Increasing Property Tax Compliance
- Struggling to collect timely property taxes can hinder government investment in infrastructure and services
- When individuals do not pay their taxes on time, they may accumulate debt, interest, and fines
- In Pristina, Kosovo, a behavioral reminder letter increased property tax compliance
Tax revenue is by and large the mechanism by which governments around the world are able to provide crucial public goods and services such as health services, water, sanitation, education, or infrastructure for their constituents at all levels. However, governments everywhere face difficulties collecting taxes, while constituents who miss deadlines may endure penalties.
For municipal governments in Kosovo, many residents fail to pay their taxes on time, or do not pay at all. For example, in 2019, in the capital city of Pristina, property tax-owing residents were encouraged to pay in two installments, however, more than halfway through the year only 31% of residents had made a tax payment, and only 2% had paid half or more of what they owed. Consequences of poor tax compliance are two-fold: individuals accumulate debt, interest, and fines, and the city faces planning challenges and cannot make necessary investments in infrastructure and public services.
To encourage more residents to pay their property taxes on time, we designed and sent a behaviorally informed reminder letter along with a copy of the first page of the property tax bill (required for payment). The letter leveraged a number of behavioral principles tailored for the context. For example, including the copy of the original bill removed hassles. The content of the letter also made the deadline and consequences of inaction salient and prompted residents to plan the date they would pay their bill.
Of more than 52,000 taxpayers who owed taxes for 2019, 4,000 were randomly selected to be sent the new reminder letter (treatment group), while the others (control group) received no letter. The letters increased the proportion of individuals who made an on-time property tax payment by 15.8% compared to the control group. If the letter were sent to all Pristina residents who still owed taxes two weeks before the due date, it could have resulted in 412,500 EUR additional net on-time revenue for the city.
The reminder letters showed that employing well-researched, context-specific behavioral elements can effectively nudge residents to pay taxes in a timely manner, adding to the existing literature showing that it is feasible to significantly and cost-effectively strengthen governance using insights from behavioral science. Read more about the letter and results.
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