Performance Measures for Sustainable Tax Reform:

Quantifying Short-Term Gains vs. Assessing Progress Toward Sustainability

Wilson PrichardInternational Center for Tax and Development

Outline1. The General Argument

1. Core Proposition2. The Practical Challenge3. Policy Implications

2. Illustrating the Argument in Sierra Leone1. The Property Tax Reform Program2. Standard Indicators of Reform Progress3. Short-Term Progress vs. Long Term Sustainability4. Identifying Measures of Long-term Sustainability

3. Concluding Thoughts

The (Very Basic) General Argument

Core Proposition• One important goal of performance measurement is to assess

whether a reform program is succeeding, in order to take corrective measures or reassign resources toward “reform leaders”

• Conceptually, performance measure can focus on two distinct elements of reform success:1. Short-term progress of a reform program in improving

performance (e.g. increased revenue, reduced leakages, greater compliance)

2. Progress in laying the foundation for long-term program success and sustainability (e.g. establishing appropriate processes, securing political leadership, overcoming looming risks to the program)

The Practical Challenge• These are frequently aligned: Short-term progress reflects the

success in putting in place the necessary elements of long-term sustained success.

• However, sometimes short-term gains can mask the failure to build the foundation for long-term success For example, short-term revenue gains may be achieved by

“squeezing” key taxpayers, or briefly suppressing networks of collusion or corruption, but without addressing the roots of existing problems

• This disconnect often related to the central challenge of politics: Where there is no political commitment to reform sustainability is unlikely – but identifying political support, or its absence, can be very challenging.

Policy Implications• Focusing on short-term gains, rather than

indicators of long-term sustainability, can provide a misleading picture of reform progress, resulting in:1. Complacency and a failure to address potential

risks to the program2. Declining program performance over the

medium term3. Misallocation of reform resources

Illustration from a Local Government Property Tax Reform Program in Sierra Leone

Program background

• City Councils reestablished in Sierra Leone in 2004, following the end of the civil war, after having being abolished in 1972

• The Councils had extremely limited capacity, with property registers often destroyed or decades out of date, leading to very limited tax collection

Program Overview• Property tax reform program was initiated in

Makeni City Council in 2006-2007, while it then began to be implemented in Freetown, Kenema and Bo in 2008.

• The program called for the identification of all local properties, automation of the property register and billing process and extensive outreach and enforcement efforts

Standard Performance Measures

• As with most tax reform programs, standard performance measure for local government reform are generally quantifiable measures directly related to revenue collection:1. Number of properties identified and valued2. Implementation of the automated software3. Distribution of Rate Demand Notices4. Public outreach about the new tax5. Total revenue collected

Short Term Gains• Against these measures Bo, Makeni and Kenema all

initially exceeded expectations, while Freetown made rapid progress on revenue collection:1. Virtually all properties were identified in Makeni, Bo and

Kenema, while significant gains occurred in Freetown2. Makeni Bo and Kenema introduced the new IT systems,

and fully automated the property register and billing3. All councils implemented basic outreach activities to

inform citizens about the new tax4. There were dramatic revenue gains in all three locations

Short Term Gains

Freetown Kenema CC Bo CC Makeni CC0

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Property Tax Collection per capita 2005-2007

20052006200720082009

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From 2007 to 2009 the largest increase in collection, in percentage terms, was in Freetown (420%), while gains were almost identical in Makeni (280%), Kenema (285%) and Bo (305%).

Long-Term Sustainability• However, short-term gains were a poor predictor of long-term progress, with

outcomes diverging sharply 2009-2011. Freetown and Makeni stagnated, Kenema continued to make progress, while Bo accelerated rapidly.

Freetown Kenema CC Bo CC Makeni CC0

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Tax Collection per capita, 2009-2011

200920102011

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Explaining Long-Term Divergence

Politically Difficult Reform Measures

• All councils implemented discovery, assessment, a basic IT system and taxpayer education. Why? These were “political easy”, brought in new revenue and

were paid for by external actors

• Divergence came in less easily monitored areas: IT system transparency, new forums for dialogue, and, above all, enforcement among elites. These were much better predictors of program sustainability. Why? Taking the “politically difficult” steps directly challenged

vested interests, and thus acted as a signal of political leadership and buy-in.

Concluding Thoughts• No set of performance measures perfectly signals future

developments: political commitment to reform can shift over time, even when apparent early on.

• However, focusing on “politically difficult” reform measures can offer insight into the strength of local commitment to reform.

• This can act as a key indicator of future success, while aiding governments or donors in identifying risks early on and allocating reform support where it is most likely to be successful.