2.4 Elements ofLocal Revenue

TABLE 2.4 Elements ofLocal Revenue

Contribution to local Intergovernmental Revenue Base Rate revenue, 2002/03 revenue sharing?

Property rates Has varied in different Variable 20.2% (more than 30% in No. It is raised and used parts ofthe country, but urban areas) locally in category A and B a new act will more municipalities consistently use market value ofland and buildings as the base. Exclusions include public infrastructure, crops, equipment, mining, beneficiaries from land reform, and tribal land.

RSC levy Business turnover Variable. The 7.1% No. The tax was raised (abolished from and payrolls. implementing and used in category A and 2006) legislation specified C municipalities. It is being that a taxing authority replaced by national grants could impose different in 2006, and the rates for each tax for government is considering different types of new tax instruments enterprise, subject to for the longer term. the concurrence ofthe national minister offinance.

(continued) Local Government Organization and Finance: South Africa

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TABLE 2.4 Elements ofLocal Revenue (continued)

Contribution to local Intergovernmental Revenue Base Rate revenue, 2002/03 revenue sharing?

User charges Consumption ofsuch Variable. The MFMA 45%. Electricity provides No. The local charges services as water, enables the “uniform the biggest share, go to the relevant local electricity, and refuse norms and standards followed by water government. removal. concerning the setting services. ofmunicipal tariffs.” The Municipal Structures Act requires tariff structures to facilitate access to basic services for the poor. The responsible national minister can issue regulations.

Source: Author’s compilation based on local government legislation and data from National Treasury 2003b and 2004b. 70

Chris Heymans

Local Government Organization and Finance: South Africa 71

favors major property developers because the value ofland on which offices are built is very low in relation to the value ofthe improvements on them. Such a tax base also favors middle-class homeowners who have made substantial improvements to their properties.These biases make a land-only tax notably regressive.Concerns have also been raised that the system ofrebates and exemptions required to improve the equity ofa land-only tax is too administratively complex and not transparent.

However,a number ofcomplexities have arisen in the context ofthe new local government situation.For example,promulgation ofthe act was held up because ofcontroversies around its application to tribal areas and farming land.The tribal issue has been dealt with by excluding communal land for 10 years and by excluding crops.

RSC Levies

RSC levies have been both an anachronism from the pre-1994 era and an important source ofrevenue for metros and district authorities.The tax was introduced in 1986 to finance the regional services councils—themselves an invention ofthe apartheid government to mitigate the fiscal stresses ofmany local governments,undertake infrastructure development at the local level, and facilitate upgrading ofless-developed areas.The levy was in essence a tax on business turnover and payrolls.

For some time,the current government has wanted to reform or abolish RSC levies,and in 2005 (Republic ofSouth Africa 2005),it finally announced that this form oftax would be abolished for a number ofadministrative,economic,and fiscal reasons.The first concerned accountability and the manner in which the tax was assessed.Metros and district municipalities did not conduct their own assessment ofthe liabilities oftaxpayers but relied on the assessments ofthe taxpayers themselves,with some recourse to the South African Revenue Services to verify assessments.However,assessments were not frequently verified,and there were no explicit penalties for nonpayment other than charging interest on arrears.The payroll element ofthe tax was also seen as a disincentive to employment creation.By setting rates nationally, the national government effectively compromised the fiscal autonomy oflocal governments.The government’s general fiscal stance has also been that a local tax like the RSC levy does not provide the best vehicle for redistribution and that intergovernmental transfers provide more equitable instruments for redistribution across localities (National Treasury 2001).

72 Chris Heymans

The 2006/07 national budget hence provides for a national grant of R 7 billion to replace the RSC levy,and this grant will be escalated in the following two fiscal years.The understanding is that the transfer grant will be an interim measure,but the government is still considering the options.The core policy debate concerns more than local fiscal capacity alone.It is also about accountability:there has been a concern that the more local governments rely on transfers,the less accountable they may become to local stakeholders (business,consumers,or others).The options the government has been considering include allowing municipalities to claim input credits on inputs used for services provided out ofproperty rates;devolving part ofthe national fuel levy so that municipalities get a share based on fuel sales in their area,introducing an electricity levy,distributing property transfer duties to municipalities on the basis ofwhere property sales take place,or introducing a new business tax.

User Charges and Utility Fees The power oflocal governments to impose user charges is only implicit in the constitution,in that it grants them executive authority over matters reasonably necessary for or incidental to performing their functions (section 156).The ability to raise income from user charges is linked to the municipality (category B or C) authorized to perform a specific service.

Utility fees from trading services (water,sanitation,electricity,and refuse removal) have jointly constituted the major local revenue source for many years—on aggregate more than 30 percent in recent years.All three categories ofmunicipalities are able to levy such charges,but the division of powers between category B (local) and category C (district) municipalities dictate which benefits in a particular context.Although the National Treasury has been concerned that surpluses have been overestimated because of inaccurate municipal cost estimates,these services—especially electricity— have made a significant contribution to local revenues.

In this context,a current prominent policy debate is about proposed changes in the electricity distribution industry that will shift distribution to regional entities and away from municipalities.Grave concerns have been expressed that even ifmunicipalities were compensated in some way or were able to introduce a surcharge on electricity purchased in their areas,the changes mean a shift away from one ofthe best-known and most clearly established local revenue sources.The fiscal implications are not known.It has been argued,though,that a surcharge would be more predictable than a trading service (Bahl and Solomon 2000;National Treasury 2005).