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The Lincoln Institute has supported the authors’ work on property taxation in South Africa for several years, and in February 2002 the Institute published Property Taxes in South Africa: Challenges in the Post-Apartheid Era. Edited by Bell and Bowman, the book presents major portions of their own work, together with chapters by several of their colleagues in the U.S. and in South Africa. This article provides an overview of seminars on property tax issues conducted by Bell and Bowman in South Africa in March 2002.
The end of apartheid in South Africa nearly a decade ago presented new opportunities and challenges to every aspect of national life, including fiscal issues. The government faced the task of extending the property tax to previously untaxed areas and adapting it to provide services through a set of radically restructured local governments. The final reorganization of local government took effect in December 2000, and the new governments now must develop comprehensive property tax (rates) policies.
Several key pieces of apartheid-era legislation had established the spatial basis for racial separation:
These policies greatly complicated efforts to amalgamate former white and black local authorities (WLAs and BLAs), with important implications for property taxation. Specifically, for local governments, the legacy of apartheid includes:
Post-Apartheid Local Government Structure
The dismantling of apartheid began in the mid-1980s and was essentially complete by the early 1990s. At the end of 1993, the Local Government Transition Act (LGTA) was signed by then-President de Klerk and, symbolically, by Nelson Mandela, leader of the African National Congress (ANC). The LGTA provided for short-, medium- and long-term transformation of local governments to create nonracial self-government. It created two-tier local governments in metropolitan areas, with powers and responsibilities shared between a geographically larger unit and two or more smaller units within the same area. The Municipal Structures Act of 1998, providing for single-tier metropolitan government, was implemented after the local elections of December 2000 as part of a general and final redemarcation of local governments that reduced the number of authorities from approximately 845 to less than 300.
Amalgamation of municipalities brought new areas into the property tax base, including former BLAs, bantustans and their associated rural R293 towns, but the residents of these newly incorporated areas had never before paid property taxes. Thus, it was necessary to develop the information and administrative infrastructure needed to value properties, determine tax liabilities, distribute tax bills to those responsible, and collect the taxes due, all in an equitable manner. Moreover, the new tax system had to overcome the psychology of payment boycotts, sometimes characterized as a “culture of nonpayment,” an important resistance technique used against the apartheid government.
Combining formerly taxed areas with different valuation rates or systems into a single municipality produces inconsistencies within the property tax roll of the amalgamated area, multiplying inequities among property owners with different effective tax rates. Both those new to the tax and those who historically have paid property taxes often question whether their tax shares are equitable and how the resulting revenue is being spent. In some instances, tax boycotts have occurred in former WLAs.
National Property Tax Policy
Although property taxation remains a local tax in South Africa, the 1996 Constitution authorizes central government regulation of property taxation. A national Property Rates Bill, scheduled for adoption in 2002, will replace current provincial property tax laws. Each locality now must adopt an explicit and comprehensive property rates policy.
Our seminars took place in this context of national legislation, municipal consolidation and municipal property rates policies. We collaborated with local institutions of higher education: Port Elizabeth Technikon in Nelson Mandela Metropolitan Municipality and the University of North West in Mafikeng Local Municipality. Seminar participants included current and former elected city councilors, newly enfranchised and long-time non-elected officials, and students and faculty of the educational institutions.
Nelson Mandela Municipality is one of South Africa’s six metropolitan municipal governments, the only local government within its geographic area. Its population and business center is the former city of Port Elizabeth. Principal property tax concerns raised at the seminar included: (1) unifying the tax rolls of the various jurisdictions making up the metropolitan area, since their valuation dates range over a number of years; (2) bringing former black local authority (BLA) areas into the property tax base; (3) deciding on the appropriate way to deal with rural (agricultural) land, previously not taxed but now part of the municipal area; and (4) accomplishing these things in a manner that is sensitive to the special circumstances of those with very low incomes.
Mafikeng, the capital of the North West Province, lies within the Mmbatho District Municipality in the former Bophuthatswana homeland near the Botswana border. Some property tax concerns raised at the Mafikeng seminar were the same as in Nelson Mandela Municipality. In addition, Mafikeng is wrestling with incorporating tribal (traditional authority) areas and the black urban agglomerations (R293 towns) of the former bantustan. Tribal areas present two special problems: property ownership is communal, not private; and the traditional authority structure remains in place, even though these areas now are included within municipal borders, creating a dual authority structure that further complicates amalgamation.
