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.
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.
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.