Getting Through the COVID-19 Crisis: To Pay or Not to Pay Taxes?

The COVID-19 crisis has spared no part of people’s life – from its direct and indirect impacts. The impacts also include taxes payable by the citizens. Many people, particularly the disadvantaged and excluded, have lost their source of income or faced a substantial decrease in their income. Businesses have also downgraded their operations or closed altogether. In such conditions, it’s become increasingly difficult to pay taxes. Yet, governments need to collect taxes for providing basic services to citizens.

So, are there solutions to address this dilemma, for now and in the long-term?

*******

Beyond paying or not paying taxes, a more serious implication of the COVID-19 crisis is its impact on the relationship between government institutions and citizens. Before the crisis, in countries like Serbia, the relationship was shifting from a role of control to that of coordination. With the emergence of mistrust between government institutions and citizens, the crisis may deal a blow to effective, accountable, and equitable delivery of public services.

How serious is the problem?

Let us take property tax in Serbia as an example. It’s a special item on every household’s bill and is paid annually, in four installments. It’s one of the rare types of taxes remaining in full in the budget of the local government which citizens will have to pay.

According to the initial results, tax collection will be lower for the first time after several years due to the COVID-19 crisis. The data from previous years had always shown a higher property tax collection rate, mostly owing to broader coverage of real property.

Compared to the same period last year, the collection is lower by 6.3% in the municipality of Vrnjačka Banja. In other municipalities, the picture is more serious. The municipality of Ćuprija expects property tax collection to be 20% lower than planned by the end of 2020. One of the underlying reasons is many citizens who own properties in Ćuprija live abroad, and due to the pandemic, they were unable to enter the country.

The funds paid for property tax entirely remain in the budget of the municipality where the tax was paid. Such funds are mostly used for investments. Due to the COVID-19 crisis, local governments in Serbia will have fewer funds for investments in infrastructure projects. This will have lasting implications. If the 2008 global financial crisis can be a comparable example, it took an average of eight years for revenues to recover to their pre-crisis level. It may take longer time in the case of post-COVID-19 recovery.

Responding to the crisis and its impacts

Faced with the above uncertainties, government institutions, particularly tax administrations, are taking measures to support payments to citizens as well as embarking on new roles to assist in the provision of wider government support.

As expected, the first response by government institutions was to ease the burdens on taxpayers and to support businesses and individuals with cash flow problems. On 10 April, the government of Serbia issued Decree on Fiscal Benefits and Direct Aid to Private Sector and Citizens due to COVID-19 (The Decree) which prescribes a set of tax policy measures and concern an obligation for repayment of deferred taxes in installments, not earlier than the beginning of the fiscal year 2021. Measures include deferral of payments of salary tax and contributions, deferral of the advance on corporate income tax payments, VAT exemptions, deferral of compliance procedures, and reduction of the default interest rate.

These measures are justified to save lives and support short-term humanitarian efforts. Many ad hoc measures are required to address the economic fallouts from the COVID-19 crisis. The challenge often, however, is the lack of attention to a crisis in a more systematic way with a medium to long-term perspective.

Leaders are under pressure to make decisions on managing the immediate and long-term impact. One of the long-term impacts is the trust between government institutions and citizens. A citizen's trust in government is a form of social capital necessary to democracy. Nenad Celarevic argues that the COVID-19 crisis has affected ‘the level of trust in relevant institutions, and the persons associated with these institutions’.

The Municipal Economic Development (MED) project of the Swiss Agency for Development and Cooperation (SDC) implemented by Helvetas has placed a special focus on strengthening accountability between local authorities (public service providers) and citizens (taxpayers and rights holders). MED specifically facilitates incentivizing and providing technical assistance to enhance local authorities’ dialogue with citizens in decision-making processes related to the use of property tax revenues.

There are two ways that MED has tapped into the crisis as an opportunity to boost the quality of citizen-local government relationships and service provision.

First, during the past few months of the COVID-19 crisis, a funding mechanism for the Performance-Based Incentive Fund (IF) to incentivize good governance and efficient property tax collection in operation was used in 18 local governments for specific infrastructure projects. Citizens have been at the forefront of identifying the needs. Some of the projects identified included the development of public spaces for children, development of spaces for gathering of citizens in the park, sidewalk and plateau development in front of the ‘Stari Trstenik’ center, and pedestrian path development.

While such small initiatives improve public services related to the Covid-19 crisis, the broader issues lie in the process of enhancing citizens’ participation in decision making without major disruptions and creating wider gulfs in trust. Before the onset of the COVID-19 crisis, MED had invested in cutting red tape in taxation procedures which the World Bank critically assessed in its Doing Business report.

The MED project invested so far 800,000 Swiss Franc into ‘improvement of property taxation’. After the first year, local governments were able to collect an additional 2.4 million Swiss Franc of property tax due to efficiency improvement. This has led to an increase in property tax revenues of local governments' own-source revenues desperately needed for the development of the local community.

Second, as much as the COVID-19 crisis has been a tragedy, it has also provided a few opportunities. For example, it has benefited countries with new capabilities in technologies. MED has used technological innovation to enhance the efficiency, quality, and transparency of public services to citizens and entrepreneurs. This has transformed Serbia’s administrative procedures that for long represented a time-consuming obstacle for growth and development.

This is a game-changing innovation with positive implications for, especially families and small and medium enterprises (SMEs) across the country. It has been fostering the relation and accountability between the citizens and its municipality. Businesses do not have to fill out a new tax application every year on paper, which is perceived as a time-consuming activity. Everything is administered electronically, and taxpayers can see the current tax balance and obligations at any time in real-time. They can pay obligations electronically and can report electronically if they acquire any additional property.

Conclusion: leveraging matters

The COVID-19 crisis has demonstrated how complexity creates more uncertainties. The experience from Serbia confirms the danger of reacting to a crisis popping up in front of us, like the whack-a-mole arcade game. This only gets us so far. Even before the crisis, citizens' trust has been critical in the context of fiscal policy (i.e., adjusting government spending and taxation to influence the economy). Crises test and worsen the trust between citizens and governments.

The MED project in Serbia has leveraged its experience before the COVID-19 crisis and adapted them to the challenges of the crisis. Accountable local governments put every effort to engage citizens in decision making. This affects the quality of public services due to citizens’ higher derived utility. Lack of trust compromises the willingness of citizens and businesses to respond to public policies. 

Related readings

• Lessons from the Frontline: Local Governments in the Time of COVID-19
• Citizen-Oriented Municipal Services in Times of COVID-19: The Role of Adaptive Learning
• We’ve Mapped the Impacts of the Covid-19 Crisis in 12 Countries. This is What We’ve Found