Parliament of the Republic of South Africa

Presentation to the Portfolio Committee for Provincial and Local Government on

the Property Rates Bill

30 May 2003

Purpose of this presentation

To address questions asked about the purpose of Municipal Property Rates in South Africa and the purpose of this Bill

To inform the debate on the basis of valuation and rating

To outline the scope of policy issues still to be addressed

Purpose of Municipal Property Rates Questions asked at work shop and during

hearings…. “ where did the current notion of property

rates come from?” “ what is the purpose of property rates?” “what do property rates pay for?” “what is this Bill about?”

Property rates in South Africa:origins of current notion Property rates has a long tradition in SA Has traditionally been used as the single most

important source of local own- source discretionary revenue

However historically only existed in urban WLA s

Amalgamation of municipalities -bring former BLA s, R293 towns etc into prop tax base

Property rates in South Africa origins of current notion... Correlation between who paid property rates

before and level of infrastructure and public services

Rallying points for rent boycotts, non -payment of service charges and one city one tax base

Result of history both decision -makers and rate payers think of rates as a price paid for specific services

Purpose of property rates in South Africa-significance When compared to revenue (and profits

from consumption-based tariff funded services and inter-governmental transfers) still the most NB source of own- source discretionary revenue for local authorities

Former WLA s 1/5 of all local revenue (+- R 4 bn or 20.2 % of own source revenue or 19.7 % of total revenue)

Significance compared

Property rates as % of total government tax revenue (comparison done for ‘90 s by IMF)

SA: 6.74 % Developing Countries: 3.30% Industrialized Countries: 5.54 %

Significance...

As % of sub-national government revenue (90 s)

SA: 11.44 % Developing Countries: 9.63 % Industrialized Countries: 12.99 %

Purpose of property rates… what do rates pay for? “ a means to distribute the cost of general

local government activities or community services among rate payers in accordance with their ability to pay, as measured by the (market) value of property”

To pay for services that generally provide benefits that accrue broadly across an area-and are not not users or sub-groups

What should this Bill aim to achieve? Legitimacy Uniformity Common tax base Common valuation cycle Horizontal and vertical Equity Efficiency Enforceability

What should this Bill aim to achieve? Openness Sound monitoring of standards Simple and transparent appeals processes Relief from extraordinary tax burdens Redistribution amongst individuals Redistribution amongst localities

The debate on the basis of valuation and rating

Issues, Options, Arguments and Evidence

Valuation and rating …issues

What to value ?

What to tax?

Who should set the rate and determine the relief?

How should this be done ?

What to value i.e. which base should be taxed? Bahl ‘98 Long standing debate if property

tax base should include improvements Thus far no uniform world wide practice

has evolved If there is a trend then it is towards valuing

and rating the total value of property However what are the cases put forward?

The case for land only

Cost of valuation process is lower Administrative efficiencies are better,

updating of property records and data maintenance is easier

land value based valuation and rating is seen as a possible incentive for investment as improvements and maintenance of improvements are excluded from taxation

The case for land only...

Land taxation has a strong relation to the notion of public good

Improvements are a matter of private choice Based on an economic theory that the supply

of land is essentially fixed (inelastic) Site value rating is said to be neutral to land

use Taxes on land discourage speculation

The case for land and improvements Total property value is easily understood The concept of willing buyer willing seller is widely accepted two thirds of property value lies in improvement in real estate land and improvements recognizes wealth in assets and

therefore treats all citizens equal land and improvement is easy to administer because source

data is readily available land and improvement valuation does not prevent land only

rating

The case for land and improvements... Valuing land and improvements allows

greater flexibility in lowering the nominal rate than a tax based only the capital value of land

This provides in a politically palatable tax base

Valuing land and improvement holds promise of optimizing the local tax base

The case for land and improvements... Record of sales of vacant land in urban

areas not as rich as sale of properties at total value

Hence sites has to be valued by residual method, ie first determine the bundled property value then deduct the value of the improvements

SVR is more subjective than total value

Land versus land and improvements (some thoughts) The test of transparency,understandability

and acceptability The test of horizontal equity (owners of

high value properties on small sites) The test of real local government income

and basis for inter-governmental transfers Political palatability

Comparative options The current UK property tax system...

