Parliament of the Republic of South Africa

1
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

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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

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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?

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Property rates in South Africaorigins 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

5
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

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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)

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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

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Significance...

• As of sub-national government revenue (90 s)
• SA 11.44
• Developing Countries 9.63
• Industrialized Countries 12.99

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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

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What should this Bill aim to achieve?

• Legitimacy
• Uniformity
• Common tax base
• Common valuation cycle
• Horizontal and vertical Equity
• Efficiency
• Enforceability

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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

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The debate on the basis of valuation and rating

• Issues, Options, Arguments and Evidence

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Valuation and rating issues

• What to value ?
• What to tax?
• Who should set the rate and determine the relief?
  
• How should this be done ?

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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
  

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Rating processes

• Issues and Options

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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)

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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)

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Evidence

• US - Oates Schwab 79/80 Pittsburg SVR, graded
  or composite rating played significant role
  citys econ resurgence.
• Yet no US states to date have authorised site
  value tax.

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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)

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Shift in Share between Commercial and Residential
Properties (1990 Total Value to 1997 Site Value)
70

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

1990 total value
60
1997 site value
50
40

30
20
10
0
Commercial properties
Residential properties
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Shift in Share from 1990 Total Value to 1997 Site
Value in CBD
M O N T H L Y R A T E S (M I L L I O N S)

12
10
1990 total value
8
6
4
1997 site value
2
0
200
600
400
800
1,000
NUMBER OF PROPERTIES
33
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)
3

1990 rates
M I L L I O N S
1997 rates
2
1
0
High improvement values
Lower values