The influence of neighboring councils on property tax reassessment regarding public sector innovation and administrative efficiency has not been adequately examined, particularly in terms of how one council may adopt the strategies of another. Thus, this study examines whether councils surrounded by others that have implemented reassessments experience greater innovation diffusion and better performance outcomes. To test this framework, data were collected through a survey of Malaysian local authority officers (support, management, and professional grades) using a quantitative approach to assess their views on relational capital, process innovation, and tax reassessment performance. Usable data from 154 responses were analyzed with SmartPLS 4 using partial least squares structural equation modeling. The results show that the relational capital of local authorities toward process innovation is stronger when the influence of neighboring councils is greater. Councils in regions where reassessments are actively undertaken tend to utilize relational capital more effectively through process innovation, leading to higher reassessment performance, while councils in less active regions struggle to achieve similar results. This study contributes to research on public sector innovation and policy diffusion by highlighting the external environmental conditions that influence the effectiveness of relational capital in administrative performance.