Land Tax Hearings Report: adoption

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Finance Standing Committee

15 November 1999
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FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
16 November 1999
LAND TAX HEARINGS REPORT: ADOPTION

Document handed out:
Report of the Portfolio Committee on Finance on the Eighth Katz Commission on Land Tax

SUMMARY
The Committee adopted the report of the Portfolio Committee on Finance on the Eighth Katz Commission Report on Land Tax

MINUTES
The Committee agreed to peruse through the report page by page and make comments as they arise. Also that grammatical and spelling errors be submitted to the Committee Clerk after the meeting.

In several instances wording in the report was discussed, but no substantive changes were made.

In the discussion of the `Exclusion of tribal and other land from tax base', Adv D Schutte (NNP) argued that this provision is important with regard to tribal land not being put to productive use. He went on to say that this kind of tax would promote and encourage the productive use of tribal land.

The Chairperson, Ms B Hogan (ANC), said that tribal land cannot be put to productive use, because of the large volume of people living on it. She went on to say that Land Affairs argued that tribal land should "act as a social security net" for the unemployed and therefore to impose a property tax would "impoverish the poorest of the poor".

Prof B Turok (ANC) added that during the hearing of evidence it was made clear that the intention of introducing such a tax was not to make land more productive.

There was consensus that no changes be made to the report regarding the `Exclusion of tribal and other land from tax base'.

The Committee adopted the report and the meeting was adjourned.

Appendix 1
Report of the Portfolio Committee on Finance on the Eighth Katz Commission on Land Tax, as follows:

The Portfolio Committee on Finance, having considered the Report of the Katz Commission on Land Tax, reports as follows:

A. Introduction
The Committee held hearings on the report on land tax on 7 and 8 October 1999.

1. Written submissions were received from the following:
(1) Department of Provincial Affairs and Local Government.
(2) Department of Land Affairs.
(3) Abolition of Income Tax and Usury Party.
(4) Local government
(5) South African Constitutional Property Rights Foundation (Sacprif).
(6) Godfrey Dunkley.
(7) Tony Vickers - Henry George Foundation of Great Britain.
(8) Chamber of Mines of South Africa.
(9) Municipal Demarcation Board.
(10) Economic Policy Research Institute.
(11) Sacob

2. In addition, oral submissions were made by the following:
(1) Katz Commission: Prof D Davis; Prof R Franzen; Prof Van Schalkwyk; Mr M Grote; Prof N Vink; Dr B Graaff;

(2) Department of Land Affairs: Mr G M Budlender, Director-General; Mr M Aliber: Technical Assistant.

(3) Department of Agriculture: Mr B van Wyk, Director: Economic Policy.

(4) Department of Provincial Affairs and Local Government: Chief Director; Ms J Manche, Director; Myron Peter.

(5) South African Constitutional Property Rights Foundation: Mr P Meaken;

(6) Mr M Jacques.

(7) South African Agricultural Union: Mr C J du Toit, President; Mr J F van der Merwe, Deputy Executive Director; Mr J S Pienaar, Director: Macro Policy.

(8) Sacob: Mr B Lacey; Mr K Warren.

(9) Municipal Demarcation Board: Dr M Suttcliff.

(10) Chamber of Mines: Mr P A Anscombe; Mr B J Shipman; Mr A J Traas.

The Committee is grateful to all participants for time and energy spent on this process.

B. Approach adopted by Committee
1. Approach to hearings
In drawing up this report, the Committee had to take cognisance of several developments. Firstly, in 1995 the commission tabled an interim report on the imposition of a land tax in South Africa. It outlined further steps to be taken before a final report could be presented. In the interim, the Constitution adopted in 1996 empowered local government to impose a property tax, which in rural areas has been known as a land tax. Only local government can impose a property tax. In a way, this pre-empted the findings of the commission. Secondly, at least one municipality has already implemented a land tax. Thirdly, to prevent further erratic and ad hoc approaches, the Department of Provincial and Local Government has already started drafting a bill to nationally regulate the imposition of property taxes (as provided for in the Constitution). The final report of the commission appeared in the midst of this process. Fourthly, the FFC and organised local government have yet to comment on the bill before it is passed by Parliament. This is a constitutional requirement.

