The Political Cost of Local Revenue Mobilisation: Decentralisation of the Property Tax in Indonesia

Abstract

Taxes on real estate property have been identified as a source of income whose potential is currently underused by many countries. 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? A look at revenue figures provided by the Indonesian Ministry of Finance suggests that reforms may have boosted tax collection at an aggregate level. However, closer scrutiny of seven local cases 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, local governments shy away from the political costs associated with more active revenue mobilisation.

Keywords: Taxation, Indonesia, fiscal decentralisation, property tax, political economy

JEL Classification: E62, H24, H71