Key Property Taxation Themes
Policy Framework
New national legislation requires each local government to produce a property rates policy to address such issues as whether to include all real properties in the tax base; whether to apply uniform or differential rates to the many categories of property included in the tax base; and what form of property relief should be given, and to whom. If the property tax is to be a viable local revenue source, local rates policies must be guided by the following principles:
These fundamental characteristics of a property tax system provide a framework for restructuring property taxes in South Africa, with tradeoffs made through an open and transparent political process at the local level.
Monitoring
The property tax base is fair market value. Because most properties do not sell in a market transaction each year, however, estimating market value is the task of trained assessment professionals. Differences in location, depreciation and other characteristics make valuation partly an art, not strictly a scientific or technical endeavor. Uniformity relative to market value may not always result, even though it is required and the assessors follow the procedures intended to achieve that result. Thus, a system for monitoring valuation outcomes is needed, which may include three dimensions of assessment quality:
Formal assessment/sales ratio studies have not been done in South Africa, but we calculated simple ratios for several cities. The results in Table 1 indicate that assessment uniformity generally needs to be improved, since coefficients of dispersion across the case study cities are typically high and the price-related differentials are generally substantially above one.
Targeting Tax Relief
Although property taxation is a tax on value, it is paid out of current income, and thus may place an unacceptable burden on property owners with low incomes. Property tax relief is any reduction in tax liability. Indirect relief results from changes that take pressure off the property tax: reduced expenditures or increased revenue from alternative sources. Alternatively, direct relief comes from a change in the calculation of property tax liability.
Direct relief was the focus of our studies and the seminar discussions. In South Africa direct residential property tax relief typically is a uniform percentage credit, termed a rebate, which generally is 20 percent or 25 percent of gross property tax liability. The rebate approach has two limitations. First, most of the tax relief goes to those with the most expensive properties. Second, low-income property owners are still required to pay most of their property tax liability, which still could be burdensome relative to income.
While an income-based circuit breaker is our preferred approach for targeting tax relief to those in need, it would be extremely difficult to administer in South Africa because income information is not readily available, in part because of the extensive informal economy. An alternative way to target property tax relief to those most in need is to exempt a fixed amount of the base from taxation.
Table 2 illustrates the effects of moving from a 25 percent rebate to a R20,000 exemption (US$1,740). Under the partial exemption alternative, the lowest valued properties, including those hardest to value at this time, are removed from paying taxes, and net taxes are reduced on all properties up to about R100,000 (US$8,700). The aggregate cost of property tax relief under this approach is substantially reduced because each property receives the same exemption. Durban and Johannesburg now are experimenting with the partial exemption approach to property tax relief.
Dealing with Previously Untaxed Areas
As a result of the local government restructuring in December 2000, South Africa now has local governments throughout country. Three types of areas previously outside the property tax now are to be brought into the tax: former BLAs and R293 townships, agricultural areas and tribal areas. In the former BLAs and R293 townships property is being transferred to private ownership and these areas must be surveyed by the national Surveyor General to establish individual property boundaries and identifications necessary to administer the property tax. Different localities are at different stages in this process.
Property taxes were levied on rural agricultural lands in the past, but these lands have not been in the property tax base since the late 1980s. Bringing them into the tax base now poses two problems. The first is developing the property record information necessary for tax administration. The second is the question of how taxes on such properties should relate to taxes levied in the urban portions of a municipality, as farmers often provide themselves and their workers with services typically associated with local government. One possibility is use-value assessment of agricultural land, an approach endorsed by a national commission that reviewed the taxation of rural lands. Alternatively, differential rates for different categories of property are allowed under current provincial property tax laws and the draft national Property Rates Bill. If there is to be differentiation in effective tax rates, imposing a lower rate on market value assessments provides greater transparency and understanding of the tax and should be part of the local government rates policy.
Bringing tribal areas into the tax base presents another set of issues. First, given communal land tenure systems existing in these traditional authority areas, how does one establish ownership, a necessary condition for the application of property tax based on the principle of private property? Second, because there is no land market per se, how are estimates of market value to be made? Finally, given the two competing governance structures that now exist in tribal areas, how does one make the payment of a property tax acceptable to residents who did not previously pay the tax? These issues are clearly the most intractable ones that must be addressed in the newest round of local government reform in South Africa.
Conclusion
The property tax has been an important part of local finance in South Africa for centuries and is likely to play an increasingly important role in the future, as newly amalgamated local governments wrestle with addressing the legacies of apartheid and the requirements of new national property tax legislation. There is no single right answer to many of the perplexing questions surrounding the design and implementation of a local property tax, but it will continue to evolve to meet changing circumstances and needs.
Michael E. Bell is president of MEB Associates, Inc., in McHenry, Maryland. John H. Bowman is professor of economics at Virginia Commonwealth University in Richmond.
