Successful Advances in Fiscal ARchItecture (SAFARI): Evidence from a new tax in Zanzibar

Mobilizing domestic revenue is crucial for governments’ ability to provide public services, but many African countries face huge challenges in raising taxes. Consequently, measures to enhance tax revenues receive much attention from policymakers and researchers. Property tax (PT) could be an important tool to increase revenues and are particularly attractive for two reasons. First, properties are immovable, and are in principle easy to identify and tax. Second, property owners are often relatively wealthy, and, thus, the PT is considered a progressive tax. Despite these advantages and the fact that the PT is levied in almost all countries across the continent, it accounts on average for less than 0.3% of GDP for countries in Sub-Saharan Africa, compared to 2% or more in many OECD countries. The literature offers so far limited evidence on how to enhance PT compliance, and whether the implementation of a new tax affects revenues from existing taxes. Tanzania is working to raise more domestic revenue, including PT. On the mainland, the tax has been in place since the 1980s, but only accounts for 0.08% of GDP. The administration of property taxes has been oscillating between decentralised and centralised collection regimes. In 2021, the property tax collection was assigned to the state-owned electricity utility company TANESCO. In this project, we study how the shift in property tax administration to TANESCO affects property owners, tenants, and revenue collection, using stakeholder interviews, surveys, and administrative tax data. In Zanzibar, the Zanzibar Revenue Authority (ZRA) is currently preparing to introduce PT on commercial buildings. In collaboration with ZRA, the project will explore opportunities to study the preparation and implementation of PT in Zanzibar, using a combination of focus group discussions, business and property owner surveys, and administrative tax data. To shed light on whether and how the tax system and enforcement more broadly constrains business development and tax compliance, the project will also conduct business surveys on the mainland and in Zanzibar, with a particular focus on fairness considerations.

Mobilising domestic revenue is crucial for governments’ ability to improve social and economic development through the provision of public services. Consequently, measures to enhance tax revenues receive much attention from policy-makers and researchers. However, efforts tend to focus on single tax bases, ignoring fiscal externalities, i.e. possible effects on revenues from other taxes. Yet, revenue-enhancing policies targeting one tax are likely to affect the collection of other taxes. For instance, an additional tax can reduce a firm’s capacity to pay all taxes because of liquidity constraints. The introduction of a new tax on commercial properties in Zanzibar offers a unique opportunity to study how additional taxes affect revenues raised. First, we examine whether property owners are compliant with the new tax, using administrative tax data. Second, we study whether the new PT causes fiscal externalities, exploiting the variation created by a randomised gradual roll-out of the tax and comparing revenues from existing taxes between property owners who are subject to the PT and property owners who are not. Third, to shed light on why non-compliance and fiscal externalities may occur, and how to limit them, we implement two randomised field experiments with interventions aimed at mitigating liquidity constraints among taxpayers and increasing the perceived fairness of the tax system. We then study the causal effect of the interventions on compliance, revenues and taxpayer perceptions, using administrative tax data and taxpayer surveys on property owners’ financial situation, business development, and their perceptions of the tax. The study advances the academic literature on fiscal externalities and tax compliance and provides policy-makers with crucial information about the broader effects of tax reforms aimed at mobilising domestic resources in low- and middle-income countries.