The Committee is of the view that in the light of these developments it would be futile to continue an abstract debate on the merits or otherwise of a land tax. Rather it would be more productive if the Committee examined the recommendations of the commission and the comments submitted thereon by various parties, in conjunction with the regulatory framework currently being drafted by Provincial and Local Government, so as to enrich debate on the issue and to assist in identifying matters that require further attention. The Committee was aware that the debate on property taxes is more developed as regards urbanised areas, and welcomed the opportunity for a public discussion that focused exclusively on the imposition of a property tax in rural areas.

For these reasons, the Committee invited the participation of Provincial and Local Government in the hearings. They presented an initial draft of their Municipal Rates Bill, thus enabling all interested parties to comment. The Committee has thus formulated this Report, based on discussions emanating from both the commission report and from the draft bill. The Committee wishes to reiterate, however, that formal consideration of the bill will be undertaken, not by this Committee, but by the Portfolio Committee on Provincial and Local Government. Finally, the Committee wishes to express its appreciation to Provincial and Local Government for attending the hearings and for making the draft bill available for consideration.

2. Approach to report
The view of the Committee is that the question of a land tax is best approached from the following two central vantage points:

(1) The impact of a land tax on economic activities in the rural areas.

(2) The net returns on revenue and the benefits for rural communities.

The Committee acknowledges that the imposition of a land tax will obviously create an additional financial and administrative burden on those persons and enterprises located in rural areas; this needs to be measured against the benefits of additional services/infrastructure that could be provided through the revenues gained from a land tax. Of critical importance in this regard is the actual amount of revenue generated; this must be measured against the costs of collection. On the other hand, the benefits derived from a land tax will only be enjoyed if the implementing agency (local government) has the capacity to collect the revenue efficiently and economically and to deliver the services.

A matter which complicates any analysis of the costs/benefits of a land tax, is the fact that the actual impact of additional taxes/revenues will be difficult to calculate until such time that there is agreement or clarity on the key variables that influence the magnitude of such a tax. Some of the major determinants in this regard are whether the tax is levied on the market or use value of the land, whether the land is valued at its site (unimproved) value or at its improved value (or a combination of both), whether the tax will be treated as a provisional tax or as income tax deductible, whether there will be a cap on the tax and what the actual rate will be, whether all land in rural areas will be taxed, including privately held land, State land and tribal land, or whether there will be the powers to exempt certain categories of land. The proposed new bill makes several suggestions in this regard and, very importantly, leaves some of the key decisions to the discretion of individual municipalities. The implications of this will be examined later on in this Report.

It is sometimes thought that the imposition of a land tax can influence land redistribution through lowering the price of land. Most of the evidence put before the Committee suggests that the land redistributive effects will be negligible. The Committee therefore sees no purpose in pursuing this line of argument further.

Finally, it must be noted that several submissions criticised the broad objectives of the commission. The Abolition of Income Tax and Usury Party states that "an illusion has been created, whether by the Tax Commission or some other agency, that there is an acceptance that a tax on land is desirable and/or needed in South Africa" and thus that "the tax is unnecessary". AgriSA argues that "the taxation of agricultural land is unacceptable", but it nevertheless considers supporting it if it is treated as a provisional tax, since "no effective increase in the tax burden would have been achieved". At the other extreme, Sacprif argues that "the contents (of the 8th Interim Report) are mala fide, incompetent, constitutionally reckless and methodologically ambiguous", and further that the commission "has displayed a clear prejudice in favour of the status quo" and has "failed to probe the various alternative tax". They argue in favour of the Georgist principles that a high land tax results in investment and growth and thus that "a single tax will facilitate access to land by the poor and unemployed". This view was supported by two independent submissions, from Tony Vickers and Godfrey Dunkley. Others such as Bill Powell argue that, since land tax "stimulates more efficient and intensive use of valuable and productive land", it should be used to "reduce the contribution to the public purse from other taxes". The Economic Policy Research Institute also supports in principle a land tax, but because "increasing the overall tax burden over the medium term can provide important resources for socio-economic development". The other recommendations all debated various points of the report, without questioning the tax system as a whole. Thus we turn to the analysis of the recommendations of the commission's subcommittees.

