Local Governments’Own Taxes and Charges

Local Government Organization and Finance: South Africa 67

their local government and finance counterparts,as well as organized local government,and obtain an assessment ofthe financial implications from the Financial and Fiscal Commission.However,there are no firm rules to ensure the quality ofconsultations and assessments,to ensure the quality ofthe information to support them,or to guarantee the ability and willingness of sector agencies and organized local government to engage in these consultations effectively.There is perhaps a need,therefore,for a more detailed appreciation ofthis diversity and its relevance to specific expenditure assignments.

Fourth,the government’s policy offree basic services demands a fine balance between expenditure assignment and fiscal capacity.National departments (notably the Department ofWater Affairs and Forestry) have been developing policy and strategy on free services,with the provision of the services ultimately being the responsibility oflocal government.However,most municipalities—especially in rural areas—would need substantial fiscal assistance from the national government and adequate operational support from service providers with the required capacity (Palmer Development Group 2004).

Finally,the persistent growth in personnel expenditure has been notably high,generally outstripping other expenditure items.Over the past few years, the amalgamation process intensified this growth.The trend has been to aggregate salaries toward the highest common denominator when merging jurisdictions that were previously ofdifferent grades.There have also been significant increases in management remuneration,and national regulation ofmunicipal personnel spending has been erratic.It is a difficult challenge; municipalities employ more than 200,000 people (National Treasury 2001).

Local Governments’ Own Taxes and Charges

The constitution sets the broad framework for locally raised revenues.Provided that they do not prejudice the national economic interest (section 229(2)(a)) and adhere to regulation by national legislation,local governments are exclusively empowered to impose property rates and surcharges on fees for services provided by or on behalfofthe municipality (section 229(2)(b)).They are,however,prohibited from imposing income,value added,or general sales tax or customs duties.In addition,national legislation could enable specific categories oflocal government to impose other taxes,levies,and duties.

Aggregate figures would suggest that local government is largely selffinancing,raising between 80 and 90 percent ofits own revenue (Momoniat

68 Chris Heymans

2001;National Treasury 2001,2003b).However,the aggregate figures maskthe high variation among municipalities.In particular—albeit not exclusively—smaller and rural municipalities are significantly more dependent than this statistic would suggest.Nonetheless,local governments have, in principle,powers to raise several revenues locally,and several have attained a high degree offiscal independence.In the 2006 national budget, the government formally abolished RSC levies (composed ofa services levy and an establishment levy on local businesses),but until then these levies formed one stream ofprimary local revenue sources,together with property rates and charges for services such as water,sanitation,electricity,and refuse removal.A few observations can be made about each ofthese sources (see table 2.4).

Property Rates Property rates are the prerogative ofcategory A and category B municipalities. They have accounted for about one-fifth oflocal revenue in recent years,and well over 30 percent in some ofthe big urban centers (National Treasury 2001, 2003b,2004b;Whelan 2002,2004).However,since the 1998 White Paper on local government came out (Department ofConstitutional Development 1998),the national government has attempted to enhance the reach ofthis tax, improve its administration,introduce a more consistent approach,and encourage more regular updating ofvaluation roles across local jurisdictions.After four years ofconsiderable debate,a new Property Rates Act was passed in 2004.

Property rates were regulated by provincial ordinances in the era before 1994,resulting in much inconsistency.The ordinances allowed for further variation within their jurisdictions,with some municipalities taxing only site values,others taxing land and improvements at different rates,and others taxing the total improved value at a single rate.Flat rate systems have also been applied in some places.The 2004 Property Rates Act requires more consistency,but the bases defined in the ordinances can be retained for four years after the date on which the new legislation came into effect (mid-2004).Nonetheless,although the act leaves decisions about differential rating ofdifferent categories ofproperty,as well as decisions about exemptions and rebates,to municipal councils, it sets out a common approach.It also attempts to systematize the process of setting property rates by requiring each council to adopt a policy that would set the framework for its decisions,rebates,and processes.

The legislation formally broadens the base ofthe tax beyond land value, to include the total improved value ofproperty (the combined land and improvement value) as the tax base.The contention is that a land-only tax