additional local revenue collections towards social sectors and public services.
3. These revenue improvement plans have been further supported by a campaign with civil society organizations to win taxpayers’ confidence and increase civic engagement (See, Mbarara city and property taxpayers). These plans were shared with the Ministry of Local Government to build a collective understanding amongst all parties.

The second stage of the project involved improving the cities’ property valuation methodology and update the property tax valuation rolls. For this, the USAID-Nathan team identified and contracted three local firms capable of undertaking professional property valuation using geospatial information system (GIS) methodology, which entails using a computer-based system for the digital entry, storage, transformation, analysis, and display of spatial data. The newly designed valuations database for each city now shows each property with its GPS coordinates, satellite imagery of the property, and the full contact details duly verified for the owner of each property. These technologies have enabled expansions of the tax base in other countries as well. For example, Liberia is improving tax collection using GIS to enhance detection and enforcement; Zambia is employing satellite imaging to map informal settlements for better land administration;  and France is using AI and detection technologies to increase the tax base.

As a result of these initiatives, the 10 Ugandan cities are already witnessing revenue gains. The total revenue collection in the 10 cities for the fiscal year 2018/19 amounted to UGX 20 million (USD 5.4 million) compared to UGX of 28.9 million (USD 7.8 million) in the fiscal year 2021/22 (Figure 2). A 26 percent increase in local revenues is projected for the current fiscal year. This projected rise in local revenues is on top of the expected revenue from the expanded base as the result of digitized property valuations.

Figure 2. City revenue collection in US$

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Since early 2022, a total of 160,000 properties in the 10 cities have been valued and uploaded to the database compared to the previous paper-based records of about 20,000 total properties—an eightfold increase—and the reforms implemented under the steps listed above. As the cities continue to broaden the base, the project expects a 100 percent increase in the revenues from the 10 cities by FY 2024/25, with the potential to continue to grow further in the subsequent years.

The 10 cities now have systems and capabilities to continue to update these valuations every five years. The cities have published the updated valuation lists and set up valuation courts with the project’s technical advice, training and equipment including computers, tablets, and electronic point of sale (ePOS) devices to enable the cities to maintain their new electronic databases to digitize valuations and records. Finally, through these actions, the project team built the capacities for the cities to repeat and update the valuation rolls every five years.

Key lessons

In a global scenario marked by a worsening debt outlook, weak revenue collections in the aftermath of COVID and the war in Ukraine, and increased demand for service delivery, Uganda’s success with property valuation offers a homegrown and sustainable option to low-income countries. The project has facilitated a sustainable and transparent system of property valuation. It has the potential to serve as a blueprint for many low-income countries, including neighboring Zambia, where almost 80 percent of property titles are held by the state, which has deprived local authorities not only from raising resources but also compromises citizens’ trust in service delivery.  

Uzma Ashraf Barton is Principal Associate at Nathan.

Kieran Holmes is Chief of Party, USAID Uganda DRM4D project.

Adam Kadir is an Associate at Nathan.

Patrick Kandole Local Revenue Specialist at USAID Uganda DRM4D.

Tim Robinson is Principal Economist at Nathan.