C. Impact of land tax on economic activities in rural areas
Unfortunately, insufficient and sometimes conflicting evidence was submitted to the Committee on the effect that a land tax will have on economic activities in the rural areas. Agriculture was given the most attention, and mining to a certain extent, but no submissions were received from other non-farming sectors such as tourism, forestry and fishing. Given that the Department of Land Affairs estimates that at least half of the revenue generated by a land tax will be collected from the rural non-farming sector, this is a fairly serious omission. Moreover, until such time that there is clarity or agreement on at least some of the key variables influencing a land tax, it is difficult to make projections about the magnitude of the actual tax burden and its consequent effects on economic activity in the rural areas.

1. Effect of land tax on agriculture
The Katz subcommittee was of the view that the impact of a land tax on agriculture was critically affected by three factors, namely the tax base, the tax rate and the deductibility of land tax from income tax.

The significance of these variables will be discussed as they relate to different aspects of the impact on agriculture.

(1) Loss of income
The commission noted that if a land tax were to be raised on the basis of the market value of agricultural land, the amount raised would far exceed that of RSC levies. The effect would be more severe than if it were to be raised on the agricultural use value of the land. It would also lead to regional distortions in that non-farming factors influence the market value of land. For example, the commission calculated that if a non-deductible land tax of 2% were to be raised on the market value of land in the Great Karoo, it would absorb 7,8% of net farm income per hectare, whilst in Bloemfontein it would be a mere 1,85 % (p 18, par 68 of report.) The consequence of using market values rather than use values, would mean that the tax burden would be more severe than would otherwise have been the case and that it would lead to regional distortions.

Land Affairs was also of the view that rates on rural property should be on site value and not on the improved value of the land, as the latter would be a disincentive for further investment by farmers.

In its submission AgriSA argued that a flat rate of 2% would yield a revenue of approximately R1,18 billion or 14% of net farm income, which they say would be unaffordable. If treated as an additional tax, it would result in a 12,32% drop in real land prices and an 11,28% decrease in net returns. In addition, they argued that the agricultural sector is having to sustain other further costs relating to user-pay charges (water, electricity and research), to the withdrawal of the rebate on the price of diesel fuel and to training levies pertaining to sectoral educational training. Moreover, they were operating in a climate of increased global competitiveness.

(2) Multiplier effects
A land tax would impact on the multiplier effects of agriculture (i.e. on the forward and backward linkages between agriculture and the rest of the economy.) The commission estimated that a 2% tax levied on the use value of land in the Olifants River basin would lead to a decline of R3,7 million in the GDP, with a loss of 212 job opportunities and a shortfall of R0,8 million in revenue. If, however, the market value of land is used, then the GDP will decline by R22,7 million, 1 305 jobs would be lost, (national) government revenue would fall by R4,7 million, with an intake of R12,6 million in land (local) tax (p 16, par 65 of report). However, the commission emphasised that revenue earned at local level from agriculture would be ploughed back into the community and that local authority spending also has a beneficial redistributive effect.

(3) Increase in short-term liabilities
One of the most severe effects of a land tax is the amount of the short-term liabilities of farmers, as they have to incur more debt to operate at optimal levels (p 22, par 78 of report).

(4) Decline of real land prices
The commission analysed the impact of a land tax on the market value of agricultural land, which showed that prices would fall by 5,3% if a 1% tax was levied on market values; a decline of 12,32 % would be incurred if a 2 % was levied. The methodology used was contested in the hearings, as was the magnitude of the decrease (cf. Provincial and Local Government and Land Affairs), but nonetheless there appears to be little doubt that land prices would fall to a certain extent which would disadvantage present land-holders but perhaps benefit future land-holders, in that borrowing costs would be lowered.

However, Land Affairs argues that the fall in land prices will have a minimal effect on future land-holders, as the impact on land prices will be more modest. In a background paper, Land Affairs argued that the estimates regarding the fall in land prices in the report were too high because it assumed that land prices are determined by the capitalisation of farmers' income streams, which is only partly correct, and that too high an initial value was assigned for commercial farm land. Moreover, it argued that farmers bear a very light income tax burden and, should income tax collection methods improve considerably, it would have a worse effect than the imposition of a land tax.

