Constitutionally, County Governments can impose property taxes, entertainment taxes and service fee and charges for the services they offer. According to the Commission of Revenue allocation report: County Own Source Revenue Report 2019, only 11 out of 47 counties can finance more than 10% of their overall budget which implies that the majority of the county governments finance close to 90% of their budgets through transfers to county governments. There is lots of potential being harnessed for increased revenue collection by the county governments. New revenue streams get added to the tax bracket and there is continuous expanding of the revenue base for streams. The Public Finance Management Act (PFMA) under Section 161 requires that counties seek the view of the Commission on Revenue Allocation (CRA) and the National Treasury when imposing a tax or any other revenue raising measure.
The National Treasury Secretary Ukur Yatani said in the Quarterly Economic and Budgetary Review report for the first half of 2021/2022, “total transfers to County Governments for the period ending 31st December 2021 amounted to Sh144.9 billion, against a target of Sh196.1 billion.” This lack of sufficient funds to the counties means that the counties cannot spend on development projects like roads and sewerage, which ultimately creates an acute unemployment crisis for the youth.
The 2020/2021 Annual Monitoring & Evaluation Report for the 2018-2023 PFMR Strategy cited various challenges affecting OSR in counties;
- There is lack of clear revenue projection methods among most counties. Whereas some counties attempt to incorporate scientific methods in setting revenue targets, some use budget balancing figures as revenue targets. This lack of standard revenue projection approaches leads to unrealistic targets.
- Lack of updated valuation rolls– property taxes have a huge potential to yield high revenues to county governments but are hindered by outdated valuation rolls and computation of rates based on unimproved site value, even for urban counties.
- Weak revenue administration structures. This results in non-alignment of revenue streams and revenue leakages.
- Pending bills due to inability to meet revenue targets by most counties
- Political interference in OSR administration inhibits collection.
- Lack of tariff and pricing policy to guide imposition of fees and/or charges by counties.
- Inadequate resources in most counties to effectively carry out public participation on legislative processes.
- Delays in disbursement of funds to county governments hinder timely implementation of the budget.
The National Treasury has developed a National Policy to Support Enhancement of County Governments’ Own Source Revenue aimed at assisting counties optimize OSR by broadening county governments’ revenue base while enhancing their revenue administrative capacity. The policy addresses OSR collection before and after devolution, challenges of revenue administration and management, policy interventions and governance, accountability and oversight for the policy. The policy interventions include; the proposed County Government (Revenue Raising Process) Bill, enactment of primary OSR Laws, development of Tariffs and Pricing Policy, development of a master valuation roll and development of an Integrated County Revenue Management System (ICRMS) among others.
Under Result Area 1 of the PFM Reforms Strategy; Sustainable and predictable fiscal space to deliver government programs, Reform Result 1.3 Efficient and effective revenue policy administration at county level, with high taxpayer compliance supported by updated legal framework and Reform Result 1.4 Credible fiscal framework at the national and county level include realistic revenue and expenditure projections consistent with a reduction in the national fiscal deficit over time address the challenges and policy recommendations named above.