Assessment of Comprehensive Own-Source Revenue Potential and Tax Gap Study of County Governments
The 2010 Constitution of Kenya introduced a devolved system of governance giving the country’s 47 County Governments the power to use instruments for generating revenues from their own sources. The ability of counties to use these instruments efficiently (including service fees, rates and taxes) is central to effective governance and service delivery at the local level.
Kenya’s Commission on Revenue Allocation (CRA) has a principal constitutional mandate to support County Governments in identifying suitable revenue streams and their policy rationale, as well as in enhancing revenue collection. In this context, Alma Economics was commissioned to estimate the maximum revenues that each County Government can generate from a set of important Own-Source Revenue (OSR) streams, as well as to identify gaps between maximum potential revenues and actual collections.
This study built upon work we undertook in 2018 and was commissioned by the CRA in collaboration with the National Treasury, County Governments, the Kenya National Bureau of Statistics (KNBS), the Council of Governors, and the Controller for Budget, with the support of the World Bank.
Overall, findings from our research suggest that despite improvements in OSR revenue generation policies and processes since our first piece of research in 2018, further work is needed to establish a clear and simple framework for defining OSR sources and reporting on actual collections.
Further collaboration between the CRA and County Governments is required to understand the reasons for discrepancies in definitions and reporting, and to explore the scope for adopting a consistent approach towards OSR revenue reporting and monitoring. Enhancing current practices to arrive at a unified reporting system will be an important development as it will allow counties to understand their potential, assess their performance, and identify areas for improvement.
Investments in improving existing management systems and infrastructure for the collection and analysis of relevant data are also critical steps towards enhancing performance in revenue collection. For example, revenues are currently collected manually, mainly relying on cash payments. This approach often results in tax evasion and can negatively affect revenue collectors’ welfare and performance. Our research indicates that automatic and cashless systems would improve performance substantially.
Investments in revenue collection and reporting infrastructure would require training the current County Government workforce and the creation of an automatic system for collecting data. This would not only focus on revenues, but also on the economic indicators that are relevant to the economic base for each stream. It is recommended that efforts are made towards strengthening collaboration and data-sharing mechanisms between different organizations and departments within and outside of County Governments. This would allow counties to better monitor their revenue base, evaluate their revenue raising activities, and adopt an evidence-based approach to OSR policy decision making.
Improved collaboration and support between departments within County Governments, a consistent reporting framework, and an automated and regularly updated database on the economic basis and revenue collection for each stream would allow for easy and timely access to information. This in turn would promote evidence-based decision making at the county level in Kenya.