2. Effect of land tax on mining
In the past, mining land has been exempted from the payment of property rates, except for land used by mines for residential purposes and for other non-mining-related activities. This was because mines tended to be developed in rural areas, where the local municipality was unable to provide services. In these instances, the mines themselves provided the services. The exemption on property rates has since been lifted. The Chamber of Mines argued in their submission that the mines should be entitled to a services rebate, as they provide much of their own services and infrastructure in the form of roads, health, emergency and sewage purification services.

The Chamber argued that if improvements to land were to be taxed, it would be "highly prejudicial" to the industry (par 4.8 of their submission). The development of mines can amount to billions of rands; accordingly, if rates were to be imposed, it would lead to extraordinarily high assessments rates. This would affect the "pay limit" of mining, meaning less ore would be able to be mined economically because of the rise in working costs.

The commission recommended that mineral rights be excluded from the tax base, as this is already done in the urban areas and because policy on mineral rights has not yet been concluded. The Chamber concurred with this proposal.

The Chamber is also of the view that the tax should be imposed on the market value of the land and that the rate of tax imposed by individual municipalities be subject to the approval of the Department of Finance.

The concern of the Committee relates to section 229 of the Constitution, which stipulates, inter alia, that a property tax cannot be imposed to the detriment of national economic policies and the mobility of goods, services, labour and capital. In the absence of substantive projections of the effect of a land tax on economies in the rural sectors (and who have never been taxed before), it is difficult to understand how a municipality will initially be guided in setting actual rates for the first time (which includes provision for exemptions, differential rates, etc). The bill also does not make provision for monitoring the economic impact of a property tax, locally as well as nationally; nor does it provide for mechanisms for intervention, should national economic policy or mobility of economic factors be detrimentally affected. These must be important considerations when a municipality reviews its rating policies and when the government reviews national economic policy. This is even more important, given the latitude municipalities have in imposing property taxes.

D. Net returns on revenue and benefits to rural communities
1. Total projected revenue
The most significant shortfall of the hearings conducted by the Committee is that hardly any evidence was led on the total amount of revenue that could be gained from a land tax. A few rough projections were made. For instance, Land Affairs calculated that a rural tax of 3% based on site value would yield R1,3 billion a year, half of which would come from non-farming rural properties (par 4, p 3 of submission by department). AgriSa estimates a return of approximately R1,18 billion from farm income alone, but they do not specify their assumptions, apart from a rate of 2%. Apart from the fact that these are figures are, at best, simply rough estimates, these figures are not very high. More definitive research needs to be undertaken to calculate the projected returns of a land tax.

2. Factors influencing revenue flows
As with the point made in the previous section, the actual amount of revenue collected will obviously be affected by key variables, some of which will be discussed below.

(1) Provisional tax vs income tax deductibility
The subcommittee proposed that a land tax should be raised as a provisional tax, which would mean that that the tax-payer would be able to "claw back" the land tax paid in the event of there being insufficiently assessed income tax. This would entail a negligible effect on land prices and the short-term financing requirements of emerging farmers, in particular, and on surrounding rural economies. The commission disagreed and recommended instead that the land tax be made income tax deductible, mainly for the reason that it would not entail a transfer of revenue from national to local government, which would avoid additional time, effort and costs in assessing and collecting revenue. Moreover, property rates at municipal level are already income tax deductible, and therefore it would be appropriate for all property taxes at local level to be treated in the same way.

In their submission AgriSA argued that, should a land tax be treated as a provisional tax, there would be no effective increase in the tax burden and the negative consequences on agriculture avoided. Should the decision be that the tax be treated as a tax-deductible expense than there would be much more disagreement on other matters such as tax-base valuation methods, rates, exemptions and frequency of valuations. Land Affairs concurred with the commission and recommended that property taxes be income tax deductible. The national Department of Agriculture agrees, calling for consistency with the way property rates are treated in urban areas. Sacob suggests that a pilot land tax exercise be undertaken for a period of three years, using provisional tax as a base, in order to assess its productiveness and ease of administration.

The draft Municipal Rates Bill is silent on this matter. In its comments, Provincial and Local Government suggests that it should be a separate tax entirely, which overlooks the fact that in urban areas property rates are already income tax deductible.

