Performance Measures for Sustainable Tax Reform: Quantifying Short-Term Gains vs. Assessing Progress Toward Sustainability Wilson Prichard International Center for Tax and Development

Outline 1.The General Argument 1.Core Proposition 2.The Practical Challenge 3.Policy Implications 2.Illustrating the Argument in Sierra Leone 1.The Property Tax Reform Program 2.Standard Indicators of Reform Progress 3.Short-Term Progress vs. Long Term Sustainability 4.Identifying Measures of Long-term Sustainability 3.Concluding Thoughts

The (Very Basic) General Argument

Core Proposition One important goal of performance measurement is to assess whether a reform program is succeeding, in order to take corrective measures or reassign resources toward “reform leaders” Conceptually, performance measure can focus on two distinct elements of reform success: 1.Short-term progress of a reform program in improving performance (e.g. increased revenue, reduced leakages, greater compliance) 2.Progress in laying the foundation for long-term program success and sustainability (e.g. establishing appropriate processes, securing political leadership, overcoming looming risks to the program)

The Practical Challenge These are frequently aligned: Short-term progress reflects the success in putting in place the necessary elements of long-term sustained success. However, sometimes short-term gains can mask the failure to build the foundation for long-term success  For example, short-term revenue gains may be achieved by “squeezing” key taxpayers, or briefly suppressing networks of collusion or corruption, but without addressing the roots of existing problems This disconnect often related to the central challenge of politics: Where there is no political commitment to reform sustainability is unlikely – but identifying political support, or its absence, can be very challenging.

Policy Implications Focusing on short-term gains, rather than indicators of long-term sustainability, can provide a misleading picture of reform progress, resulting in: 1.Complacency and a failure to address potential risks to the program 2.Declining program performance over the medium term 3.Misallocation of reform resources

Illustration from a Local Government Property Tax Reform Program in Sierra Leone

Program background City Councils reestablished in Sierra Leone in 2004, following the end of the civil war, after having being abolished in 1972 The Councils had extremely limited capacity, with property registers often destroyed or decades out of date, leading to very limited tax collection

Program Overview Property tax reform program was initiated in Makeni City Council in , while it then began to be implemented in Freetown, Kenema and Bo in The program called for the identification of all local properties, automation of the property register and billing process and extensive outreach and enforcement efforts

Standard Performance Measures As with most tax reform programs, standard performance measure for local government reform are generally quantifiable measures directly related to revenue collection: 1.Number of properties identified and valued 2.Implementation of the automated software 3.Distribution of Rate Demand Notices 4.Public outreach about the new tax 5.Total revenue collected

Short Term Gains Against these measures Bo, Makeni and Kenema all initially exceeded expectations, while Freetown made rapid progress on revenue collection: 1.Virtually all properties were identified in Makeni, Bo and Kenema, while significant gains occurred in Freetown 2.Makeni Bo and Kenema introduced the new IT systems, and fully automated the property register and billing 3.All councils implemented basic outreach activities to inform citizens about the new tax 4.There were dramatic revenue gains in all three locations

Short Term Gains From 2007 to 2009 the largest increase in collection, in percentage terms, was in Freetown (420%), while gains were almost identical in Makeni (280%), Kenema (285%) and Bo (305%).

Long-Term Sustainability However, short-term gains were a poor predictor of long-term progress, with outcomes diverging sharply Freetown and Makeni stagnated, Kenema continued to make progress, while Bo accelerated rapidly.

Explaining Long-Term Divergence

Politically Difficult Reform Measures All councils implemented discovery, assessment, a basic IT system and taxpayer education.  Why? These were “political easy”, brought in new revenue and were paid for by external actors Divergence came in less easily monitored areas: IT system transparency, new forums for dialogue, and, above all, enforcement among elites. These were much better predictors of program sustainability.  Why? Taking the “politically difficult” steps directly challenged vested interests, and thus acted as a signal of political leadership and buy-in.

Concluding Thoughts No set of performance measures perfectly signals future developments: political commitment to reform can shift over time, even when apparent early on. However, focusing on “politically difficult” reform measures can offer insight into the strength of local commitment to reform. This can act as a key indicator of future success, while aiding governments or donors in identifying risks early on and allocating reform support where it is most likely to be successful.