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1.1 The transfer of responsibility for providing services from central government to local levels of government has created new needs for sustainable, local sources of revenue. Providing an adequate level of services can be difficult for rural local governments which typically have limited tax bases compared with urban centres. Property taxes have often been viewed primarily as urban taxes but their importance for rural communities cannot be over-estimated. The taxation of rural land and industries can offer to local governments an important source of ‘own tax’ revenues.

1.2 The main reasons for decentralization of the public sector include increasing overall efficiency and effectiveness by allowing local governments to improve responsiveness, accountability and performance of the production and delivery of services. The process of decentralization is an essential part of ensuring that local governments have an active and important role in respect of local governance.

1.3 The decentralization of powers must be accompanied by sufficient revenue to ensure that the new responsibilities of local government are adequately financed. Decisions are required as to which revenue sources should be available for the exclusive use of local governments and which should be subject to inter-governmental sharing. Revenues through grants and other inter-governmental transfers play a large role in the finances of local governments in most countries. However, to ensure that fiscal autonomy of a local government is real, it is essential that a significant percentage of the total revenue of the local government is regarded as its ‘own revenue’, i.e. under its control. Local taxes are an important source of locally-derived revenues.

1.4 Tax on property is an effective local tax as property has a fixed location within the jurisdiction of a specific local government. Few other taxes have its advantages in terms of predictability and stability of yield. Property tax is difficult to avoid and the property provides an asset against which enforcement action can be taken to secure payment of the tax. Moreover, rural communities normally have limited access to other significant tax bases. The taxing of the land and related property of agricultural enterprises and other rural industry can thus provide an important source of revenue to local governments.

1.5 To enhance fiscal autonomy, local government should have some discretion in deciding the extent of the tax base and in setting the tax rates. Few developing countries currently give their local governments much freedom in this respect. However, it is important that local government have tax-setting powers, although this is likely to be within constraints set by the central government. If a local government does not possess the authority to decide the amount of any tax, then local tax policy and accountability to local tax-payers will be weak. In many developing economies, property tax revenues tend to be relatively low in part because of the way in which the tax is administered. A central government is less likely to treat a tax as important if it merely administers the tax and then passes the revenue to local governments. It is therefore important for local governments to have a leading role in property tax systems if they are to be the beneficiaries.

1.6 Taxation is never popular, and changes to the taxation system through the introduction or modification of a rural property tax are likely to be a politically sensitive issue. There is a need for strategies to address opposition to the tax, e.g. through the provision of good information to the public, through transparent decision-making processes, and through the phasing or gradual introduction of changes.

1.7 In some cases, the implementation of a decentralization policy may require the introduction of a completely new property tax. In other cases, the emphasis may be on the extension of an existing urban tax system to include rural properties. If an existing property tax system is dysfunctional, there will be a need to transform it into a more efficient and equitable system.

1.8 This guide is intended to assist countries that wish to introduce new property tax systems or to expand or reform existing systems. The guide is aimed primarily at supporting land administrators who have been assigned the responsibility for the technical design and implementation of rural property taxation systems. Its contents regarding policy aspects of property taxation in support of decentralization may be relevant to national decision-makers and those in central government responsible for preparing legislation and development programmes. Those in the donor community and others who work in broader rural development programmes may also find the information useful.

1.9 The guide starts by describing the potential benefits of decentralization for making the delivery of services more efficient and effective, and it identifies problems which can result in failure to reach that potential. The guide describes the importance of local governments becoming fiscally autonomous, and shows how rural property taxes can be a vital source of revenue for rural communities. It identifies issues that should be considered in the design and implementation of rural property taxes. The overall message is that property tax in rural areas is technically feasible and will benefit the rural economy and rural governance.

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