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Decision To Assign Property Tax To Central Government, An Onslaught On Fiscal Decentralisation In Ghana

Feature Article Decision To Assign Property Tax To Central Government, An Onslaught On Fiscal Decentralisation In Ghana
JUN 13, 2022 LISTEN

“There is no story that is not true.” ~ Chinua Achebe. The attempt by the Government of Ghana (GoG) to centralise the collection of the property tax through an arrangement with a private consortium, a certain Digital City Solutions Limited, presents yet the single most inimical policy decision to Ghana’s local governance system. While it may presently not be so, it will be irrefutable to state, from hindsight, that a desire for good practice and sacrificial efforts, pushed by genuine patriotism, have shaped Ghana’s local governance policy and legislative frameworks.

Since 1988, when the Ghana embarked on this model of decentralisation – a programme designed to cede some political, administrative, and fiscal powers and responsibilities to the Metropolitan, Municipal and District Assemblies (MMDAs) – various governments have strived to expand the frontiers of decentralisation in all its forms and modalities. Indeed, the PNDC Law 207 which was later adopted and expanded in the 1992 Constitution, provided the seedbed for the growth of Ghana’s decentralisation system. Almost all governments since 1992 have pushed decentralisation reforms through extensive participatory and consultative processes with stakeholders.

Relative Contribution of Successive Governments to Decentralisation

It is undisputable that the J.J. Rawlings’ Provisional National Defence Council’s (PNDC) administration had laid a resilient foundation for decentralisation as evidenced by Article 240 and other provisions in the 1992 Constitution. Indeed, Rawlings’ democratic administration, from 1992 to 2000 had continued the pursuit for a buoyant decentralisation and local governance through setting up the institutional and legislative architecture. This position is also reinforced by enactment of the Local Government Act, 1993 (Act 462), and other Acts of Parliament and legislative instruments. The J. A. Kufour administration (2001 to 2008) among others, focused on the creation of more districts – arguably regarded as one of the key processes of decentralization.

The GoG in 2010, produced a ‘Decentralisation Policy Framework’ which acknowledged fiscal decentralisation as critical to empowering MMDAs to have the suitable funding and financial management arrangements. The devolution of revenue mobilisation and spending powers to MMDAs would allow for responsive local governance, efficient and accountable public service delivery. Again, the seriousness of the GoG towards fiscal decentralisation manifested in the establishment of the Fiscal Decentralisation Unit (FDU) in 2011 by the Ministry of Finance (MoF). The FDU has since operated as the focal point through which the MoF has explored intergovernmental fiscal arrangements, including the assignment of expenditure and revenue responsibilities, fiscal transfers, borrowing and other fiscal measures. Without a sliver of misgiving, the actions, and inactions of the Nana Akufo-Addo government have injured the nature and stride of fiscal decentralisation.

It is obvious for practitioners, scholars and stakeholders operating in the space of local governance that a fiscal decentralisation is an essential condition for a sound revenue system for local authorities. However, the fast evolution of cities and urban centres in Ghana, with their ever-increasing populations, has left the MMDAs austerely outpaced in terms of financing, delivery of municipal services and implementation of their composite development plans and budgets. The MMDAs are unable to cope with the many problems faced by residents, such as inadequate basic services including clean water supply, housing, waste collection and sanitation, improving the road network, transport, extension of electricity to newly built suburbs, etc. The current financing arrangement for District Assemblies in Ghana is not markedly different from practices in especially countries in Anglophone Africa. However, the disposition of government in delaying the release of the District Assemblies Common Fund (DACF) weakens the service delivery ability of these District Assemblies.

The Depletion of Central Government Transfers

The DACF as provided by Act 455 (1993) has been one main instrument of intergovernmental fiscal transfer. Article 252(2) of the 1992 Constitution instructs that “Parliament shall make allocation of not less than five percent of the revenues of Ghana to the district assemblies for development and the amount shall be paid into the District Assemblies Common Fund in quarterly instalments”. Cognisant of its central role to the District Assemblies’ functionalities, the previous John Mahama administration had discretionarily increased the DACF to 7.5 percent of total government revenue. Indeed, in 2016, stakeholders and Civil Society Organisations had persuaded government with a proposal to increase the DACF to 12 percent. Regrettably, in 2017, government rolled back the quantum from 7.5 percent to the constitutional threshold of 5 percent. The government further attempted to cap all earmarked funds to a fixed tax revenue (25% of tax revenues), through the Earmarked Funds Capping and Realignment Act, 2017 (Act 947). Though, this move was later declared by the Supreme Court as a violation of Article 252 (2) of the 1992 Constitution. It appears the court’s ruling had no effect on the government’s plans to reduce the quantum of DACF to the MMDAs.

In Ghana today, the reality is that MMDAs are assigned more expenditure functions than they can finance from all sources of revenue available to them. This vertical imbalance arising out of a mismatch of functions and finances, somewhat legitimises their dependence on the central government for transfers. The only stable and substantial own revenue source to the MMDAs is the property tax (property rate). Practically, the MMDAs are often left with little but property tax, business licences, user charges and market fees, etc. The proceeds from these assigned revenue sources are usually insignificant, except property rates, which provide a prospect of good revenue. The MMDAs would be pushed to a hopeless situation when the central government succeeds in subcontracting the collecting the property tax.