References
Bell, Michael E. and John H. Bowman. 2002. Property Taxes in South Africa: Challenges in the Post-Apartheid Era. Cambridge, MA: Lincoln Institute of Land Policy.
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On July 18, 1997, the Congress of the Republic of Colombia passed an innovative new Law of Land Development with ambitious goals for permitting municipalities to recover socially created land values, known in Spanish as plusvalía. Specifically, Law 388 declares that the public has a right “to participate” in increases in land values created when land use regulations increase the potential for development. Three categories of public actions are covered:
(1) changing a designation of rural land (in which development is extremely limited) into land for urban or suburban development;
(2) modification of zoning or other land use regulations;
(3) modification of regulations that permit greater building density.
Briefly stated, the legislation provides that the square-meter value of the land shall be determined before any public action and then after the action. Any municipality, at the initiative of its mayor, may demand that it “participate” by being able to recapture 30 to 50 percent (as it chooses) of the increase in value. The value is determined by multiplying the two square-meter values by the area of the parcel concerned and subtracting the pre-action value from the post-action value. A maximum of 50 percent was established to ensure that developers would still be financially motivated.
With this legislation, Colombia has enacted into national policy the basic premise of Henry George’s writings: that the public has a moral right to recover socially created values, as manifested in this case by increases in land values released by the three categories of public decisions mentioned above. With the possible exception of Taiwan, few if any other countries have attempted to so directly incorporate Georgian principles into actual legislation at the national level.
Implementation Procedures
The current legislation is only the first step. Under Colombian practice, acts of Congress set general policies, but implementation depends on follow-up at the national executive level and at the municipal level. To make the critical before and after square meter evaluations as objective as possible, an independent organization known as the Agustín Codazzi Geographical Institute will carry out assessments according to guidelines established in the law for each of the three categories.
Fees (called participaciones in the law) must be paid when a landowner applies for permission to subdivide or to construct on the property, when the use of the property is changed, when the property is transferred, or when development rights (representing rights for additional construction) are acquired. These fees are to be recorded in the registry of titles to assure compliance, and land cannot be transferred in the registry until the fees are paid in one of various forms:
(1) by paying cash;
(2) by transferring to a public body a portion of the property that is of equivalent value;
(3) by exchanging urban land of equivalent value at other locations;
(4) by making the public body a partner in the execution of the project with an interest of equivalent value;
(5) by providing needed infrastructure or open space of equivalent value; or
(6) by giving back a portion of the development rights created by the public action that is equivalent in value.
It may be anticipated that most developers will prefer to partner with municipalities instead of paying cash. Indeed, the legislation provides an incentive to use method (6) since it carries a 10 percent discount on the fees, or methods (2) or (4), which have a 5 percent discount.
Municipalities must earmark the revenues produced from participation in socially created land values for specific purposes:
Potential Implications of the Law
This legislation touches on many land policy issues that have long been of concern to the Lincoln Institute. Martim Smolka, director of the Institute’s Latin America and Caribbean Program, and other Institute associates are holding seminars and training programs to share experiences in working out implementation procedures, possibly assist in pilot projects, and carefully monitor the Colombian experiment as it unfolds.
One such program was a three-day workshop cosponsored in March with the National University of Colombia and the Advanced School of Public Administration in Bogotá. The workshop consisted of both formal and informal commentaries from a broad range of interested parties from Colombia and other countries. Since Colombia has obviously taken a bold step and there are few precedents for guidance, the appropriate officials must be innovative as they proceed toward actual implementation. The workshop identified a number of potential issues that will have to be faced as further steps are taken.
Constitutional Issues: The new law is squarely based on Article 82 of the Colombian Constitution of 1991, itself a remarkably innovative document on many aspects of urban land reform. Article 82, in simplified terms, states that when public actions increase the development potential of land, the public has a right to participate in the increased value (plusvalía) produced by such actions, so that the costs of urban development will be defrayed and distributed equitably.
The legal/constitutional debate is twofold: 1) Can the municipalities act on the sole basis of the law, or should they wait until the national government issues “regulations” and remain subject to these regulations? and 2) Should the law be limited to establishing the common, general principles, since the 1991 Constitution attributes the responsibility of land taxation exclusively to municipalities?
Practical Effects of Municipal Discretion: The workshop also pointed out that the voluntary nature of the law may have negative and possibly unintended consequences. Since it is the mayor of each municipality who initiates the imposition of the “participation,” he or she may well come under considerable pressure, financial or otherwise. In rapidly developing areas, a 30 to 50 percent share of increasing property values might be a very large sum. One speaker, for example, asserted that in Cali 60 percent of the increases in land values caused by planning decisions would be equal to the entire municipal budget. On the other hand, the law may facilitate mutually useful negotiations and partnerships between municipalities and developers that do not occur now.