(2) Market value vs use value
In contrast to the subcommittee and organised agriculture, most commentators favour the use of market value over use value as the basis for valuing land. The Chamber of Mines was concerned about the "appropriateness" of applying use-valuation methods on non-agricultural land; it proposed that agricultural land be valued according to its use value and that there be a choice of assessment methods for other non-farming land. Agriculture concurs with this point of view, but points out that the application of use-valuation methods is not without its difficulties. If cognisance is not taken of "different land use patterns and land qualities, land taxes will not be fair and just per taxpayer, even in the same area" (p 2 of submission by national Department of Agriculture). Sacob submitted that "whilst the use value method may be the most equitable, it is simply not practical for rural land to be so measured within a foreseeable time" (Par 3.1 of their submission). Land Affairs feels that "market value is a more appropriate measure of the value of land, and is, after all, what determines the rewards to rural land owners when they choose to sell their land" (par 6, p 4 of their submission).

The Municipal Rates Bill specifies that the rates will be determined at market value. But in its comments on the commission's proposals, Provincial and Local Government suggests that there could be special treatment for agricultural property (Par 4.3, p 6 - Comments on the Katz Commission Report on Land Tax and the Draft Property Tax Bill).

It is clear that there is no unanimity on this question. Whilst the Committee would be inclined to agree that there are less complications to determining the market value of a property, it is of the view that these matters need much more attention before a final decision can be taken and that perhaps more flexibility should be allowed in this regard.

(3) Site rate vs flat rate
The commission recommended that the property rate in rural areas should be valued on its unimproved (site) value. As has already been mentioned, the Chamber of Mines, organised agriculture and Land Affairs are of the same view.

The draft Municipal Rates Bill says that a municipality will have the discretion to levy a rate on the improved or unimproved value of property or on a combination of both (Clause 5(2)). This could lead to significant intermunicipal, as well as sectoral, differences in revenue flows, especially if the actual rates are not adjusted accordingly. Clause 4(b) permits two different rates to be set; one for the site value and one for the improved value of the same property.

(4) Actual tax rate
The commission recommended that individual municipalities should determine the actual tax rate, subject to the approval of the Department of Finance. Public participation processes must be encouraged when deciding on the tax rate. The implication is that there need not be any uniformity across municipalities and between categories of property, although it is suggested that Finance be allowed to impose a cap on municipal rates.

The draft Municipal Rates Bill favours local participation as well, but does not specifically refer to public participation processes. Clause 4(a) grants the Minister of Finance powers to impose a cap on tax rates. Clause 4(b) allows for different caps to be set for different categories of property. This would apply to all municipalities.

(5) Exclusion of tribal and other land from tax base
The commission, Land Affairs, Agriculture and Sacob all endorsed the principle that tribal land be exempt from a land tax for a stipulated period of five years or more; some argued that these areas should fall under a complete general exemption. A further recommendation from the commission was that local government receive compensatory grants from other spheres of government. Land Affairs argued that land in these areas is not used for productive purposes and that in periods of high unemployment, these areas act as a social security net. To impose a property tax under these circumstances, would impoverish the poorest of the poor. If, however, a property tax were to be introduced, it should not interfere with present systems of tenure, nor should it impede individuals who wish to take up freehold tenure. The department believes that a great deal of study and further consultation must be done before this can be successfully accomplished.

The Committee was informed that tribal land is located both in the heart of rural areas and in the midst of urbanised areas such as the Durban metropolis. It would seem that not to impose a property tax on tribal land in the urban areas would be highly conflictual for equity reasons, as urban dwellers are taxed. In more rural areas, this need not necessarily be the case. Notwithstanding the above, the Committee believes there is merit in further exploring the recommendations of Land Affairs in this regard.

The draft Municipal Rates Bill stipulates that rates may be levied in these areas only if the traditional authority has been consulted, if the property has been surveyed and if it is registered in the name of one person (Clause 11). It allows for an extension of a further three years (above the initial three years) for the phasing in of a property tax in these areas (Clause 9(2)(a)). These are matters that are left to the discretion of the individual municipality.

(6) Other exemptions
The bill also allows for rates not to be levied on property of which the State is a non-beneficial owner and stipulates that rates may not be charged on property carrying public infrastructure (Clause 4(1)(a)). There will be no compensation for these exclusions. The bill also allows municipalities the discretion to grant exemptions that will not to be compensated by other spheres of government. The granting of this discretionary power is important, given the widely divergent circumstances facing different municipalities; but the process of granting exemption must be transparent.

