Measuring the performance of sub-national tax administrations
BY MARTIN IKE-MUONSO
Subnational governments’ renewed focus on IGR expansion prioritises tax administration performance measurement. With distressed financial conditions, state and local governments are increasingly interested in improving the tax administration’s capacity to deliver enough revenue to provide good governance. But such improvements require learning from the existing gaps that need addressing, operational and other weaknesses affecting the complete optimization of existing potential, repeated mistakes that need correcting, structural inadequacies to improve and untapped opportunities to optimise. Therefore, the necessity for measuring the performance of tax administrations is also appreciable by other stakeholders beyond the government.
Taxpayers, for instance, crave more convenience and equity. By reviewing its performance on these measures, tax administrations learn the touch points for achieving their goals. Subnational tax administrations must, therefore, regularly measure their performance along several dimensions based on the strategic goals and objectives that they have set for themselves. There are about eight reasons for this. The first is to rigorously evaluate the outcomes of their activities concerning the goals set for themselves. The second is to provide a valid basis for establishing credible processes and structures to deliver their target outcomes. And based on the first and the second reason, the third is to design appropriate budgets to ensure that these processes and structures are in place and functioning at the right level. Performance measurement also provides the basis for motivating the workforce and discovering weak links to exterminate if necessary. The fifth and the sixth reasons are to learn and improve. The former may also facilitate evidenced understanding that there was indeed an improvement.
Performance management is the entire process of learning, improving, and controlling future activities of subnational tax administrations based on performance measurement outcomes. Unfortunately, less than 20% of all state tax administrations and less than 5% of all local governments’ tax administrations have appropriate strategic structures for performance management and, by regressed extension, performance measurement. As they say: “If you cannot measure it, you cannot control it.” Tax administrations at subnational levels constitute an integral part of the entire public-sector system, lacking the propelling force of robust performance management systems. Ideally, tax administrations can only meaningfully appropriate the benefits of performance measurement in the context of adequately developed strategic goals and objectives. Performance measures define parameters for tracking how well or not they achieve these objectives and goals. Entrepreneurs and corporate organisations take performance management and measurement seriously and leverage them as drivers of their growth and profitability. Forward-looking public-sector institutions do the same. Therefore, tax administrations, particularly at the subnational level, must measure their performance to drive expected outcomes, and stakeholder expectations are more critical in IGR expansion.
About four complexly interconnected factors seemingly underlie the growing popularity of subnational governments’ tax administration performance measurements. The first is ongoing public sector reform, the umbrella factor within which the other three are subsumable. Governments at all levels are reforming their public service. Tax administrations are very central in this process because of their strategic importance. The focus is on improving IRS effectiveness and efficiency. However, each subsidiary objective – efficiency and effectiveness – can stand alone as a reason for renewed interest. The fourth is to pay more detailed attention to particular issues affecting the success of tax administrations, such as simplifying the tax system, better managing administrative and compliance costs, improving involuntary tax compliance, tax inspection and overall tax administration productivity. Again, these issues are also central to the effectiveness and efficiency of the subnational IRS.
The tax administration’s effectiveness, among other things, primarily derives from its reliability, ensuring the proper application of the law, achieving an elevated level of voluntary tax compliance, and accomplishing set objectives. One of the most relevant indicators for gauging the effectiveness of the IRS is the level of undeclared taxes or unpaid tax liabilities, known as the tax gap. On the other hand, the efficiency of tax administration refers to achieving more revenue collection with minimal cost inputs. Efficiency is essentially value-for-money optimization or the combined reduction of collection costs and the maximisation of the size of collected revenue. However, efficiency gains depend significantly on the robustness of internal processes and tax administration organisational structures. Some examples of these processes comprise adequacy and promptness of budget allocations for delivering on agreed strategic priorities, a result-based organisational culture, technology adaptation, knowledge prioritisation and compensation.
Three levels of performance evaluation for subnational tax administrations have emerged from this discourse: strategic, operational, and individual. At a strategic level, the focus is on organisational performance. The performance measurement at this level focuses on comparing actual outcomes against the IRS’s overall strategic goals and objectives. However, solid performance at the strategic level is impossible without corresponding high performance at the operational and individual levels. There must be a vital link connecting the performance indicators at these levels to deliver outstanding results. For instance, if the technological capacity and compensation of the workforce are not at the right level, it depletes the operational and strategic level performance. Individual and operational performance indicators are often considered the most crucial factors for overall performance. The process level performance indicators focus on the interconnected effectiveness of strategic functions such as human resources, revenue collection, tax education, dispute resolution, tax audits, etc. Thus, when the individuals within, for example, the human resources department, are performing exceptionally well and, in turn, collaborate effectively with other units which are also doing well, there would be the realisation of the broad goals of the tax administration.
