The World Bank has proposed that the Kenyan government exempt low-income earners from contributing to the controversial housing levy and the Social Health Insurance Fund (SHIF). This move, the Bank argues, would protect low-wage workers from undue financial strain while addressing structural issues in Kenya’s labor market and tax system.
Housing Levy Criticism
The housing levy, introduced in June 2023 under President William Ruto’s administration, requires salaried workers to contribute 1.5% of their monthly income, matched by an equal contribution from employers. The levy is part of the government’s affordable housing initiative aimed at addressing housing deficits and creating jobs for Kenyan youth.
However, the World Bank’s Public Finance Review for Kenya highlights the levy’s negative impact on the cost of labor, which it says discourages formal employment. The Bank recommends exempting Kenyans earning below Ksh.32,333 from the levy to improve tax progressivity without significantly affecting revenue collection.
“A reform that solely repeals the housing levy for low earners—those earning less than half the average wage—would result in a revenue decline of just 0.08% of total personal income tax (PIT) and social security contribution revenues. This can be offset by a marginal increase of 0.05 percentage points for above-average earners,” the report states.
Challenges with SHIF Contributions
The Social Health Insurance Fund (SHIF), which replaced the National Health Insurance Fund (NHIF) in October 2024, has also faced criticism. Currently, Kenyans contribute 2.75% of their income to SHIF, with a minimum contribution of Ksh.300. Informal sector workers are required to contribute based on their household income, but many fail to comply.
The World Bank’s report warns that SHIF is projected to collect only Ksh.67 billion annually, far below its target of Ksh.157 billion. The Bank attributes this shortfall to the payroll tax design, which it says discourages formalization and imposes higher costs on small employers and low-wage workers.
Proposed Reforms
To address these challenges, the World Bank suggests several reforms:
- Housing Levy Exemption: Remove housing levy requirements for workers earning below Ksh.32,333 to minimize financial strain on low-income earners.
- SHIF Contribution Waiver: Exempt informal workers and low-wage employees in the formal sector from SHIF contributions, financing their healthcare coverage through the national budget.
- Focus on Formal Sector Workers: Streamline SHIF contributions by targeting formal sector workers while subsidizing coverage for low-income and informal sector employees.
“These measures could encourage labor market formalization, reduce distortions, and promote equitable access to housing and healthcare services,” the report concludes.
Broader Implications
The proposed reforms highlight a pressing need for policy adjustments to alleviate the financial burden on low-income Kenyans while ensuring sustainable funding for essential services. Implementing these changes could also foster job creation, economic inclusivity, and stronger social safety nets.