Maintaining a Political Constituency: The political environment that made this bold legislation possible included scandalous cases of overnight fortunes being made from a zoning change in Bogotá and a decision to expand the urban perimeter in Cali. In the latter case, land prices were said to have multiplied by more than one thousand times!
Beyond initial implementation there is the long-range question of maintaining a political constituency for the effective implementation of such a law in the face of powerful and well-financed resistance by landowners and developers. On the other hand, the ability of any national government to have passed such a law in the first place is an achievement of exceptional interest to those concerned about “value recapture” as an essential element in urban land policy.
Maintaining Objectivity in Assessments: In spite of very specific procedures in the law designed to make it as objective and transparent as possible, it will not be easy for the Codazzi Institute to make the required before and after assessments accurately under the time constraints defined in the statute. Moreover, the various transfer alternatives to cash payment of the fees, which are sure to be popular, are dependent on a local determination as to what constitutes “equivalent value.” A number of speakers pointed out that this process might be an invitation to corruption.
Technical Issues: Speakers also pointed out a number of technical assessment problems with the guidelines as set forth in the law. For example, if restrictive zoning causes one owner to lose value, which in turn increases value for an adjoining owner, what provision can be made for compensating the former while recovering the increased value from the latter? Moreover, since the market anticipates public action, will the “before” assessment already reflect increased values arising from the probability of the action? Or, if land use or building regulations increase values of low-income, small property owners, they may not have the cash to pay for development fees, nor would the other forms of payment be feasible at a very small scale. Forced sales or displacement of the poor could result. These matters raise the policy calculation: Is it better to stride ahead and work things out over time or attempt legislative correction of technical problems before proceeding further?
Economic Effects: Although legally described as public participation in the increased values that public actions have created, the legislation may also be seen as a form of capital gains tax. How often will it be used? Will implementation tend to push down the price of the land affected, or will changes in value be passed on to the ultimate consumer? If it is the latter, the law could have a negative effect on affordable housing. For this reason Article 83(4) exempts land to be used for “housing of social interest,” as defined by the national government. Will this become a loophole for widespread evasion? There is little international experience to answer such questions.
Master Planning: Law 388 of 1997 also requires all municipalities to prepare master plans (Planes de Ordenamiento) and contains fairly detailed descriptions of them in Articles 9 through 35. Obviously, planning alters expectations of owners, and therefore of land values. The administrative and economic interaction of the city’s planning process and its recapture of increased land values will surely be a complex one.
Conflicts in Objectives: As is often the case with fiscal tools, the new changes seek several objectives that are not always compatible: financing better urban development; reducing land speculation; introducing increased equity and progessivity into taxation; and closing some of the favorite avenues for corruption of municipal officials.
Learning from Innovation
In spite of these concerns, Colombia continues its tradition as one of the world’s most innovative nations in urban land planning, law and finance. Bogota was the first major city in the world to create a special zoning district that recognized the realities of low-income housing practices. Stimulated by the ideas and influence of the late Lachlin Currie, an economic advisor to the national government for some 30 years, the city used special assessment districts (contribuciones de valorización) to carry out a major physical transformation during the 1960s. Colombia’s laws on territorial development of 1989 and 1991, to which this 1997 law is a modification and supplement, are among the most comprehensive approaches to land planning since the British Town and Country Planning Act of 1947. Furthermore, the Colombian constitution is virtually alone in specifically mentioning the moral claim of the public to increases in land values caused by public action.
As might be expected, some of these innovations eventually fell short of initial expectations. Indeed, some participants at the workshop argued that the energies going into the recovery of plusvalía might be more usefully spent on increasing the efficiency of conventional property taxes. On the other hand, the new law is addressing and resolving some problems of earlier legislation and policies, and the country is learning from its experience. The conclusion of the workshop participants was that the process has been worthwhile, and that the new law must be understood and evaluated in its relationship to previously established instruments of value capture and fiscal policy in general.
William A. Doebele is professor of urban planning and design, emeritus, at Harvard University Graduate School of Design and a faculty associate of the Lincoln Institute. This article was prepared with important contributions by Martim Smolka, senior fellow for Latin America Programs, Fernando Rojas, visiting fellow of the Institute, and Fernanda Furtado, faculty and research associate of the Institute.
See also Fernando Rojas and Martim Smolka, “New Colombian Law Implements Value Capture,” Land Lines, March 1998.
