Local Government and Property Tax Reform in South Africa
Since first holding democratic elections at the national and provincial levels in 1994, South Africa has undertaken far-reaching constitutional changes. Arguably, the most fundamental transformation is taking place at the local government level, where the divisions created by apartheid were most severe. These changes were set in motion by the Local Government Transition Act of 1993, and during 1994-1995 the formerly racially segregated urban local authorities were amalgamated into a variety of non-racial transitional councils:
- in metropolitan areas, transitional metropolitan councils (TMCs) with constituent transitional metropolitan local councils (TMLCs);
- in secondary cities and towns, transitional local councils (TLCs); and
- in rural areas where no primary municipalities existed in the past, transitional representative councils (TRepCs) or transitional rural councils (TRCs).
In non-metropolitan areas, the former regional services councils were transformed into district councils, thereby retaining a secondary tier of local government in rural areas.
In March 1998 the national government published the White Paper on Local Government, which set out its vision for the future of local government. The White Paper resulted in passage of the Local Government Demarcation Act and the Local Government: Municipal Structures Act. Under the Demarcation Act, the Municipal Demarcation Board was established to assign new boundaries for the different categories of municipal governments throughout the country. The present 843 transitional municipalities are to be severely reorganized after the local elections in November 2000 into 284 newly demarcated municipalities (see Table 1).
Within the six metropolitan areas to be established, single-tier metropolitan municipalities will replace the TMCs and TMLCs. In the non-metropolitan areas 47 district municipalities will replace the present 42 district councils. Each district municipality will consist of two or more (primary-tier) local municipalities to replace the present local and rural councils. A typical future local municipality will consist of a number of neighboring towns and their rural hinterland. In sparsely populated rural areas where the establishment of a local municipality is not viable (designated as district management areas), a district municipality will be the only form of local government.
Municipal Finance Reform
The structural reforms at the local government level also require reform of municipal finances. The government is currently preparing two important pieces of legislation in this regard, the Local Government: Property Rates Bill (dealing exclusively with property taxation) and the Municipal Finance Management Bill.
Section 229 of South Africa's Constitution guarantees "rates on property" (i.e., the property tax) as an autonomous source of revenue for municipalities. It states that the "power of a municipality to impose rates on property...may be regulated by national legislation." National framework legislation regarding the property tax is indeed needed for the following reasons:
- Property tax is currently levied in terms of four outdated provincial ordinances retained from the apartheid era (e.g., it is not presently possible to utilize computer-assisted mass appraisal (CAMA) because physical inspections of each rateable property is legally required).
- Property tax is presently levied only by urban municipalities.
- The future amalgamation of urban and rural councils (i.e., the structural changes to date and still to be effected) necessitates change.
- The amalgamation of racially segregated urban municipalities has resulted in a number of constitutional challenges.
- It is the most important own-tax instrument at the local government level, accounting for 19 percent of total local government operating income (Budget Review 2000).
Therefore, the Local Government: Property Rates Bill, currently in its 10th draft, is to be welcomed, at least in principle. It has not yet been published for public comment and may be further amended. However, when this bill is eventually passed into law, it will regulate the levying, assessing and collection of property taxes by municipalities.
Policy Issues in the Property Rates Bill
Diversity of Tax Bases
Urban municipalities generally have a choice between three tax bases, which are spread remarkably evenly throughout the country:
- Site rating (rating land values only) is prevalent in at least three of South Africa's nine provinces (Gauteng, Northern Province and Mpumalanga);
- Flat rating (rating improved capital values) is dominant in the Western Cape; and
- Composite rating (rating land values and the value of improvements, but at different tax rates) is most commonly used in KwaZulu-Natal.
Earlier drafts of the Property Rates Bill retained this diversity as well as local choice. However, clause 5(1) of the 10th draft of the bill now states that a rate levied on property "must be...an amount in the Rand (South Africa's currency) determined by the municipality on the improved value of the property." Although it seems that government has opted for a single tax base (i.e., improved capital value), the bill goes on to provide that a rate levied on the "improved value of property may be composed of separate amounts on the site value of the property and the value of the improvements." By implication, therefore, composite rating and site rating have been retained (if the amount in the Rand on improvements is set at zero).
Extension of the Tax Base and Possible Exclusions
In principle a municipality may tax "all property in its municipal area," including areas where the property tax has not been levied before, such as agricultural and tribal land. However, the bill also allows a municipality to exclude a category or categories of property from rating. These excluded properties need not be reflected in the valuation roll.
McCluskey and Franzsen (2000) suggest several reasons why municipalities should include all properties in the valuation roll, and then allow specific exemptions rather than exclusions from the taxing process. First, it can be difficult to justify and defend exclusions constitutionally; second, it is politically easier to phase out an exemption than to introduce a tax on formerly excluded properties; and third, if properties are not valued and thus not reflected in the valuation roll, the extent of the tax base relinquished through exclusions is not known.
