Increasing tax collection is an area of focus the world over. In Pakistan, tax collection, and property tax in particular, is a substantial issue even relative to other developing countries. Property tax collection in Punjab is roughly a fifth of the level of developing countries (World Bank 2006). For the past 5 years, the Excise and Taxation Department (E&T) Punjab has been working with the Centre for Economic Research Pakistan (CERP) and its team of international researchers from Harvard University, London School of Economics and M.I.T. in order to improve performance tax collection. The collaboration so far focused on two distinct projects, namely the Performance Pay Project and Merit-Based Transfers and Posting Project, that were designed to improve tax collector performance by introducing performance based human resource (HR reform).
The project was originally formulated by the primary investigators and government officials from the departments of Local Government, Excise and Taxation, Audit and Accounts at a workshop on ‘Civil Service Reforms’ at the National School of Public Policy (NSPP) jointly organized by NSPP, Harvard’s Evidence for Policy Design, and the Centre for Economic Research in March 2014. Since then, the primary investigators have held a number of meetings with government stakeholders at all levels to work out details of the project design.
For this project our team conducted multiple meetings with TMAs and local government officials from Lahore, Gojra, Sialkot and Faisalabad during 2015 to discuss project feasibility and to refine its design. For instance, the project team visited MC Gojra several times during summer 2015 and held discussions with the Tehsil Municipal Officer, Tehsil Officer Finance, and Tehsil Officer Infrastructure and Services. Further, the Punjab Municipal Development Fund Company (PMDFC) recommended municipalities for the pilot phase of the project based on several parameters such as maintenance of detailed records of budgeting and expenses monitoring of local services through a performance tracking system. Moreover, the Excise and Taxation Office (E&T) also provided valuable feedback on the suitability of localities within municipalities for the pilot phase of the project.
Broader Rollout and Current Design
After the successful completion of our previous project we have transitioned into the current project that focuses on complementary reforms on the taxpayer’s side. If citizens believe their tax dollars are spent in ways that benefit them they are more likely to comply. This project is aimed at linking local property tax collection with local government services in order to bridge the trust deficit between the State and citizens. In motion since November 2014, the implementation of the pilot in Lahore and Gojra was started during the financial year 2015-16.
The reforms aim to strengthen the citizen-state relationship by reminding citizens of the productive social purposes for which their tax payments are used and by reducing the discrepancy between provided and desired services.In collaboration with Urban Unit, our team designed 500 neighbourhoods based on the following criteria
- Each neighborhood consists of approximately 100 to 400 taxable properties.
- The properties have a 70% taxable ratio.
- There is 7.5 lac recovery expected
Then these neighbourhoods are selected by ballot for either intervention or control. For now these neighbourhoods are selected from two municipalities, Lahore and Faisalabad. The sample may be expanded to include additional districts in FY2017-18.
We propose a set of schemes that can help rebuild the virtuous cycle between taxes paid and services provided. The schemes include eliciting citizen preferences for public goods and sharing this information with the local government, earmarking a portion of tax revenue to be allocated to the same area from which the revenue was collected and earmarking a portion of tax revenue to be allocated based on citizen preferences. The design will allow for comparison between the following policy reforms;
- Information and Preference Elicitation; the tax staff will inform citizens of the tax-service linkage and give them a more direct voice in how their taxes will be utilized by credibly providing them information about how local taxes are used.
- Local allocation; In order to strengthen the link between taxes paid and services provided, this intervention will require local governments to allocate 35% tax collected from the a neighborhood to that same neighborhood.
- Direct Allocation; This intervention is a combination of the previous two interventions but additionally requires the tax provision on services preferred by the citizens.
The project employs the smart policy design approach, whereby researchers and practitioners work together in long-term embedded relationships in order to fuse research with public policy. The approach (i) identifies the policy problem, (ii) diagnoses underlying causes, (iii) designs feasible policy solutions, (iv) tests solutions through implementation and rigorous evaluation, and (v) refines solutions based on continuous monitoring and feedback. The project will be implemented using a randomized control trial (RCT) design. This will allow us to interpret any differences between the various schemes and a comparison group as causal.
Outcome and Policy Impact
There are wide-ranging policy benefits that are likely to accrue from this project. The question of what determines taxpayer morale and whether to better establish connections between service provision and tax payments is not only incredibly important to understand to help improve tax collection but also gets at the more fundamental social compact relationship between the citizen and the state whereby the citizen pays taxes in expectation of benefits and services received from the state.
More broadly by examining impacts on outcomes beyond tax payments, such as citizen attitudes and views on the state and political engagement, the project stands to have wide-ranging policy benefits. Should the impacts be substantial it will also pave the way for powerful reforms in the E&T department and other tax departments that can help improve citizens’ willingness to pay and raise taxpayer morale.