The newly introduced housing levy is a classic example of hypothecated tax. What this means is that the tax is earmarked to achieve a specific purpose by the government and is not expected to be channelled to any other use other than the intended use.
Hypothecation of tax is not a new thing in Kenya. Over time, levies have been introduced to raise funds for various key priority areas. Some of the levies include; Sugar Development Levy (SDL), Railway Development Levy (RDL), Road Maintenance Levy Fund , the National Hospital Insurance Fund (NHIF), the National Social Security Fund (NSSF), Hotel and Catering Levy, Fuel Levy, Standards Levy, and Export Levy.
Housing in Kenya, especially the urban areas, has been one of the challenges that successive governments have failed to address. According to Habitat for Humanity, the housing deficit in Kenya stood at two million in 2012 and it continues to increase at a rate of 200,000 units every year. It is clearly evident that this issue needs to be addressed with utmost urgency. However, is it the government’s responsibility to provide housing for its citizens?
The role of government, in our understanding, is to build roads, provide utilities like sewer, water and electricity services, build hospitals and schools and build any other necessary infrastructure which cannot be efficiently provided and managed by the private sector.
The government also has the responsibility to address issues that make housing affordable, including controlling the prices of houses. This happens when the government breaks up cartels that make housing, and real estate in general, expensive. Further, the government should encourage innovation in the real estate sector. Such innovation would mean building homes using cheaper technology and in this way, prices of homes would reduce significantly.
The cost of land is one of the greatest hindrances to affordable housing and the government should have a radical policy approach towards managing this. For many first-time home buyers, taking a mortgage is not an option as it is too expensive. So the only viable option would be a short-term loan, which may not really suffice. It should be the government’s work to ensure that mortgages are affordable and that there is more access to affordable long-term credit.
Rather than having a housing tax, the government should focus on how to increase people’s incomes without the cost of life necessarily going up. This can ensure that individuals have more disposable income and that housing is affordable.
Proponents of hypothecation argue that it is easy to justify to the public the core reason of collecting a particular revenue. It also enhances accountability and transparency as it is easy to follow the money which has been collected. This facilitates trust in government, especially if revenue collected can be accounted for.
Hypothecation, however, does have its fair share of challenges that make it an unattractive method of raising funds from the public. First, it is difficult to remove the tax when the task it was intended for has been achieved. The government will always find other places to divert the money collected. Further, when such monies are collected they attract ‘tenderprenuers’, increasing cases of graft. A case in point is how some private hospitals have colluded with corrupt NHIF officials to make fictitious claims and in some instances overprice the medical services received by the members.
Hypothecation should not be encouraged since it removes free will and choice from the people who pay taxes. Individuals should have a say on whether or not they want to be part of the housing scheme and if they want to pay the housing levy. Taxpayers should have a choice on whether to purchase their houses through bank mortgages or savings and credit cooperative societies (saccos), which are very popular in Kenya. This policy also reduces the amount of disposable income. This means that more households will be constrained on their savings and spending will be reduced greatly, which has a subsequent effect on the economy at large.
Hypothecation is a bad tax and economic policy as it reduces policy competition during allocation of funds. Taxation should be driven by need and as such various policies have to compete to get a certain share of the taxpayers’ money. Imagine a case where for every new government policy a new tax is introduced. The ideal should be that various needs are identified and then prioritised to help determine the revenue share that each gets. This ensures that the proportion of revenue allocated is based on the priority.
The success of any government is based on having reliable structures with an element of flexibility at the same time. Hypothecation, however, removes that flexibility from Parliament or the Cabinet Secretary for Treasury to reallocate funding to priority sectors. Hypothecation essentially ties the hands of government as spending of hypothecated funds is constrained. Governments should be in a position to spend especially during difficult economic cycles without seeming like they are breaking the law.
William Wordsworth is quoted as having said “Life is divided into three terms — that which was, which is, and which will be. Let us learn from the past to profit by the present, and from the present, to live better in the future”.
In Kenya we have had the NSSF and the NHIF which in all fairness have largely been mismanaged, and riddled with graft. Hypothecation in each case has not been successful yet the revenues are still collected. The housing levy should be abolished to avoid going the same path.
Kuria is a Tax Consultant at Andersen Tax, Kenya. [email protected]