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This part of the report examines the revenues raised locally by the municipalities and means for local revenue expansion. Financing local services from locally raised revenues10, where the local authorities also set and control taxes and fees, promotes accountability as residents can easily see what they get for the money they pay to the municipality. Also, this places the onus on local authorities to select and design the scope and content of the services in line with local willingness to pay for them and to pursue adequate local and least-cost solutions. This is demonstrated in the municipal water utilities that are financed largely through user fees, rather than tax revenues. By and large, the managers of the water utilities and the local authorities pay attention to the service needs and affordability of tariffs by the citizens when planning for investments.
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Revenues raised locally corresponded to 39% of municipalities’ total revenues in 2000 (US$3.4 billion or 1.7% of GNP), implying that each urban citizen, on average, directly paid US$72, including US$ 27 in the form of taxes and fees, to his or her municipality. This amount includes all revenues reported by the municipalities. It is, however, believed that municipalities under-report user fees paid for the basic municipal services and revenues from other commercial municipal enterprises. The proposed performance benchmarking system will allow the operation of all municipal enterprises to be aggregated to provide more accurate information on municipalities’ own revenues in the future. This will also help to design policy recommendations for reforms in municipal enterprises that provide commercial services, and reforms in utilities that provide basic infrastructure services.
Table 4.1
Composition of Locally Raised Revenues, 2000
|
Category
|
Percent of
Municipal Revenues
|
US$
Per Resident11
|
A: Local taxes and fees
|
|
|
Real Estate
|
4.8%
|
8.80
|
Environmental sanitation
|
1.9%
|
3.45
|
Duties
|
2.6%
|
4.80
|
Contribution to infrastructure investments
|
1.6%
|
2.95
|
Other taxes
|
3.7%
|
6.95
|
Subtotal local taxes and fees
|
14.6%
|
26.95
|
B: Business and enterprise
|
|
|
Rent and sale of property or goods
|
10.5%
|
19.45
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Revenues from Institutions and Enterprises
|
6.2%
|
11.45
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Other non-tax
|
7.7%
|
14.15
|
Subtotal business and enterprise
|
24.4%
|
45.05
|
|
|
|
Grand total
|
39.0%
|
72.00
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4.3 Locally generated revenues comprise two parts. First, about one third is raised from local taxes and fees (Table 4.1) for which the rates and coverage are largely determined by the central government. Second, above two thirds of the revenues are generated from various business and enterprise activities where prices, tariffs and other costs are mainly determined by the local authorities. The operational information of these enterprises are not regularly available in the public domain since they are considered as commercial entities.
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Real estate tax: The importance of the real estate tax has varied considerably in the past. High inflation and, until 1998, re-evaluations of the capital value of land and property every four years meant that revenues went up immediately after the revaluations, and then fell sharply until the next revaluation. Since 1998 revaluations have been carried out annually and the real estate tax’s contribution to municipal revenues appears to have stabilized somewhat, although high inflation and delays in property evaluation erodes the amount of this tax in real terms. The real estate tax is the single most important local tax and the Government is considering various options to increase local revenues through this tax.
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Environmental cleansing tax: This tax was imposed on residents and businesses using municipal solid waste collection. However, amounts collected later declined as the nominal tax amounts failed to keep up with inflation. In December 2003 Municipal Revenues Law was amended and the cleansing tax was tied to water consumption for domestic users. For non-domestic users a separate tariff was introduced. Government organizations, local administrations, universities, international organizations, and charity organizations are exempt from this tax. This tax is a good example of how local revenue collection is relatively easy when clearly linked to a visible service.
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Duties: These include fees for a number of services and vary considerably from municipality to municipality. The three most important items include use of public spaces (including parking), construction permits, and brokerage charges, making up about 75% of the duties. Other items include registration and inspection fees, work licenses on holidays and equipment inspection.
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Contribution to infrastructure investments: This is a fee charged to the beneficiaries of infrastructure projects. The fee is low and represents about 1.6% of the total municipal revenues. For citizens that would benefit from a particular infrastructure project, reforms in the contribution to investments should be considered by linking it to a significant percentage of the real estate tax.
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Other taxes: This includes taxes on: (i) advertisement on board and billboards; (ii) entertainment services with as much as 25% of a ticket price being charged as tax; (iii) communications in the form of 1% of revenues earned by PTT (the postage, telegraph and telephone company) within the municipality; (iv) tax on electricity and gas equal to 5% of the sales; and (v) fire insurance equaling 10% of fire insurance fees collected by insurance companies.
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