Own-Source Revenue Potential and Tax Gap Study of Kenya’s County Governments : Final Report

Kenya has a positive economic outlook, achieving an average growth rate of 5-6 percent in recent years. Nonetheless, there has been an increase in the fiscal deficit (to 8.8 percent in 2016/17), partly due to domestic revenue shortfalls and spending pressures relating to a drought and Presidential elections. As a result, Kenyan Authorities have committed to a number of corrective actions, including ways to broaden the tax base, including strengthening revenue performance at the county level. A new draft policy and County Revenue Bill (2018) therefore aim to broaden the County revenue base, to strengthen administrative capacity of counties to raise own revenues, and to provide a regulating framework for county imposition and variation of rates, in line with national tax policy and economic objectives. The Commission on Revenue Allocation also aims to strengthen incentives for counties to enhance own-source revenues through an OSR performance element in the central allocation formula. In order to inform the draft policy and reform of the CRA formula, a better understanding in needed of the potential revenues possible at county level and of the barriers or opportunities available to counties to achieve more of that potential in order to reap the benefits of devolution, to generate efficiencies from consolidation of local government structures and be able to better fulfil their mandates for decentralized service delivery through more sustainable financing. In some cases, investment in the administration of OSR might be needed in the infrastructure, equipment or staff administering the taxes, fees or charges, and therefore, having a better understanding of the revenue potential may help to identify whether such investments are worthwhile.