Eighth Interim Report of the Commission of Inquiry into certain
Aspects of the Tax Structure of South Africa

The Implications of Introducing a Land Tax in South Africa

REPORT OF THE LAND TAX SUBCOMMITTEE OF THE COMMISSION OF INQUIRY INTO CERTAIN ASPECTS OF THE TAX STRUCTURE   OF SOUTH AFRICA

(KATZ COMMISSION)

The Implications of Introducing a Land Tax in South Africa

AUGUST 1998

The implications of introducing A LAND TAX IN SOUTH AFRICA

CONTENTS

Foreword
Chapter 1- Survey of the Work of the Subcommittee

1.    Background
1.2  Interim Report of the Subcommittee
1.3  Media Statement No. 15
1.4  An overview of submissions received by the Subcommittee
1.5  Conclusion

Chapter 2 - The Economic Effect of a Land Tax on Agriculture

2.1 Introduction
2.2 Methodology and data used
2.3 Measuring the effect of a land tax
2.4 Data used for the analysis
2.5 The effect on market values of land in Gauteng and South Africa
2.6 The results of the Heidelberg case study
2.7 The Olifants river basin results
2.8 Summary of the results from the other case studies
2.9 Land taxes and RSC levies
2.10 Conclusion

Chapter 3 - The Capacity of Rural Municipalities in South Africa

3.1 Introduction
3.2 Local government structures (municipalities)
3.3 Intergovernmental revenue sources available to local government
3.4 Own sources of revenue for local government
3.5 The capacity of District Councils (DCs) to introduce a land tax
3.6 General summary
3.7 Conclusions

Chapter 4 - Recommendations

4.1    Introduction
4.2    Tax principles
4.3    The capacity to implement a rural land tax
4.4.   The impact of a rural land tax
4.5    The tax authority
4.6    The definition of the tax base
4.7.   The taxpayer
4.8    The method and frequency of valuation
4.9    Tax relief measures
4.10  The tax rate and the desirability of rate-capping
4.11  The relationship with other taxes
4.12  Recommendations to the national government
4.13  Recommendations to the provincial governments

Appendix

1. BACKGROUND
2. FRAMEWORK LEGISLATION

2.1 Introduction
2.2 Reasons for framework legislation
2.3 Aspects to be considered in framework legislation
2.4 Proposals of the Subcommittee for framework legislation at primary local sphere

3. SUBMISSIONS

FOREWORD

To: Prof. M.M. Katz

Chairman of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa.

We, the undersigned, appointed by you as members of the Land Tax Subcommittee of the Katz Commission (hereafter called the Subcommittee), have the honour of submitting our Final Report.

Status of the report and investigative procedures

The Subcommittee began its deliberations at its first meeting on 24 May 1995, and released an Interim Report at end of 1995. The arguments contained therein were based on published and unpublished material on the subject of land taxes as they relate to South Africa; the input of two prominent international scholars; and numerous submissions to the Subcommittee following a public call for evidence on the matter. The recommendations contained in the Interim Report were substantially accepted by the government, and taken up in the White Paper on Land Reform.

In its Interim Report, however, the Subcommittee presented reasons why a final report was not feasible at that time. The Interim Report also stated that:

"The Subcommittee believes further investigation is required to ascertain the merits of a land tax in the local sphere, and to ensure that it is implemented in a non-distortionary manner if it is agreed that it should be implemented. The Subcommittee therefore recommends that the following issues be investigated further:

• Whether these benefits of a local rural land tax will actually arise. This will be partly contingent on the form of rural local government, and partly on consultations with all the relevant stakeholders, including the participants in the land reform programme.

• The proper role of the national and provincial governments. The Subcommittee has not been able to give proper consideration to the relative roles of Provincial governments, the national government and the Financial and Fiscal Commission. A further complicating factor is the shape of the final Constitution, especially with respect to the powers and functions of the various tiers of government and the intergovernmental fiscal relations. While it seems evident that municipalities should be provided with a framework within which the tax could be implemented, it is not clear whether this should be a provincial or national responsibility. It is also not clear what the relative roles of the Financial and Fiscal Commission, the Departments of Land Affairs and Agriculture, etc. will be.

