Decentralisation of the Property Tax in Indonesia

Financing for development requires developing countries to step up their domestic revenue mobilisation. Many governments recognize this fact in principle, but find it difficult to reform their tax systems. Property taxes have been identified as a source of income whose potential is currently underused by many countries. Subnational levels of government in particular are often unable, or unwilling, to increase their collection efforts. Indonesia has recently decentralised the property tax to the local level, but has this led to a better use of the tax potential from this source? The paper presents the findings from a project imple-mented in cooperation with the Indonesian Ministry of Finance. Along with an analysis of aggregated data at the national level, in-depth case studies were conducted in seven cities and districts. Preliminary evidence suggests that those local governments that took over the responsibility in 2013 or before have in fact succeeded in collecting more taxes from this source. Their revenue growth rates are higher than before, and higher than those of cities and districts where taxes were still collected by central government agencies. However, a majority of local governments has started property tax collection only in 2014. It is doubtful whether this group will also benefit from decentralisation. Taking a closer look at the seven case studies reveals that local governments are still far from tapping the full potential of the property tax. Most of them are struggling with deficient data, low public acceptance of the tax and huge amounts of tax liabilities. More importantly, however, local governments shy away from the political costs associated with a more active revenue mobilisation, relying on central government transfers instead. The paper presents a conceptual framework for the assessment of the political costs associated with each of the tax instruments available to local governments.