The amount paid is set by the local authority in accordance with a prescribed formula

As example two adults living in a 30 000 pound house (band A) will pay 2/3 as much tax as those living in a band D house (80 000) and those in band H (320 000) twice as much

Comparative options The current UK property tax system?

Foundations (Law, Henry : April 2000)- occupiers of commercial properties pay uniform

business rate (UBR) based on annual rental value

- rate is set annually at national level

- total amount collected is distributed to local authorities through complex formula

- 50 % of full rate can be levied on vacant properties

- agricultural land and buildings are exempt from UBR

Comparative options The current UK property tax system...

Residential properties are subject to Council tax

Council tax is based on the selling price at the time of the valuation (currently ‘91)

Properties are assigned to 8 valuation bands ranging from A - H

A under 40 000 pounds H over 320 000 pounds

Comparative options The current UK property tax system... Advantages of UBR and Council tax

- easy to administer

- taxes are difficult to evade and avoid

- ensuring compliance is easy

- because the taxes are tied to property they can be applied by any LG structure

Disadvantages of UBR and Council tax

- valuations involve inspection of premises

- many appeals are generated when valuations are received

- financial disincentive to improve and develop

- the tax rewards the owner of vacant and undeveloped land

Disadvantages...- valuations are insufficient and infrequent (up and down turns)

- exemption of agricultural properties distorts the property market

- allocation of all UBR income to local authorities gives rise to high gearing of discretionary local government spending

- local authorities have no direct interest in promoting improvements

- the tax is regressive in that an undue proportion of the burden is borne by low value properties

- the tax is also regressive across local authorities (Westminster with highest concentration of high value properties has lowest rates)

- banding avoids valuation of individual properties which leads to fortuitous advantages and disadvantages for those value is close to the step between one band and the next

- Council tax generates insufficient income

Rating processes

Issues and Options

Rating: issues and options

Site rating (the base of the tax is land values only)

Flat Rating (the base of the tax is land and improvements with both taxed at the same rate)

Composite rating (the base of the tax is land and improvements,they are both taxed but at different rates)

Who must decide - the basis and the rate Section 229 - rate setting a local

power or an unfettered local power?

Most Govt.'s do not give unlimited powers. (Bahl ‘98)

Evidence

US - Oates & Schwab ‘79/80 Pittsburg SVR, graded or composite rating “played significant role city’s econ resurgence”.

Yet no US states to date have authorised site value tax.

Number of local authorities using Site, Flat or Composite Rating

Province Site Flat Composite Total Percent

Cape 4 89 72 165 44.5

Natal 34 1 32 67 18.1

OFS 10 8 33 51 13.7

Transvaal 78 2 8 88 23.7

Total 126 100 145 371 100.0

Percent 34.0 27.0 39.1 100.0

Source: CSS (1994)

Shift in Share between Commercial and Residential Properties (1990 Total Value to 1997 Site Value)

Source: City of Cape Town, Department of Finance, Rating and Valuation project. Staff compilations

1990 total value1990 total value

1997 site value1997 site value

Commercialproperties

Commercialproperties

Residentialproperties

Residentialproperties

0010102020

30304040505060607070

%%

Shift in Share from 1990 Total Value to 1997 Site Value in CBD

1990 total value1990 total value

1997 site value1997 site value

00

22

44

66

88

1010

1212

200200 600600400400 800800 1,0001,000

MONTHLY

RATES

(MILLIONS)

MONTHLY

RATES

(MILLIONS)

NUMBER OF PROPERTIESNUMBER OF PROPERTIES

Shift in Incidence from a Sample of CBD Properties with High Improvement Values to Properties with Lower Values (1990 Total Value to 1997 Site Value)

1990 rates1990 rates

1997 rates1997 rates

High improvement

values

High improvement

values

Lower valuesLower values

00

11

22

33

MILLIONS

MILLIONS