Own-source revenue (OSR) collections by counties are up to four times below the minimum potential, a new study by the National Treasury showed, shining the spotlight on inefficiencies by the devolved units.
The OSR potential and tax gap study revealed that the 47 county governments can raise a minimum Sh124.7 billion annually.
In financial year 2017/18, county governments targeted to raise Sh49.2 billion in OSR but only collected Sh32.5 billion, similar to collections in 2016/17. This was a massive Sh92.2 billion below the potential. Nevertheless, OSR out-turn in the financial year 2017/18 was better (66 percent) than in 2016/17 (56.4 percent), which had a higher target (Sh 57.7 billion).
“The study’s main policy finding is that counties should focus revenue improvement efforts on streams with a strong policy rationale, significant revenue potential and cost-effective to collect,” the Treasury said.
“Not all revenue streams are suitable for revenue enhancement effort. In general, user charges are based on fee payment for accessing a service, and health services for instance, should not be targeted for revenue enhancement in case they make crucial healthcare inaccessible,” it however noted.
According to the study, property taxes hold the biggest potential for OSR collections in counties, estimated at Sh66.2 billion annually. Other prospective OSR sources include business licences (Sh23.4bn); vehicle parking fees (Sh12.6bn); liquor licences (Sh10.2bn); outdoor advertising charges (Sh6.3bn) and Sh6bn from building permits.
The study followed a worrying trend where OSR performance has continued to deteriorate since the inception of the devolved system.
“In general, counties’ OSR performance has deteriorated in the last three years both as a proportion of targeted collections and in absolute terms,” the Treasury said.
Furthermore, official data showed that OSR is financing an increasingly smaller proportion of the county governments’ spending. For instance, it financed 15.5 percent in 2013/14; 13.1 percent in 2014/15; 11.9 percent in 2015/16; 10.2 percent in 2016/17; and, 10.7 percent in 2017/18.
“This trend confirms growing reliance by the counties on transfers from the National Government. Globally, locally-generated revenue is a key indicator of subnational governments’ fiscal autonomy, and hence the need to strengthen contribution of OSR to budgets of Kenya’s Counties,” the Treasury added.
The dip in OSR collection over the years has meant that Exchequer releases and conditional grants to county governments have been on an upward trend from 2013/14 to cover for the shortfall.
“Since the financial year 2013/14, county governments have missed their OSR targets. In general, the increasing variance between projected and actual OSR collection, highlights the difficulty counties continue to face in preparing realistic revenue forecasts,” said the National Treasury
"Funding gaps occasioned by unrealised revenue projections are the major source of fiscal constraints faced by counties while implementing their annual budgets”.
Counties' dependence on transfers from the Exchequer climbed to a record high in the 2016/17 financial year. Records showed — an indication of flaws in collection and management of their OSR.
To tame this anomaly, the Treasury last year developed a policy on enhancement of OSR performance by counties.
The implementation of the policy which was submitted to and approved by the Cabinet will include; assisting County Governments to determine their revenue potential and improve revenue forecasting; supporting the counties to develop principal laws to anchor their revenue measures in line with Article 210(1) of the Constitution; and, ensuring that all counties have established appropriate institutional arrangement for collecting OSR, and that they have adopted more effective revenue management systems with common standards.
Further, to support implementation of the policy, the government has also initiated legislative reforms at the national level intended to improve performance of county governments’ revenue sources including property and entertainment taxes; business and liquor licences; tourism levies; outdoor advertising fees; and, several decentralised user charges.
“In addition, draft legislation has been forwarded to Parliament which is intended to ensure that county governments’ taxation and other revenue-raising powers are not prejudicial to national economic policies, economic activities across county boundaries or the national mobility of goods, services, capital or labour” the National Treasury said.
The draft legislation — the County Governments (Revenue Raising Process) Bill, 2018 — which fulfils Article 209(5) of the Constitution, was approved by Cabinet alongside the policy and has been submitted to Parliament.