The practice of local revenue collection for cities and towns in Ethiopia is limited. Most towns and cities depend on state and federal governments support to finance development projects, leaving them with no power to collect their own revenues. The practice has left development impaired while leaving essential services to the mercy of aid. With what seems to be a plan to change that, the Addis Ababa City Administration has embarked on a new property tax. As much as this new scheme is essential as a source of local revenue, the amount of tax would be unbearable for city dwellers, writes EBR’s Addisu Deresse.
Samson Desta [Not Real Name] is a 42 years old banker who lives at a residence he and his siblings inherited from their parents. Their parents’ residence, located in the Akaki Kality District of the capital, rests on 500 square meters of land.
Samson, who is married and a father of two, also has siblings who are married and live in the same compound. That property has been more of a blessing for the big family, given the skyrocketing price of rent the capital has been witnessing over the years.
“I cannot even begin to imagine what life would have been like with my two children in a rental house,” Samson feels thankful for the property his parents left to the family.
For decades, the property has not only saved the family from rental costs but also served as a source of revenue for Samson and his siblings, who led a decent life by sending their children to private schools.
Samson and his siblings collect ETB 40,000 monthly by renting houses in their compound. After spending a portion of it on recurrent expenditures such as power, tap water, and wifi, the balance goes to supporting their respective children and their education. For so long, the family only had to pay a little over ETB 2,000 a year in rental income tax.
This amount may only hold briefly as the Addis Ababa City Administration Revenues Bureau has introduced a new property tax directive. The new directive sent down to district offices on May 13, 2023, would incur a significant amount for property owners in the city.
The new directive separates properties into those used for business and housing. Each subcategory has its grade, and each category has its subcategories.
Properties constructed of mud and wood are taught in the first subcategory, condominium houses are in the second, and brick villas and flats are classified in the third subcategory.
A property in the first grade of a residential category pays ETB 214 per square meter. In contrast, condominium houses, villas, and apartments in the same grade pay ETB 247 and ETB 361, respectively. For properties owned by businesses, the exact grade in the first category pays ETB 444, a business condo pays ETB 493, and a villa or apartment made of brick owned by a business pays ETB 632 per sq. meter.
The tax value for all properties stands at 4.5 Pct. The total annual tax for a property can be calculated by multiplying the size of the property by the value per square meter by 12 months and then by the tax value.
Samson’s family’s property rests on about 217 square meters. Based on this calculation, the annual tax for the property of Samson’s family will jump to more than ETB 25,000 per year. A number Samson thinks is impossible to bear.
“I am hoping there is some mistake I made while calculating the tax,” Samson says. “Otherwise, it is absolutely impossible to even imagine being able to afford it.”
This is the second shocking news Samson received in the same week last month. The private school he sends his children to gathered parents, where the school announced a proposal to increase school fees by 100Pct. Samson and his family this difficult to understand what is really going on in the country.
Samson’s fear is not only for himself and his family. He understands how this will reciprocate to the people who live in his rental houses.
“By the end of the day, it won’t be much of a problem for me,” Samson explains. “I will double the rental prices and let the people shoulder the burden. That’s what we call fueling inflation, isn’t it?”
“For this year, to ease the burden, taxpayers are required to pay only 50 Pct of the calculated amount,” reads the letter sent to districts. “Those who have already paid this year’s tax are also exempt from the new tax bracket.”
Urban financing experts contend that property taxes are essential for developing cities and towns, notwithstanding how alarming it may be to city residents.
Such was the argument when interest groups in urban financing convened at The Urban Centre to listen to a panel discussion on local revenues for Ethiopian towns and cities in the late afternoon of October 20, 2022.
“You can also consider property taxes,” said Abebe Zeleul, senior national advisor at UN-Habitat, in an interview with EBR. “Property tax was, by the way, introduced in Ethiopia during the imperial era.
Unfortunately, it didn’t go well enough to boost local revenues. Local governments must identify properties and include the majority of them in their tax brackets.”
According to Haile Gebreyohannes, a senior urban revenue and finance specialist, cities finance themselves in various ways. Cities finance themselves through subsidies, own-source revenue, community contributions, external assistance, and domestic loans.
“All of these sources of financing for our cities are either low in amount or insignificant,” Haile said. “Some others are not reliable, while others are very difficult to mobilize.”
Actual Own Source Revenues (OSR) for Ethiopian cities include income from land lease (non-recurrent), trade and professional tax, transfer of title deeds (non-recurrent), and many other low-yield items.
According to Haile, state revenues account for less than 30Pct of the OSR of Ethiopian cities, while leasing income accounts for the highest. When annual expenditures account for less than 20Pct of the total budget, recurrent budgets account for greater than 75Pct.
“The implication is obvious: fiscal deficit,” Haile argues. Urban financing has been a problem for a long time. This problem is exacerbated by various things, such as the high land cost, the requirement for infrastructure upgrades, and the difficulties in luring private investment. But in recent years, a number of cutting-edge finance techniques have also been created to address these issues.
Tax increment financing (TIF) is one example. With this instrument, towns can make expenditures in public infrastructure and other upgrades within a specific area and then use a percentage of the gain in local property prices to cover those costs. This may be a practical approach to paying for urgently needed upgrades without burdening taxpayers.
Community development financial institutions (CDFIs) are yet another case in point. These specialized lenders give money to enterprises and initiatives in disadvantaged areas. CDFIs can help close gaps in the stock lending market and offer crucial finance for initiatives that might only proceed with them.
There are numerous instances of creative urban finance methods in use all around the world. Even the most challenging urban development projects might be financed with enough innovation and inventiveness.
According to Abebe, generating local money has proven to be distant from these best practices. In Ethiopia, there is no fiscal decentralization and no empowerment of the cities. Urban local governments’ OSR is minimal and needs a solid legal foundation. Due to a lack of data and data management systems, their potential has yet to be discovered. The accepted concepts could be more precise, and the rate and bases are limited. Additionally, cities rely more on capital than long-term revenue streams like land rents.
In sub-Saharan Africa, several systems are the collection of property taxes is made up of several diverse systems, some located at the national level and some at the local level, according to a working paper written by Rose Wanjiru, Anne Wanyagathi Maina, Eldah Onsomu, and Graeme Stewart-Wilson and published in 2019. There is now universal acceptance that property tax systems in sub-Saharan Africa do not result in the intended cycles of public investment and local government empowerment because of the frequent center-local disputes. Therefore, the efficient application of property taxation depends on institutional trust and cooperation across organizations.
The article discusses recent events in Kenya, including the passage of a new constitution in 2010 that drastically reduced the power held by the national government and gave it to county governments instead. The new constitution gave 47 new county governments authority and responsibility previously held by the central government. Kiambu, Laikipia, and Machakos were the three counties where the study was conducted.
Although fiscal transfers from the federal government are the primary source of funding for county governments, property taxes make up the majority of their sources of income. The county government has the authority to set its own tax rates, property rates, and tax bases.
This affords a unique chance to look at some of the prospects and issues facing property taxes in sub-Saharan Africa.
“It is not whether the government must collect a property tax,” Samson argues. “There is not a sane person who argues against that. However, imagine a 20-fold increment in property tax, added to a 100Pct increment in school fees and a 100Pct increment in the price of eggs and teff. That is insane!”
11th Year • June 2023 • No. 118 EBR
