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4.10 Aggregated data on the collection costs and efficiency of local taxes and duties are not available. The absence of such information hampers the development of policy related to local tax reform. Estimates suggest that on average the collection rate for the real estate tax is about 50% and the performance varies across municipalities.
4.11 Several factors hamper the performance of the real estate tax.
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First, poor and outdated records of properties are key issues. Properties are not always registered in municipal rosters as the rosters are not updated regularly. In some cases, even though a house may be serviced with water and electricity the property may not be registered.
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Second, the value of a property is typically lower than the market value. There are delays in reassessing the value of a property and as a result the full potential of the tax is not utilized. There are a number of committees, including the mayor, municipal staff and community leaders, which meet and reassess land values every four years across the country. Home improvements are included in the property value using centrally determined construction cost indices but this also takes time.
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Third, municipalities are not allowed to keep all the real estate tax proceeds they collect. For non-metropolitan municipalities, 15% of the collected tax is transferred to the provincial government. District municipalities in a metropolitan area can only retain 34% of real estate tax revenues with 58.5% and 7.5% being transferred to the metropolitan municipality and the provincial administration, respectively.
Issues
4.12 There are several issues related to revenues raised by municipalities:
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Limited size and control of taxes and fees: Most of the power to set and adjust local taxes and fees is in the hands of the central government. The rates for real estate tax are fixed at 0.1% on residential buildings and urban land, 0.2% on commercial buildings and 0.3% on non-urban land. The assessed land value is determined by a committee with local and central representation every four years, but the value of buildings is assessed through central guidelines. The real estate tax is increased every year by half of the revaluation factor. The rate for all other taxes and duties (including the environmental cleansing tax and the contribution to infrastructure investments) are all determined centrally either in nominal or percentage terms. Delays in increasing the rates decrease the potential size of the revenues that could be collected, which in turn causes municipalities to lose interest in collecting. This is particularly true in Turkey’s high-inflation environment. The per-capita amount collected is low with an annual contribution of US$27 per capita compared to a per capita income of around US$2,000 in the year 2000.
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Many taxes and low collection rate: The proliferation of local taxes and fees makes them costly to administer. The municipalities have to spend scarce resources to collect a number of taxes, irrespective of their revenue potential. This reduces the collection efficiency since not enough resources can be devoted to collecting all the taxes. As cities grow they become more dependent on government transfers and revenues from business activities, and less dependent on local taxes and duties. The poor collection performance of some of the local taxes and duties in the big cities (compared to smaller ones) suggests that there is room for improvement. Further, the lack of a proper financial management system creates a scenario where the tax collection performance of municipalities is not clearly known.
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Municipalities involved in operations that could be managed by the private sector: Aggregate data on business activities in municipalities are not available. However, representatives from central and local authorities confirm that big cities in particular carry out many business functions, apart from providing basic infrastructure services. Property management (renting business space) is perhaps the most important one, but there are also examples of municipal construction companies, tree/plant nurseries, bakeries and companies selling coal for space heating. Some of these services could be provided by the private sector and the role of the municipalities in these areas is not clear. Since systematic information on these enterprises is not available it is difficult to assess the magnitude of the problem and suggest reforms. Thus, as a first step, information on the operations of these enterprises should be made publicly available.
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Absence of tourist tax: There are a number of tourist sites in Turkey that attract both local and international tourists. The tourism activities in these sites support the economy and bring in foreign currencies. However, the municipalities where these sites are located do not receive any additional resources from the center and neither are they allowed to raise special local taxes to finance the costs of development. The central government transfer schemes are based on the resident population and not the tourist population. However, the infrastructure in the area has to be designed for both the resident and the tourist population to meet the peak service demands during tourist season (roads, water and wastewater systems etc.). This leads to a mismatch between the infrastructure needs and the availability of resources resulting in delays in development of the infrastructure that in turn negatively affect the growth of tourism. Further, it puts undue pressure on tariffs for the resident population that would have to pay for infrastructure that is also intended for the tourist population who visit for a short while. An example of the use tourist taxes is provided (Box 4).
