By Julius Mugaga Tukacungurwa
August 11, 2026: A new study presented to Makerere University College of Business and Management Sciences (CoBAMS) has revealed that reforms aimed at increasing commercial property-tax revenue can generate significant economic and fiscal costs for businesses and the central government.
Presenting the study titled, Commercial Property Taxes, Firm Behavior & Fiscal Externalities, Nathan Sunday, a PhD student in the Department of Economics at the University of Michigan, said property taxation remains attractive in developing countries because buildings provide a relatively observable and inelastic tax base. Yet compliance remains exceptionally low in Uganda, where only about 10% of properties reportedly pay their annual liability in full. The World Bank has consequently described property taxation as a “sleeping giant” of domestic revenue mobilisation.
Addressing the participants who consisted of the Dean, School of Economics, Associate Professor Ibrahim Mike Okumu, Economists at Makerere University, Staff and Graduate Students at CoBAMS, Sunday said much of the existing policy debate has focused on improving compliance and strengthening enforcement, while paying less attention to the economic consequences of higher property taxes. The study argues that, although conventional theory suggests property taxes should impose limited distortions because land and buildings are relatively inelastic, commercial firms can be affected when they own their premises or when landlords pass higher taxes on to the tenants.
The research examines a major property-tax revaluation undertaken by Kampala Capital City Authority (KCCA) after roughly a decade without an updated valuation list. The reform expanded the property register, brought previously untaxed properties into the system and increased liabilities for existing properties. KCCA estimated that potential revenue could nearly triple.
Using administrative corporate-income-tax and Pay-As-You-Earn records, the study applies difference-in-differences methods to compare firms inside Kampala with comparable firms outside the authority’s jurisdiction. The staggered rollout of the new tax rolls across Kampala’s divisions provided additional variation for identifying the reform’s effects.
The findings indicate that the reform reduced firm survival by about 3.2%. Among surviving firms, average revenue and profits showed no statistically significant overall change, but the effects varied considerably by firm size. Larger firms experienced gains in revenue and profits, while smaller firms were more adversely affected. The researchers link this pattern partly to the reallocation of economic activity through local input markets.
Employment and formal wage bills also declined. At the same time, wage informality increased, suggesting that some firms responded to higher costs by shifting workers into less formal employment arrangements rather than simply eliminating jobs. The study estimates that about 71% of the decline in formal wage bills can be attributed to this shift. Wage reductions were concentrated among higher earners, resulting in lower within-firm wage inequality.
The rental-cost channel was also significant, with business rents increasing by about 9%. Firms with greater borrowing capacity were better able to absorb the shock, while highly leveraged or credit-constrained firms experienced greater difficulties.
A central finding concerns what the researchers describe as a “vertical fiscal externality.” While property taxes generate revenue for local government, weaker firm profitability, employment and formalisation can reduce the central government’s income-tax revenues. The study estimates that for every one Uganda shilling collected through local property taxes, the central government loses approximately 0.30 shillings in combined corporate and personal income-tax revenue.
The study concludes that property taxation can remain an important and relatively efficient revenue instrument, but policymakers should account for its broader economic effects. Using the Marginal Value of Public Funds framework, the researchers estimate an MVPF of 1.53 for the KCCA reform. This implies that the reform improves welfare only when each additional shilling of property-tax revenue finances public goods generating at least 1.53 shillings in social value.
Sunday’s presentation therefore calls for property-tax reforms to be assessed not only by how much revenue they raise, but also by their effects on business survival, employment, wages, rental costs and other government tax bases.
Writer: Julius Tukacungurwa, Photographer: Christopher Kaahwa, I.T Support: Moses Kibirango