The blog of the Urban Institute
June 1, 2021

Improving Local Governments’ Capacities to Raise Revenue Could Boost Global Development Efforts

Kampala, the capital and largest city in Uganda, had a revenue problem. With a narrow tax base and a lacking collection system, the city faced a low revenue ceiling that collections still labored to meet.

But in 2011, the Kampala Capital City Authority sought to change this outlook by instituting reforms to improve its tax administration and increase local revenues as a result. These reforms aimed to build an accurate record of taxpayers, improve the effectiveness of billing and collection, and increase citizens’ motivation to pay taxes by creating simple and transparent payment platforms. In just four years, the city doubled local revenues.

Kampala’s experience highlights the difficulties of subnational domestic resource mobilization (DRM) that many local governments face worldwide, but it also demonstrates opportunities for development partners to support local reform efforts. Our new report explores these difficulties and identifies policies and practices that subnational governments and development partners can pursue.

A bar chart showing that low-incomecountries have room to improve subnational government revenues compared to lower middle income and upper middle income countries.

Enhanced subnational DRM could help improve basic services and increase trust

Subnational domestic resource mobilization (DRM) refers to the process by which funds are raised and spent by district, municipal, and state governments. Subnational governments fund their operations and services through a range of revenue sources, including intergovernmental transfers, such as grants and subsidies, and own-source revenues, such as taxes and other charges subnational governments have the autonomy and discretion to collect and use.

Efficiently mobilizing domestic resources can help sustainably advance development priorities while strengthening governance and accountability structures. In countries experiencing the twin forces of rapid urbanization and decentralization reforms, improving subnational DRM is critical to maintaining and expanding access to basic services.

In many places, the roles and responsibilities of subnational governments vis-à-vis service delivery have expanded without a sufficient corresponding increase in their capacity for revenue collection. In other words, these governments must meet the basic service needs of a growing population and must raise some of the revenue to cover these needs, but they lack the tools, systems, and financial management capacity to do so.

With more—and better managed—resources, subnational governments could more efficiently respond to the ever-growing demands they face. And some evidence suggests trust between citizens and the state is strengthened when subnational governments use resources in ways both accountable and responsive to citizens’ needs and priorities.

What solutions exist to strengthen subnational DRM?

Barriers to improving subnational DRM, particularly raising own-source revenue, generally fall into two categories: technical and political. Subnational governments often lack the administrative and technical capacity to manage local revenue systems, and political considerations and incentives often conflict with efficient revenue administration.

Places like Kampala are overcoming these challenges through innovative policies and programs. In Peru, some municipalities have created semiautonomous tax administration services that have helped reduce burdens on overwhelmed public revenue agencies and increased local revenues. In Nairobi, Kenya, policymakers got rid of duplicative, burdensome local fees by introducing a unified business permit, which could reduce the costs of revenue collection and barriers to small business activity while increasing revenues.

In Za-Kpota, a commune in Benin, a framework that facilitates discussion between elected officials and civil servants on DRM strategies has partially addressed the challenge of political commitment. And in the city of Punjab, Pakistan, experimental evidence shows that providing performance incentives to motivate tax collectors can increase property tax revenue significantly.

Our research suggests effective subnational DRM reforms and policies must be context driven but can also depend on forces outside of local control, such as intergovernmental relationships. Other common features of many successful reform efforts include the committed leadership of key local stakeholders, the support of national government and international development partners, and actions packaged as part of broader reforms, as opposed to piecemeal interventions.

How can development partners best support local efforts?

Development partners can support and reinforce the efforts of local leaders to bolster local resources, but, their support in this area has been limited to date. In order to advance development priorities on governance, accountability, and local service delivery, greater attention must be paid to subnational DRM and supportive national-level policies, such as tools that improve revenue forecasting to increase transfer predictability. Development partners, like the US Agency for International Development, can use their convening power to identify DRM challenges and build coalitions for reform, connect local leaders with policy advice and technical assistance, and lend visible support for politically challenging reforms.

Improving subnational resource mobilization will require building on international and local evidence and adapting to changing needs, realities, and opportunities. Development partners are more than well equipped to play a catalytic role in these change processes.  


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