3. Costs and capacity to implement
The commission did a comprehensive survey on the capacity of municipalities in each province to implement a land tax. It concluded that as most primary municipalities do not have the capacity to implement a land tax, district councils (DCs) would have to be the implementing agencies. The majority of DCs will only be able to implement within four to six years. This is with logistical support from national and provincial government. The establishment of a valuation roll will have cost implications, the total being difficult to estimate because of a lack of key data. Additional staff will have to be employed to administer a land tax. Some areas, such as in the Northern Cape, are so scarcely populated that it seems that it would be difficult to obtain a positive net revenue.

The initial costs of implementation are likely to be very high, especially because large areas of rural land will have to be surveyed and valued. Another shortcoming of the hearings is that no submissions were made about the capacity of the office of the Surveyor-General and the valuation profession to meet surveying and valuation requirements. These tasks will be made more difficult by uncertainties about security of title and the fact that significant tracts of land have not been surveyed. It is clear that the decision to embark on land tax has significant cost and capacity implications, most of which has not yet been quantified. It is to be hoped that sufficient time and resources will be made available to ascertain and cover these costs and to cost and provide for the necessary logistical support. In the absence of comprehensive cost estimates, it is even more difficult to ascertain the full revenue yield of a land tax, i.e. revenue less costs of administration. It is possible, as mentioned before, that some areas such as the Northern Cape will not yield a net positive revenue.

The draft Municipal Rates Bill specifies that a rate can take effect at a date determined by a municipality, but not before the municipality's valuation roll is enacted. Furthermore, the bill grants each municipality a grace period of three years to phase in a land tax, in areas where such a tax has not been imposed before. The bill does not specify the sources of funding for the implementation of a land tax, nor which agency/sphere of government will be responsible for driving the process of implementation.

4. Benefits of land tax to rural areas
In their submission, AgriSA was of the opinion that the agricultural sector would derive little benefit from the revenues gained from a land tax as farmers provide their own infrastructure on the whole. Of the 38 local government functions listed in the Constitution, AgriSA argued that only two would benefit the farming community. Land Affairs points out that levies on land and property taxes are not used for measurable services such as lights and water (for which user-charges are levied) but rather for roads, bridges, emergency services, municipal airports and good governance. Moreover, agricultural communities do make use of services and facilities afforded by villages/towns.

The Committee concurs with these views, also bearing in mind that for equity reasons it is important that rural and urban areas be equitably taxed.

(1) Channelling of revenue/services to rural areas
An issue of concern is how revenue from a land tax will be directed by a municipality towards providing services in a rural area. The commission recommended that a municipality only be allowed to implement a rural land tax if it satisfies the Department of Finance that it has a business plan for the provision of services to the rural areas. The Municipal Bill does not specify purposes for which revenue ought to be used, except to say that "a rates policy must allow the municipality to promote local social and economic development" (Clause 13(2)(d)). The Committee would like to see more specificity as regards services to rural areas, most probably along the lines proposed by the commission.

E. Comments by Committee
The Committee accepts that for purposes of equity, as underlined by the Constitution, municipalities must have the powers to levy a property tax in urban, as well as rural areas. It also accepts the argument that rural dwellers can derive additional benefit through revenue earned from a land tax. However, the Committee has several concerns relating to the implementation of this tax. These concerns arise because this will be a new tax, the impact of which is still uncertain, the revenue yield unknown, and the capacity to implement limited.

Both the commission and the proposed bill envisage wide discretion to individual municipalities to implement this tax. Among other things, they will be able to determine actual rates, including differential and additional rates, grant exemptions, exclusions, rebates, reductions and grants-in-aid. They will be able to choose between utilising site value, the improved value or a composite of both and will be entitled to differentiate between categories of property and between different categories of owners liable for the payment of rates. It would appear from the present draft bill that there is no imperative to secure a basic uniformity of approach across municipalities. However decisions on rates policies can only be made if the impact of these choices are well understood in terms of projections on revenue flows and the impact on economic activity. Section 229(2) of the Constitution specifies that a municipality may not impose a property tax in such a way that "materially and unreasonably prejudices national economic policies , economic activities across municipal boundaries or the national mobility of goods, services, capital and labour". While the rates policy of a single municipality may not, on its own, negatively affect economic policies, the cumulative effect of a rates policy across municipalities might well have such an effect, bearing in mind that rural property rates will affect important economic sectors such as agriculture, mining, tourism, forestry and fishing.

