Enhancing Own Source Revenue (OSR) potential

County governments receive a substantial portion of their funding from the national government through the equitable share of revenue allocation. According to the Commission on Revenue Allocation (CRA), OSR constitutes approximately 13-15% of total county revenue annually, with the remaining 85-87% sourced from the national government's equitable share and conditional grants. In the 2023/24 financial year, counties were allocated KES 385.4 billion as equitable share, accounting for about 30% of total national revenue. While this is a constitutional requirement, excessive dependence on national transfers can create fiscal instability for counties, especially during periods of budget cuts. For instance, the CRA (2022) estimates that counties have the potential to increase their OSR from the current KSh 31 billion to over Ksh 130 billion per year if they fully exploited their revenue sources. Strengthening OSR can provide counties with a reliable revenue base, enhancing their ability to finance local priorities without solely depending on the national government.

When counties optimize their revenue potential, they have more resources to invest in local infrastructure, healthcare, education, and other public services, thereby promoting economic growth. Evidence shows that counties with higher levels of OSR tend to have better service delivery outcomes. Evidence from countries with robust local government revenue systems, such as South Africa and Brazil, shows that when local governments are financially empowered, service delivery significantly improves (Shah, 2021). For instance, in the 2021/22 financial year, Nairobi, Mombasa, and Nakuru counties collected more than KES 15 billion in OSR combined, enabling them to make substantial investments in local projects that improved quality of life.

1. OSR can also foster stronger public accountability. When citizens contribute directly to the revenue through local taxes and fees, they have a vested interest in monitoring how those funds are utilized. This encourages more active public participation in budget-making processes and strengthens the social contract between the government and its constituents.

Many counties still rely on outdated and manual revenue collection systems prone to leakages and corruption. A 2019 audit by the Auditor General revealed that counties were collecting less than 50% of their potential OSR due to weak administration systems. For example, revenue from property taxes, market fees, and business permits often goes uncollected due to weak administrative capacities and insufficient enforcement mechanisms.

The tax base in many counties is narrow, partly due to economic informality. Over 80% of businesses in Kenya operate informally, making it difficult for county governments to capture these potential taxpayers. 

"price" and "promise" reflects the relationship between tax rates and the perceived benefits or services provided by the county governments. Tax compliance rates are low, with many individuals and businesses evading local taxes due to perceived lack of value for money in public services. For example, a survey conducted by the Institute of Certified Public Accountants of Kenya (ICPAK) in 2022 showed that 65% of respondents were not in favor of higher local taxes without a corresponding improvement in services.

The existing legal frameworks guiding revenue collection at the county level are often inconsistent, leading to conflicts over taxation jurisdictions and ambiguities in setting tax rates. For example, counties sometimes face legal challenges when trying to introduce new levies or adjust existing ones, limiting their ability to expand revenue sources.

Many counties lack the technical expertise needed to modernize revenue administration. There is a shortage of skilled personnel in areas such as tax administration, financial management, and policy analysis, which impedes efforts to streamline revenue collection processes.

Implementing technology-based revenue collection systems, such as electronic tax registers, e-payment platforms, and GIS mapping for property tax administration, can reduce leakages and enhance revenue efficiency. A study by the World Bank (2021) showed that counties in Kenya that have embraced digital revenue collection have seen an increase in their OSR by up to 30%. The adoption of technology can significantly enhance revenue collection efficiency. Counties like Nairobi and Mombasa have already implemented automated revenue management systems that have reduced revenue leakages and increased collections by more than 30% in recent years. Expanding digital platforms to other counties can improve transparency, streamline payment processes, and minimize corruption.

Counties should work towards formalizing the informal sector and integrating more businesses into the tax net. Simplifying tax registration processes, providing tax incentives, and engaging the informal sector through tailored awareness programs can increase compliance. For instance, offering presumptive tax arrangements for small businesses could encourage them to formalize and pay taxes without overburdening them.

Revising legal frameworks to clarify taxation mandates, standardize tax rates, and simplify tax procedures can boost OSR collections. Counties should also collaborate with the national government to harmonize revenue laws, minimizing overlaps and legal disputes.

Counties should invest in training revenue officers and enhancing institutional capacities to improve tax administration. Partnerships with institutions like the Kenya School of Government and development partners can provide relevant training programs in tax administration, financial management, and policy formulation.

In addition to traditional sources such as property taxes and market fees, counties should explore new revenue streams like environmental levies, parking fees, and public-private partnerships (PPPs). For example, Nairobi County collects significant revenue from parking fees, which contributes to its OSR base. Such diversified revenue sources can offer a more sustainable approach to revenue generation.

Educating taxpayers on the benefits of paying local taxes can foster a culture of compliance. County governments should engage in outreach programs that demonstrate the link between tax payments and improved services, thereby building trust and reducing resistance.