• The contents of the framework within which the tax should be implemented. The relevant issue to address is the degree of freedom that rural municipalities will have in defining the tax base, identifying the taxpayer, measuring the taxable value and setting the tax rate. In addition, decisions will have to be made on whether matters such as exemptions and relief are to be set in the national, provincial or local sphere, as well as the latitude allowed for the administration, collection and enforcement of the tax.

• The optimal administration of a rural land tax in the local sphere, where the administrative processes raised above relating to the definitions of the tax base, the taxpayer, the taxable value and the tax rate, as well as exemptions, tax relief, administration, collection and enforcement should be investigated in more detail. This will also include preparation of required legislation.

• The relationship between the tax and other revenues, including whether the tax should replace or supplement RSC levies, and the relationship between the tax and fiscal transfers. A further issue is whether the tax should be regarded as a net addition to the tax burden or whether it should replace other existing revenues.

• The ways in which such a tax can be linked to urban local tax systems, including cooperation in the implementation of valuation methods and ways of using the tax to smoothen the urban-rural interface in South Africa."

The Subcommittee was subsequently requested to continue with its deliberations, with the above-mentioned issues as its Terms of Reference.

As a first step, the Subcommittee released a media statement ⁽¹⁾ in which it set out those issues that it believed should receive further attention, along with its own views on each of these issues. This media statement elicited a large reaction from various interest groups, both in support of, and critical towards, the views expressed by the Subcommittee. At one extreme, some held to the Georgist view that a site value tax on all land should be introduced, while all or most other taxes should be abolished. Alternatively, some respondents fiercely resisted the prospect of a land tax as an unjust impost on only one form of wealth that would discriminate against certain sectors of the economy (i.e. the agricultural sector).

To gain a better understanding of certain aspects of these submissions, the Subcommittee arranged for verbal submissions in substantiation of some of these written submissions. However, this exercise only served to highlight the lack of substantive evidence that existed in South Africa on the issues at hand.

For this reason, the Subcommittee recommended to the Commission that further primary research should be conducted to substantiate the recommendations it was expected to make. This Final Report summarises the Interim Report of the Subcommittee, reports on the deliberations of the Subcommittee subsequent to the release of the Interim Report, and reports in some detail the results of the research that was commissioned. Based on these data, the Subcommittee ends its report with recommendations on the manner in which this sensitive issue should be dealt with in future to the benefit of all the citizens of South Africa.

A matter of concern

At the time of drafting this report, the Subcommittee was awaiting the results of the White Paper on local government, which eventually appeared at the end of March. During the (long) course of its investigation, the Subcommittee has noted with appreciation the many efforts that are being made at the political and administrative level to provide order to this difficult arena of public policy. However, the Subcommittee was also often frustrated in its attempts to provide a sound and rational basis for its recommendations because of the lack of progress in some areas of local government affairs. The result, as will be seen below, is often counter-productive: provincial governments implementing overtly unconstitutional policies; municipalities taking the first steps in implementing (the wrong kind of) rural land taxes before the Subcommittee has reported its recommendations; and so forth.

The most damaging result, however, is the almost complete lack of progress in redeploying human, fiscal and material resources to those rural municipalities that need it the most. South Africa’s poor are largely rural dwellers, and they live in communities of poverty. Without a sound framework of policy to provide them with these resources in the local sphere, their chances of escaping poverty are so much smaller. For this reason, the Subcommittee urges national and provincial governments to renew their efforts to provide a policy framework within which much-needed resources can be deployed in the sphere closest to where it matters. For this reason, too, the Subcommittee urges the authorities to consider its recommendations, not only on their own merits, but as part of the broader process of ordering of local government affairs.

Acknowledgements

The Subcommittee wishes to thank all individuals and organisations that contributed to this process by means of written and oral evidence and to those respondents who participated in the research project. These include the various government agencies that provided the data required for the extensive modelling that was done, and those officials from the many District Councils that were visited or that responded to the questionnaire. A special word of thanks is due to the persons who acted over time as Secretaries to the Subcommittee of the Commission, Mr. D M Allwright, Mr. W Donachie and Ms A Smit, for the able logistical assistance provided.

1) Media Statement No.15, published in Government Gazette No 17496, dated 11 October 1996

Contents Foreword    Chapter 1   Chapter 2    Chapter 3     Chapter 4   Appendix   Home