The draft Municipal Rates Bill grants the Minister of Finance powers to issue guidelines to assist municipalities in the exercise of their power to levy rates consistent with section 229(2). It is contended that assistance to municipalities in implementing this Act, especially with respect to these clauses, will have to be much more extensive than the mere issuing of guidelines. It would require fairly extensive research and quantification, especially in the early phases of implementation, agreement on certain key variables, and the creation of a body of research and support from which municipalities can regularly draw whilst making decisions. A further requirement is the development of a monitoring capability to assess the impact of these rates and the specification of powers intervention, neither of which is catered for in the proposed draft Bill.

Again, municipalities will also require substantial technical and administrative support to effectively implement and administer a rural property tax. Not only will all land have to be surveyed and valued, but staffing and other operating costs will escalate. At some point in time, the cost-effectiveness of a land tax, especially in sparsely populated rural areas, will have to be evaluated. It is clear that revenue yields (i.e. the cost measured against the returns on revenue) will differ from area to area. A disturbing feature of the hearings was the absence of an opinion from the surveying and valuation professions on whether sufficient capacity exists to implement the provisions of this Bill, which stipulates that all land must be surveyed and valuated before such a tax can be implemented. Concerns were raised in the hearings about whether, indeed, such capacity exists on the scale that would be required.

A further two worrysome matters are that the Bill is silent on the relationship of a land tax with other taxes and that it is unclear who will be responsible for the implementation of the land tax. As has been outlined in this Report (and in the hearings), there is still much debate about whether the tax should be a provisional tax or income tax deductible. The opinions of the SARS and Finance were also not solicited at the hearings in this regard. Implementation is impossible without finality on this issue. Secondly, there will be several key implementing roleplayers, ranging from Provincial and Local Government and Finance to the SARS and the Surveyor-General's Office, to the valuation profession, to organised local government, to individual municipalities. These bodies would have to interact in one way or another with each other and with organised business and labour and other interested parties, in those sectors of the economy that will be affected by a land tax. No plan or programme of implementation was put to the Committee in this regard, and the bill is largely silent on these matters.

Having taken all these factors into consideration, the Committee is of the firm view that, whilst in the long run a rural property tax would be beneficial to rural communities, it would be extremely premature to immediately embark on the imposition of a rural land tax, for the following reasons:

1. Key decisions have yet to be made (such as the relationship of a land tax to other taxes).

2. The identification of key implementing agencies and their specific functions and responsibilities, as well as their relationships to each other, have neither been spelt out nor agreed upon.

3. At present, municipalities do not have the capacity to implement and administer a land tax.

4. Not even a preliminary quantification of anticipated revenue and costs has been undertaken.

5. A general assessment of capacity requirements, especially from a technical and administrative point of view, has yet to be made.

6. It would appear that the Bill, in its present form, could lead to endless litigation.

For these reasons, the Committee recommends that before a rural property tax is imposed, the following matters be attended to:

(1) Key roleplayers must urgently meet to resolve all outstanding matters.

(2) A detailed and phased programme of implementation, that also specifies the functions and responsibilities of key roleplayers and takes capacity constraints into consideration, must be drawn up.

(3) A preliminary audit of capacity requirements of all roleplayers (not only municipalities) must be undertaken.

(4) A preliminary quantification of anticipated revenues and costs must be done.

(5) Further and on-going research must be undertaken on the likely impact of a land tax on economic activities on all sectors of a rural economy, that also takes into consideration the impact of globalisation on the domestic economy.

In order to expedite these matters, it is further recommended that the draft Municipal Rates Bill make provision for a phased implementation of a rural tax that is conditional on the attainment of certain specified goals and objectives, in relation to the above recommendations, and that the Departments of Provincial and Local Government and of Finance urgently meet to resolve all outstanding matters. The members of the Katz Commission expressed a willingness to assist with the finalisation of the draft Municipal Rates Bill; it is recommended that this offer be taken up. Finally, the Committee would like to draw attention to the constitutional requirement that both the FFC and organised local government have to comment on the bill before it is passed by Parliament.

Report to be considered.

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