Argument for Upholding the Decentralised Collection of Property Tax

Consequently, the decision by the GoG to adopt a ‘centralised control’ of collecting property tax would severely encumber the MMDAs’ ability to generate own revenue for development. While the literature generally emphasises that each level of government should be assigned taxes that are as closely related as possible to the benefit derived from spending them, it often also notes that ‘if fiscal decentralisation is to be a reality, subnational governments must control their own sources of revenue’ (Martinez-Vasquez et. al 2006;21).

The decentralisation of taxation is closely linked to efforts to build accountability between citizens and local authorities, and, to further improve local service provision. The local collection of property taxes helps to build accountability between the MMDAs providing municipal services and the citizens utilising these services. A centralised collection arrangement as pursued by government cannot directly provide answerability from the ‘centralised collection agency’ in the same magnitude as a District Assembly. An initiative that curtails accountability to the people would, to some extent, oppose good governance ethics.

In local government tax assignments, it is generally argued that lower-level governments should tax revenue bases with low mobility between jurisdictions. Property tax is therefore often called the ideal tax for local governments. Taxes that are considered especially suitable include user fees, business licences and taxes on immobile properties. Real estate is the ultimate immobile asset, making property tax well-suited to local control.

By reason of spatial proximity, the MMDAs are deemed to have more knowledge about both existing properties and those that are being built. The MMDAs’ function in the issuance of development and building permits affords them this information on property ownership. They are therefore better positioned than the central government or its subcontracted associates to build property cadastres and implement taxes on properties.

Traditionally, a plausible argument has been made that there is an obvious link between property and the provision of municipal services such as domestic waste collection, water and sanitation, drainage systems, infrastructure, local roads networks, etc. It is rational if resources for the provision of the municipal services are collected locally from the properties benefitting directly from the array of services.

Given the prevailing political-economy and social factors in Ghana, the administration of property tax by the central government could be counterproductive. The central government’s furtive ‘attempt to ‘seize’ and subcontract the collection responsibility of property tax is not only an assault on fiscal decentralisation, but it would as well equate to a bad revenue design for the MMDAs. An improved revenue administration cannot compensate for bad revenue design. As Fjeldstad and Heggstad (2012) succinctly put it, “there is no merit in making a bad revenue system work better”.

If the justification by central government has been the inefficiency or poor collections of property tax by many MMDAs, we must not be oblivious that incentives are better aligned with responsibilities. If property tax is collected by the MMDAs, they will be more dedicated collectors of the tax if it comes directly into their accounts, rather than going to a central government agency for redistribution. Local government practitioners and stakeholders do not have trust and confidence in this arrangement because successive governments have not demonstrated fidelity with the laws, allocations, and releases of the DACF.

Action to Improve Property Tax Administration

It is true that Ghanaian MMDAs, over the years, have not fully exploited property tax as a local revenue source. Many factors are easily in sight, including outdated or non-existent valuation rolls and property registers, limited administrative capacity and equipment, and the lack of political support to MMDAs to enforce property tax.

Luckily, many MMDAs had begun reaping revenue from property rates with the support of CSOs and stakeholders in international development cooperation. The narrative had significantly changed, GIZ Ghana, for instance has been investing colossally in decentralisation reforms, including strengthening the capacity of MMDAs in the area of mobilising internally generated funds (IGF). These investments are pervasive, including the creation of the revenue management software – the district local revenue software (dLRev), undertaking and paying for property valuation, training and capacity building initiatives, logistical support to MMDA and Land Use and Spatial Planning Authority (LUSPA), etc. If anyone wonders why Ghana’s development journey has been one of a ‘cyclical redundancy’, the brazing act of government to ignore or treat as trivial all the huge investments and supports by the development partners and civil society, provides the answers.

There is doubt that the GoG’s case for centralisation of the property tax is also built around macroeconomic considerations and equalisation, and the case for local government efficiency in collections. In the process of fiscal decentralisation, it is important to be conscious of the risks for macroeconomic management and fiscal discipline. It is true that extensive devolution of revenue and spending responsibilities to subnational tiers of government can affect the central government’s ability to carry out stabilisation and macroeconomic adjustment through the budget. However, local administration of property tax does not in any conceivable form impact macroeconomic stability negatively.

The Centralisation of Property Tax and Effective Collection

Despite the decorative arguments in favour of decentralisation, most countries with decentralised systems, including Ghana are not collecting anywhere near their potential in property taxation. The reasons for the underperformance of local authorities in Ghana are pervasive, with socioeconomic, cultural, and political underpinnings. Centralisation is not the elixir to heal the malaise of poor collections! With the record of ineffective collections of property tax by local authorities, a number of anglophone countries in Eastern Africa have drastically recentralised key aspects of property taxation in recent years in the hope of collecting more. For example, Rwanda, Tanzania, and the Gambia took the decision to centralise the collection of property tax. Verily, the empirical evidence in favour of centralised taxes is fairly weak. There is an avalanche of evidence that Francophone countries with relatively centralised systems vary in their effectiveness. For the most part they noticeably underperform in relation to property taxation. The evidence further reveals that Liberia – the most centralised anglophone country – has not performed well in property tax administration.

The role of central governments is preferably to provide legal framework for property taxation, whereas its administration is left for local authorities. The evidence from many MMDAs already shows that property rates can provide reliable and substantial revenues. The historical antecedents have provided the guidance that anglophone countries typically decentralise key aspects of property taxation such as collection and administration.

The views expressed here are strictly the author’s and do not reflect the position of any of his professional associates.

By MOHAMMED MUSAH | [email protected]

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