Title: Social Compact: Urban Services and Taxes
Principal Investigators: Asim Khawaja, Mehwish Shaukat, Adnan Khan and Benjamin Olken
Implementing partners: Punjab Local Government Department and Punjab Excise and Taxation Department
Project type: Large scale (Lahore and Faisalabad)
Start Date: Pilot stage 2015-2016 Operational: 2016
End Date: December 2019
The social compact between citizen and state – whereby a citizen pays taxes and receives (public) goods and services – is a critical link in the development process. This link is especially salient in the context of local governments and a significant metric on which they are judged. However, if citizens perceive little benefit from their tax payments, or local services are disconnected from local decision-making, this link can be broken. This can create a vicious cycle where citizens do not receive high quality services because resources are limited by low levels of local tax revenue, and the low quality of services leads to a low willingness to pay taxes, as well as a broader lack of trust in the state.
The study seeks to examine these issues by introducing a menu of reforms that strengthen the link between the provision of local urban services and local property tax collection in urban Pakistan. The three main interventions are:
- Demand. In this intervention, tax staff informs citizens of the link between taxes and services by showing a short video on local taxes. Tax staff then solicits citizens’ preferences on which type of local goods should be prioritized in their neighborhood. The results of this preference elicitation are then shared with the local government in an effort to improve the allocation of services.
- Delivery. In the status quo, revenue is collected from administrative tax units and transferred to local governments that allocate these to city-level services. To strengthen the link between taxes paid and services provided, this intervention requires local governments to allocate a portion of property tax collected from a neighborhood (tentatively 35%) to that same neighborhood. As in the Demand intervention, tax staff informs citizens of the link between taxes and services and convey details about the intervention.
- Demand and Delivery. This intervention combines the previous two. By both eliciting citizen preferences (#1) and requiring local governments to allocate funds to the neighborhood (#2) in accordance with these preferences, it seeks to make the tax-services link even more salient and credible. As in the Demand intervention, tax staff solicits citizens’ preferences on which type of local goods should be prioritized in their neighborhood. Citizens are then informed that 35% of their neighborhood’s property tax revenue will be earmarked for their preferred service.
In addition to main treatments, CERP will implement a variant of the Demand and Delivery intervention where local leaders will mobilize the community to help enhance the tax-service link. Finally, CERP will randomize the content of the information and preference elicitation at the property level to help understand how to make the information credible and how to best get citizen voice.
The sample consists of approximately 500 neighborhoods in two of the largest cities of Punjab, Lahore and Faisalabad.
Re-engaging with urban areas is a key priority for Pakistan in general, and Punjab government in particular. The country is in the midst of revitalizing local governments, and enabling citizens’ voice within this context could significantly impact the success of these local governments. The demand for this study came from a combination of the Punjab Local Government Department – which provides services – and the Punjab Excise and Taxation (E&T) Department – which collects the property taxes that fund these services. The project is strongly supported by both Departments and backed by the Chief Minister and is anticipated to be a key pillar in the reform agenda of the government.
Last year, CERP introduced interventions to all concerned neighborhoods in the sample. Tax staff surveyed nearly all of approximately 60,000 total properties in the sample.
In Demand and Demand and Delivery neighborhoods, CERP surveyed taxpayers for their preferences over a variety of local services including sanitation, street repair, and street lighting. CERP aggregated these preferences and transferred them to the relevant Local Government departments. Now CERP is working with the Local Government to begin service implementation using earmarked property tax funds and preparing for the second year of the study.