"Public infrastructure" is to be excluded from the tax base. This will have significant implications, particularly for municipalities with large tracts of land owned by public utility companies, and may need to be reconsidered in light of privatization. International practice suggests that public utilities should be rated at least on their operational land.
Differentiation and Phasing-in of Rates
Current legislation only provides for rate uniformity throughout a municipal area. However, municipalities sometimes achieve effective differentiation by granting arbitrary rebates to certain properties on the basis of zoning. For example, all improved residential properties in the Pretoria TMLC are presently granted a 35 percent rebate.
The bill provides that different rates may be levied for different categories of property according to use, status or location-a critical point in light of the extension of municipal boundaries into rural areas. For example, it would be possible for a future local municipality (comprising various small towns, commercial farmland and tribal land) to have the following different property categories (and therefore different tax rates):
- residential properties in a formal township in town A (consisting of generally low-value properties);
- residential properties in a formal township in town B (consisting of generally high-value properties);
- residential properties in an informal (squatter) settlement;
- commercial properties;
- industrial properties;
- commercial farmland;
- tribal land.
However, a municipality will have to justify its differential rate schedule in an annually revised rates policy document presented to all taxpayers. Although municipalities may be permitted to treat ratepayers differently, they must justify this action. The bill also allows for the phasing-in of rates over a three-year period with respect to property not subject to property taxation before 1 July 1999 (e.g., tribal land). In certain instances the period may be extended for a further three years.
The bill (clause 5(2)) states that municipalities may set their own tax rates. However, the Minister for Local Government, in concurrence with the Minister of Finance, may set a limit or rate cap on the amount. Apart from reducing municipalities' fiscal autonomy, rate caps set nationally may not reflect differences in taxing capacity that exist between municipalities (see Table 2).
An alternative, and more practical, "capping" measure that has been inserted in the 10th draft (clause 5(3)(a)(ii)) is to limit the annual tax rate increases, not unlike one part of Proposition 13 in California.
Extension of Property Tax to Tribal Land
Extending property taxation to tribal land is an area of major political concern and is fraught with practical problems. "Ownership" of tribal land is not uniform, and some tribal authorities are not prepared to accept any form of local government within their area of jurisdiction, let alone any form of taxation of "their" land. Identifying the taxpayer may be problematic. Furthermore, formal ownership of tribal land seldom reflects the complex system of tenure rights of the individuals entitled to the use of that land. Even if it were possible to identify a taxpayer and establish an assessed value for (tribal) "property," the abject poverty and inability of residents in many tribal areas to pay any tax will have to be considered. In fact, few tribal areas presently receive municipal services that could justify the introduction of a property tax.
Clause 13 of the bill requires municipalities to adopt a rates policy and then levy rates accordingly. This is a welcome change. The rates policy, which is to be reviewed annually, must explain and justify the provision of exemptions, rebates, reductions and relief for the poor. This policy should significantly enhance the transparency, efficiency and accountability of municipal councils, and perhaps encourage compliance.
Valuation Quality Control
Another welcome aspect in the bill concerns monitoring valuation quality for equity and consistency across the country. However, the bill (clause 64) confers this responsibility on the Minister responsible for local government. McCluskey and Franzsen (2000) suggest that an independent and professional valuation agency, preferably at the national level, should be established for this highly technical task. Such agencies exist in Australia, New Zealand and Canada. In South Africa, this type of agency should perform the following primary tasks:
- provide technical advice to government on valuation issues and the regulation of the valuation services sector;
- set minimum quality standards and specifications necessary to meet government outcomes;
- monitor and audit the valuations submitted by valuation providers (e.g., municipal valuers) against certain minimum standards; and
- certify to municipalities (and through them to ratepayers) that the resulting valuations meet the minimum standards for a fair and consistent property tax system.
The monitoring service could well be expanded to provide valuation advice, expertise and data to municipalities. Such an agency could also undertake valuations of property for other taxes levied at the national level, such as estate and gift taxes.
The Local Government: Property Rates Bill should provide a solid framework for property taxation as South Africa begins to implement its new local government structure. If municipalities adhere to the principles articulated in the bill, a more uniform, equitable and efficient property tax system will play an even more important role in the future.
Riël C.D. Franzsen is professor in the Department of Mercantile Law at the University of South Africa in Pretoria, South Africa. His research on property tax reform in South Africa has been supported in part by the Lincoln Institute.
Budget Review 2000: Chapter 7. South Africa Department of Finance. http://www.finance.gov.za/b/budget_00/default.htm
Franzsen, R.C.D. 1999. Property taxation in South Africa. In W.J. McCluskey (ed.) Property Tax: An International Comparative Review. Aldershot, UK: Ashgate, 337-357.
Local Government: Property Rates Bill. 2000. 10th draft. South Africa Department of Provincial and Local Government.
McCluskey, W.J., and R.C.D. Franzsen. 2000. Some policy issues regarding the Local Government: Property Rates Bill. SA Mercantile Law Journal 12: 209-223.