Box 4: Case for Introduction of Tourist Tax
A sample case for introducing tourist tax is the Antalya metropolitan municipality. The resident population is less than 1 million while it is estimated that tourists spend as much as 20 million person-nights in and around the city (4 million domestic and foreign tourists ; 5 nights in the region). The tourism economy around Antalya is estimated to be more than US$1 billion.
To attract tourists and to not create any environmental risks, the city had to heavily invest in water systems, sewerage networks and a wastewater treatment plant. However, the cost of this investment – around US$250 million – is high and cannot be fully supported by water and wastewater tariffs without raising them to unaffordable levels for the year around residents. The combined water and wastewater tariffs are around $0.80/m3 which is high compared to the income levels in Turkey. This has led to financial difficulties for the water and wastewater utility.
If the local authorities were allowed to charge a tourist tax of US$1/night through the hotels and hostels, additional local revenue of US$20 million would be generated. Rates could be even higher depending on carrying capacity and revenue targets, but the tax would eliminate some of the financial difficulties of the water and wastewater utility and provide opportunities for development of infrastructure services.
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Reforms
4.13 A comprehensive view should be taken towards the strengthening of local revenues. This would include an assessment of the overall national tax structure to ensure consistency between overall taxation policies and its implementation at the local level. Proposals to be considered under the bill on Public Administration should include:
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Local tax reform: Local tax reforms should include the following. A thorough review of the existing local taxes and fees needs to be conducted before local tax consolidation can take place. This review is expected to last about six months and should be one of the early actions taken to support the reform process.
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Consolidation of local taxes: The real estate tax is the largest single source of local revenues while other taxes are small, collection rates are low and the administrative costs are high. Thus, as a first step the costs for collecting and administering the various taxes should be assessed and compared to the revenue they generate. As a next step, the number of taxes should be consolidated where taxes that are costly and/or generate only small amounts of revenue should be eliminated. The tax rate for the real estate tax should be revised upwards and provisions should be made to allow timely adjustments of the tax to keep pace within inflation. Administrative focus on just the real estate tax will improve the local tax collection rate.
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Introduction of tourist tax: The need to establish a tourist tax is clear since it will allow the development of infrastructure in tourist areas. This in turn will help to support the growth of the tourism industry. Turkey has an abundance of tourist sites around mountains, lakes, seacoast and beaches and in areas of archaeological or historical importance. Tourism accounts for an estimated 4% of GNP and continues to grow. About 10 million foreign tourists came to Turkey in 2002 compared to 7.5 million visitors in 1999. Foreign travel receipts amounted to 2.6% of GNP in 1999. The tourism tax should be set at a rate that would be affordable to tourists and not be a deterrent to the growth of the industry.
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Flexibility in setting rates: The rigid central government control on taxes and fees should be relaxed. After tax consolidation, broad guidelines should be set on the remaining taxes by the central government while it would be the responsibility of the municipalities to decide on a tax rate, given their needs and local conditions. Tariffs and fees should be determined at the municipal level based on cost recovery objectives. Cost recovery targets should also be established through norms and monitored through the performance benchmarking system. This would increase the responsibility and the accountability of the local authorities towards tax collection and service delivery.
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Improving financial management and collection: As responsibilities of local authorities increase towards generating local revenues, it is important to strengthen the financial management system. The system should not only keep track of resources but at the same time monitor service levels in line with the performance monitoring system that is currently being developed. Better financial management would show the deficiencies in tax collection leading to policy reforms and would be essential in preparing for the local handling of any EU pre- accession funds for local investments. As part of the improvement of the financial management system, technical assistance through training and use of equipment (computers, internet etc.) should be considered.
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Involve private sector in commercial activities: Incentives should be put in place for municipalities to leave the commercial activities to the private sector. This would need to be underpinned by further studies to gain a better understanding of the scope and content of municipal business activities and the extent to which they crowd out the private sector. Broadly speaking, the municipalities should focus on activities that provide basic services to the population and even in these areas attempts should be made to include the private sector as much as possible. The private sector has a role to play in the provision of basic urban services (transportation, water, solid waste management). These services are currently fee based (except solid waste management which is likely to be fee based in the future) and have the potential to attract the private sector. This will bring about efficiency of operation that would contribute towards the reduction of the chronic deficit in municipal budgets. To reach sustainability in the services, the municipalities should aim to reach full cost recovery through user fees and taxes.
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