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County tax collections hit record Sh40bn but still short of potential

National Treasury building
The National Treasury building in Nairobi. FILE PHOTO | NMG 
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Own source revenue (OSR) collections by counties rose 24 percent to hit an all-time high of Sh40.3 billion on improved efficiency but still fell short of the estimated potential by the National Treasury.

An analysis by the Controller of Budget Office for the financial year ended June 2019 showed the revenue improved from four-year low of Sh32.49 billion that had been achieved last year.

A total of 13 counties hit the goals they had been given by the National Treasury, up from the previous financial year when only three counties met the target.

“Analysis of OSRs as a proportion of annual revenue target showed that 13 counties namely; Lamu, Vihiga, Taita Taveta, Narok, Elgeyo Marakwet, Isiolo, Nakuru, Bungoma, Tana River, Kwale, Laikipia, Kirinyaga and Kiambu exceeded their annual targets,” read the report.

A comparison with preceding financial year shows that all counties posted growth in revenue collection except four- Homa Bay, Kisumu, Samburu and Wajir whose collections tanked.

This offers hope for devolved units to reduce the over-reliance on National Treasury’s disbursements and overseas grants for development projects and payment of salaries.

Fifteen counties recorded a more than 50 per cent of growth in OSR in a period that also saw a record 38 counties meet at least 50 per cent of the budgeted collection targets.

Fastest growth

Laikipia and Kakamega had the fastest growth. While OSR of Laikipia grew by 97.4 per cent to Sh815.79 million, that of Kakamega rose by 94.8 per cent to Sh858.3 million.

Others with above 50 percent growth were Busia, Embu, Kajiado, Kiambu, Kilifi, Makueni, Mandera, Migori, Murang’a, Nyamira, Taita Taveta, Tharaka Nithi and Trans Nzoia.

On the contrary, counties that missed their targets by far included Migori, which achieved only 25.9 per cent, Wajir (30.1 per cent), Kisii (36.1 per cent), Garissa (43.3 per cent), Meru (44.8 per cent) and Nandi at 45.4 per cent.

Counties get their revenue from market and trade licensing fees, parking fees, land rates, liquor licensing, county parks, beaches and public cemeteries. They also control licensing of domestic animals and casinos.

More counties have over the recent past moved to automate their major revenue streams to stop theft of public resources that is rampant with the manual payment systems.

The improved collection still trailed the targeted collection of Sh53.86 billion. It was also only a third of the OSR potential of Sh124.7 billion as estimated by National Treasury in the Potential and Tax Gap study released early this year.

During the period under review, Nairobi City county generated the highest OSR at Sh10.24 billion followed by Mombasa and Narok at Sh3.71 billion and Sh3.12 billion respectively.

Closing the super seven counties with OSRs above Sh1 billion were Nakuru (Sh2.8 billion) Kiambu (Sh2.74 billion), Machakos (Sh1.55 billion) and Kajiado with Sh1.07 billion.

Revenues of many counties look aligned to the latest Gross County Product (GCP), a measure of how much each county contributes to Kenya’s GDP.

Higher revenues

A higher GCP indicates higher economic activity which should essentially translate to higher tax revenues.

Data from Kenya National Bureau of Statistics (KNBS) shows highest contributors to Kenya’s GDP are Nairobi with GCP of 21.7 percent, followed by Nakuru (6.1 percent), Kiambu (5.5 percent) and Mombasa (4.7 percent).

Closing top 10 are Machakos, Meru, Kisumu, Nyandarua, Kakamega and Uasin Gishu.

But Narok’s OSR is a surprise. It is only beaten by Nairobi and Mombasa, despite its GCP being 2.2 per cent, a distance 13th on contribution to Kenya’s GDP.

The report commends Narok for automating its revenue collection, leading to a growth in OSR for the third year running.

Nairobi, Mombasa, Kiambu, Narok, Nakuru, Kisumu, Machakos and Nyeri have the highest number of formal sectors with the Treasury calling for partnerships with the Kenya Revenue Authority (KRA) and private companies to increase revenue collections.

Those who have embraced this look set for better outcomes.

Kiambu has contracted the KRA to collect property rates, land rent and single business permits while park entry fees — the biggest stream in Narok County — is collected by Kenya Airports Parking Services (Kaps), a private company.

The overall improved performance across counties that netted an additional revenue of Sh7.8 billion was however overshadowed by a 40.9 per cent rise in sitting and travel allowances to Sh8.6 billion.

It pushed up recurrent spending by 13.5 per cent to Sh269 billion of the total expenditure of Sh376.43 billion, translating to 71.4 per cent of total spending. This means development spending was Sh107.44 billion, being only 28.5 per cent of total spending.

With exception of only five counties, the rest of the devolved units contravened Public Finance Management Act that requires them not to spend more than 35 per cent of total revenue on wages and benefits.

Treasury still believes more could be done to enhance OSR. It is recommending transferring of land rates collection role from National Lands Commission role to counties.

This, it said, will increase efficiency in revenue administration as all the revenues due to counties would be collected in one stop shop.

“There is also [a] need to revise land rents to increase the revenue collected,” Treasury further proposed in study published early this year.

It further called for digitisation of the title deeds, centralising all the county land registries and introducing technology- backed valuation rolls to match market prices of properties.

A recent audit by the National Treasury showed that OSR collections by counties are up to four times below the minimum potential — shining the spotlight on inefficiencies by the devolved units.

Tax gap

The OSR potential and tax gap study revealed that the 47 county governments can raise a minimum Sh124.7 billion annually.

“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.

Worrying trend

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.

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