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Will the digital revolution unleash the potential of property taxation?

Written by Gundula Löffler, Cathal Long, Justine Knebelmann

Image credit:Bunting Kargbo on Unsplash

Our new ODI report discusses some of the ways in which digitalisation is revolutionising property tax administration in developing countries. In this instalment of Budgets and Bytes, we draw on the findings of the report to explore how this trend presents new opportunities and challenges. We also offer our thoughts on how local governments might navigate these challenges through greater collaboration and adopting new approaches to digitalisation.

The promise of property tax

Local finance experts have been telling us for decades that cities in developing countries are sitting on vast, untapped revenue from property taxes. But cashing in on that potential has proven to be rather difficult. Laborious and time-consuming tax administration processes paired with unfavourable political incentives have meant that significant property tax yields remain a somewhat distant hope at this stage. However, as our new report on the digitalisation of property taxation in developing countries shows, advances in technology mean it is now easier to register properties, value them, and ensure that taxpayers meet their obligations.

Getting more properties on the tax register

Most of the digital innovations that feature in our report address challenges related to the spatial nature of property taxation. For example, the availability of satellite images and aerial orthophotographs taken by drones has changed how land and property records are compiled and updated. This allows for digital data management systems to link geospatial data such as GPS coordinates to ownership information and is particularly useful in places without a functioning addressing system. Although the new approach normally still requires surveyors to visit every property in person to collect owner and occupancy details and to verify the physical features of structures, they now go equipped with handheld digital devices which can easily confirm the location on the spot and upload all information directly to a database.

These technological advances have led to a large increase in properties on the tax register. For example, the city of Freetown, Sierra Leone doubled its number of registered properties to 120,000 in just one year. In Kampala, Uganda, at least 300,000 geotagged properties have been added to the tax register since 2014.

Improving property valuations

Information technology does not just help with localising and recording properties. A major bottleneck for property taxation in low- and middle-income countries has been the valuation of properties as a way to determine the tax base, primarily because of a lack of formal property markets and qualified valuers. Digitalisation offers effective ways to overcome this issue through using statistical estimation techniques. For example, the Computer Assisted Mass Appraisal (CAMA) method uses data on a range of observable characteristics to estimate the value of properties for which this information is not available. The formula can be calibrated to be as simple or sophisticated as the availability of data on property characteristics permits it to be. In middle-income countries such as India, China and South Africa, this method is combined with georeferenced data such as high-resolution satellite imagery or LiDAR technology to carry out mass appraisals.

Meanwhile, lower-income countries such as Malawi, Senegal and Sierra Leone are adopting simpler approaches by using a formula that relies on objectively verifiable characteristics collected from the field (e.g., location, building materials, number of floors, utilisation and special features such as garages or balconies). This has resulted in a rapid expansion of the tax net and an increase in the average value of registered properties in cities such as Dakar, Freetown and Mzuzu. The simplicity of the approach also helps taxpayers to understand how the value of their property has been determined.

Better services for taxpayers

Many property tax reforms have led to the introduction of new digital services for taxpayers. Property tax administrations have set up digital platforms that allow taxpayers to register or submit additional information about their properties online, to receive their electronic tax notifications, to submit an appeal or a complaint, or simply to ask for help. Taxpayers can also settle their bills through mobile or online payments and receive electronic receipts. Cities in countries as diverse as Colombia, India, Kenya, Nigeria, Pakistan, the Philippines and Tanzania have used combinations of the above to accelerate and simplify the interactions between the property tax administration and the taxpayers.

A growing number of cities are committing to digital reforms…

Many of the digital innovations in property taxation reviewed in our report show real promise, and some have already yielded concrete results in terms of increased revenue. Unsurprisingly, cities around the globe are beginning to show interest. For example, more and more members of the Africa-Europe Mayors’ Dialogue are putting the digitalisation of property taxation on their reform agenda. The Mayors of Accra, Dakar, Freetown and Kampala have long championed digital innovations to strengthen their property tax systems, making some impressive strides in the process: for example, Freetown has quintupled its potential property tax revenue. Kanifing Municipal Council, with assistance from ODI and a Digital Identification and Finance Initiative in Africa (DigiFI) research team at MIT’s Abdul Latif Jameel Poverty Action Lab (J-PAL), is planning to introduce a number of digital tools to improve the identification and mapping of properties using Google Plus codes. It is also looking to develop a digital payment system for taxpayers. Kanifing’s reform process draws on experiences from Dakar as a fellow member of the Africa-Europe Mayors’ Dialogue. Like in Dakar, it will be accompanied by a rigorous research design to evaluate its impact on the reform and identify ways to improve it.

…but new opportunities come with new challenges

Despite the expected and actual gains from digitalisation, these reforms come with challenges of their own that need careful navigation. One important challenge pertains to the cost and management of software solutions. They often require a sizeable upfront investment and non-trivial maintenance costs which can be difficult to mobilise, particularly for sub-national governments. Furthermore, choosing the appropriate contracting model for systems development or adaptation, articulating the right specifications and managing their implementation by third-party providers can be tricky, with many potential pitfalls. They also require staff to develop new skills and capabilities, which are not always easy to acquire or retain.

A different approach could help to navigate these challenges

Successful digital transformations in government are increasingly taking a different approach, favouring the ‘small parts loosely joined’ principle over procuring monolithic IT systems that try to do everything. This approach is associated with digital public infrastructure – defined by the Digital Public Goods Alliance as ‘solutions and systems that enable the effective provision of essential society-wide functions and services’. Increasingly, these can be combined with digital public goods: open-source software that governments can reuse at lower cost, and with more flexibility.

Some municipalities are already applying this approach to revenue administration. For example:

● In the UK, local councils use the GOV.UK Pay platform to collect payments for local services and the Notify platform to inform taxpayers that their council tax is due.

● In India, 950 cities are using the open-source platform DIGIT to administer municipal services including property tax.

One advantage of this approach is that when these parts do not work as well as they should, they can be replaced without the need to replace the whole system. This approach can also help cities avoid being locked into long, expensive IT contracts.

Given their relevance to the Sustainable Development Goals, the international community should consider more investment in digital public goods for property taxation. As a first step, development partners should encourage their project teams to work in the open and nominate solutions as digital public goods where relevant.

Further scope for collaboration

It is not just about sharing code, however. Cities can also benefit from pooling their resources and experiences. For example, the Foundation for Public Code in the Netherlands and Spain and the London Office for Technology and Innovation in the UK help cities coordinate when their IT contracts are up for renewal. They share either their purchasing power or the information that helps them negotiate improved contracts. By adopting similar approaches, more cities like Dakar and Kanifing will be able to learn from each other in the future.