People have been complaining that businesses, especially, can find themselves taxed by both the national and a county government. On the other, people comment that counties should be raising much more money locally – implying that the Constitution expects counties to raise most of the money they spend.
THE SYSTEM – IN BRIEF
The major source of money for counties is what is known as the “equitable share”. It is a share of revenue raised nationally that is allocated each year to the counties. That overall share must be at least 15 per cent. In fact in 2022 it was 26 per cent. It is “equitable” because the amount must be fixed on the basis of a long list of factors in the Constitution intended to ensure fair division. That amount is shared between the counties, again supposedly in an equitable way.
Then there is the equalisation fund – 0.5 per cent of the revenue collected by the national government - which is to be used in marginalized areas within counties to equalise the distribution of basic services. It is not necessarily to be used by the county government itself.
There are a host of questions we cannot discuss here - such the meaning of words like “revenue”, or how the system has actually worked, including the delays in sending money from the Treasury to counties, and the varied abilities of counties actually to spend the money they receive.
The counties may raise property rates (a form of tax), entertainment tax and any other tax that an Act of Parliament authorises counties to impose. And they may charge for services.
Are counties supposed to aim at self-sufficiency?
Counties are encouraged to raise money locally. It must be said that clearly we have a long way to go. The Commission on Revenue Allocation reported last month that “the growth in total county governments’ own source revenue has been consistently below the aggregated target set by the county governments since the inception of devolution”.
Article 203 of the Constitution about the equitable share says that a factor in fixing this is “the need for economic optimisation of each county and to provide incentives for each county to optimise its capacity to raise revenue.” To “optimise” something is to make it the best possible. It is not the same as “maximise” – make it the biggest possible. So this means that a county must work to raise the local revenue that is most appropriate to enable it to get the best out of its devolution powers. The emphasis is not on raising local money at all costs.
There was never any expectation that counties would be self-sufficient. In many countries lower level governments depend heavily on allocations from the national revenue. Dr Mutakha Kangu in his book on Devolution points out that the Constitution talks about “revenue raised nationally”.
It is not the national government’s revenue. Every taxpayer in Kenya is in a county. An element in deciding “which government can tax what?” is convenience. It was decided that income tax is most conveniently raised through KRA, and that having a standard law on this was best. But rates are best assessed and raised – as they always have been – locally. And collecting revenue nationally makes it possible to redistribute it to help achieve more even development.
The power of the counties to raise local revenue is strictly limited. Rates have traditionally been charged only in urban areas. Surely some counties have more entertainment to be taxed than others. And what is an entertainment tax?
This is weak constitution drafting. There has been an Entertainments Tax Act since before 1950. It does not define “entertainment” clearly, so there may be a risk of counties defining the word to include activities that are not usually included – thus widening their taxing powers under the Constitution. Certainly I think it is a mistake to use a word relying on old ordinary (not constitutional) law for people to understand it.
WHAT IS A TAX?
A crucial distinction in the constitution is between taxes and charges. The money raised by a county is either a tax or a charge (whatever it is called).
A government policy to Support Enhancement of County Governments’ Own-Source Revenue has a useful definition of tax. In fact the clearest I have seen is from an Australian judge: “A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered.” If you get nothing specific for what you pay, that is a tax.
There has been a lot of confusion – including by lawyers and courts. Two distinguished legal authors wrote, “The taxes that counties may levy … include property taxes, entertainment taxes, fees and licenses (such as for business, catering, parking, land rents etc.), sewerage and water charges and any other tax that they are authorized to impose by statutes.” This confuses taxes and charges.
Counties are allowed to deal with licensing of food undertakings, liquor, dogs and trade. There is always a fee. But do people get any service in return? I suggest that if they do not these are taxes – and are only allowed because of the specific mention in Schedule Four of the Constitution
Counties have been imposing what they call “cess” because the old local authorities used to do so, without asking whether they have the power. The word has caused a lot of confusion. I looked it up in the Oxford English Dictionary. It says, “An assessment, tax, or levy: in various special applications” or referring specifically to India “Imposing additional taxes, such as the road cess, the irrigation cess, the public works cess, and the education cess”.
A few Acts of Parliament allow cess to be imposed, the Dairy Industry Act, for example. None of these was passed or has been amended since the Constitution came into effect, except the Tea Act 2020 which makes a function of the Tea Board “to advise the county governments on agricultural cess and fees”. I do not think this gives county governments the power to impose cess if it is a tax.
I am afraid that many people, including judges, have looked at the word, thought it does not say “tax”, and treated it as something different. Several of them have held that it is wrong for a county to levy a cess on a product that is nationally regulated (like timber or tea) – without confronting the question of whether it is really a tax so needs parliamentary approval.
Last year the Supreme Court dealt with a case brought by Base Titanium which was charged cess for transporting minerals from Kwale county to Mombasa Port.
The court said, "a county does not have the authority to charge a cess, levy or tax where they do not offer anything in return”. In this case the county argued it did offer a service – use of the road. But the court held that this was a service provided by the national government not the county.
I would have argued that the real nature of the cess was not about services, even if it had been a county road, but about raising money – and a tax.
It is a pity that the court did not say more clearly, “There was no service in return, so this is a tax, and is unconstitutional because Parliament has not allowed it”.
We need clarity on the distinctions between taxes, charges and fees.
The Court also said that the charge violated Article 209(5) of the Constitution which says that any county power to raise revenue must not prejudice national economic policies, economic activities across county boundaries or the national mobility of “goods, services, capital or labour.” Mombasa’s “cess” did have this effect - making movement of goods across county boundaries more expensive.
Lawyers can find useful decisions of courts in other countries on these issues, usually because, as here, one level of government has limited power to raise money.
A final, important, question is whether the Constitution gives Parliament too much power over counties’ revenue raising.
