Property Tax Reform in Indonesia: Emerging Challenges from Decentralisation

Indonesia is in the midst of an exciting decentralisation reform. Expenditure and revenue responsibilities have been rationalised, granting Dati II local governments responsibility for virtually all public services. Although devolved revenues have initially funded the newly devolved local responsibilities, there is increased concern that additional local revenues may be needed to further sustain the decentralisation process. One possibility would be to restructure the property tax from a pure "shared tax" to a more "local oriented tax"'. This would involve granting local tax rate discretion to promote autonomy and accountability, allocating property tax revenues entirety to local governments based on property location to promote ownership of the property tax, and adjusting the relative co-administrative responsibilities between central and local governments. All three required changes could be implemented immediately, while retaining the benefits of the current legal and institutional shared tax structure pending a more thorough review of the broader revenue allocation decisions.