In addition to the levels of performance evaluation, the results chain provides a highly invaluable approach to delineating relevant performance measures and corresponding indicators. The results chain typically looks at the entire spectrum of outcome delivery, starting with the inputs. Accordingly, the focus is on four phases: inputs, process, output, outcomes, and impact. Because most performance evaluations are usually over a brief period, we eliminate the impact phase because of its long-term focus. This approach requires the development of performance measures and indicators for each phase and across the three levels.
For instance, in the input phase, there should be considerations like the adequacy of input resources such as personnel, digital infrastructure, and financial budgets at the right quality. The preceding also suggests that subnational tax administrations must develop performance measures for these crucial factors in terms of adequacy and quality at the individual, operational, and strategic levels. An excellent example of the process phase performance measurement includes efficiency considerations and service quality to taxpayers.
The global yearning for standardised and objective assessment of tax administrations’ relative strengths and weaknesses at the country level gained roots at the G20 summit in 2010. The International Monetary Fund, Organisation for Economic Cooperation and Development, the United Nations and the World Bank received a mandate from the summit to identify constraining factors for tax administration performance. The result was the emergence of the G20 Development Working Group, which developed indicators for meaningfully monitoring, assessing, and improving tax administration capacity. That became known as the Tax Administration Diagnostic Assessment Tool [TADAT], now widely deployed in providing an objective assessment of the health of critical components of the country’s tax administration. The framework has nine performance outcome areas covering most tax administration functions: thirty-two high-level indicators and fifty-five measurement dimensions. The tool generally facilitates the identification of relative strengths and weaknesses in tax administration systems, processes and institutions and is immensely helpful in setting the reform agenda. The nine performance outcome areas are [1] the integrity of the taxpayer base; [2] effective risk management; [3] supporting voluntary compliance; [4] on-time filing of declarations; [5] on-time payment of taxes; [6] accurate reporting in declarations; [7] effective tax dispute resolution; [8] efficient revenue management; and [9] accountability and transparency. Each of these areas has key performance indicators for its assessment. Although the design of TADAT was with country tax administrations in mind, it is highly invaluable for use in performance measurement at the subnational levels. Sadly, more than 80% of states and 97% of local government tax administrations in Nigeria do not have substantial knowledge of this tool, not to mention its deployment.
Regardless of adopting TADAT or any other custom-built performance measurement system, it is essential to ensure that the measures and indicators align with organisational outcome expectations. Such alignment, cascaded down to the individual level, strengthens the overall management system. Other critical management tasks riding on the back of correctly identified performance measurements include the specifications of key performance indicators and other details of each measure. Due to its evaluative importance, each indicator must have baseline standards for future performance levels. Of course, performance scores in each assessment period and the cumulative performance of each indicator help analyse, understand, and report the results for each measure. There is also a need to exercise caution in comparing or benchmarking subnational tax administrations’ performance against those of other states and local governments. Differences in tax rates and the overall legislated tax burden; and differences in the underlying cost structures resulting from institutional arrangements present contexts making such comparisons difficult and unrealistic.
Finally, like corporate organisations that take their performance evaluation at all three levels very seriously, subnational tax administrations must do the same to speed up their efficiency and effectiveness. The IGR expansion emergency makes this even more imperative. Regular and comprehensive measurements of the performance of tax administrations at the state and local government levels are the surest way of achieving sustained solid revenue growth. The TADAT tool, modified based on the administration’s peculiar contexts and situations, can be a good starting point. However, where the capacity for such modification is non-existent, some fundamental process indicators could be helpful and provide meaningful strategic guidance. Such indicators should cover tax collection, auditing, productivity, administrative costs, voluntary compliance, compliance costs and taxpayer attitudes. Trend data collected across these spectra of indicators can aid meaningful reviews and provide the basis for improvement. Let us start today.
Martin Ike-Muonso, a professor of economics with interest in subnational government IGR growth strategies, is managing director/CEO, ValueFronteira Limited. He can be reached via email at martinoluba@gmail.com