EXECUTIVE SUMMARY OF OBJECTIONS TO THE 2003 RATING BILL

This is quite surely a Money Bill and can only be introduced to Parliament by the Minister of Finance.
Rates in this Bill are a Capital Tax and some 100 000 jobs a year will be lost because of that. This is because improvement costs will be entirely consumed every thirty six years by a 2% pa tax. There are more friendly places to put savings.
These rates discriminate against property owners. They not only pay taxes to SARS on their rents but they pay capital taxes as well. Other asset classes are not subject to the latter.
An alternative rating system is to levy Royalties as the MERATX© system which is an annual user-charge or royalty not a tax. See below.
The nature of the Bill’s valuation instructions are that up to 25% of valuations will be inaccurate. MERATX© is 100% accurate.
Improvement rating will cost R2,5 bn more than the MERATX© royalty collections over ten years.
In this Bill the State, the Province and the Municipalities bear all the operational and infrastructural costs of running the Country, the Provinces and the Municipalities without gaining any benefits. Their costs can be entirely recovered if the taxes on wages, savings and trade are repealed and the State concentrates on royalty collections as MERATX©.
The Bill’s rebate proposals are administratively impossible to entertain. In Cape Town alone it requires the separate appraisal of twenty different categories of properties and four hundred different suburbs to be equitable.
The requirement that all residential erven be assessed at the same "rate" will appropriate the entire rents of properties in some suburbs. Claims for compensation will proliferate.
Public Services which have been privatised should not be exempt

OVERVIEW
The stated aim of this Bill is to standardise rating practice throughout South Africa and to do so equitably and in such other manner as to alleviate poverty, and create employment.
We will show that the Bill will, disappointingly have the opposite effect.
Our qualifications for making this assertion are that we are professionally engaged in Municipal Valuations and that we have also devised a proprietary Rating System (Meakin Rates and Taxes System – MERATX©) which satisfies all of the aspirations contained in the Bill or the Constitution. MERATX© was offered under licence to the Cape Town Municipality but was declined for reasons which were not explained.
Here are our detailed observations and arguments:-
ANY AND ALL CAPITAL TAXES ARE A MONEY BILL
Sec 10.1.a states that the assessed rate must be based on the improved value of the property (41.2.e). This is the amount of money "the property would have realised if sold….." (39.1). This is therefore a money bill as sec 73.2 77(i) of 108 of 1996.
Only the Minister of Finance can introduce such a Bill. The reason for this is that only the Minister of Finance may decide on economic policy.
This principle was most recently acknowledged in the Royalties Bill.
For instance the Minister of Finance and the Katz Tax commission have rejected both wealth and capital taxes. Their reason is that they are concerned at how an annual levy of 1% or 2% will impact on the value of JSE listed shares and other assets.
They are right to be concerned. At a 2% p.a. levy these assets would be entirely consumed by the tax in 36 years. What makes this even more inequitable to property investors is that depreciation is generally not allowed on buildings so that their houses and other properties also have to be able to generate extra rents to replace the buildings, over the same period.
THIS CAPITAL OR WEALTH TAX ON PROPERTY DISCRIMINATES AGAINST PROPERTY OWNERS
The Bill singles out property owners for this tax and therefore unfairly discriminates against them. This contradicts the Right to Equality (sec9 of 108 of 1996). Owners of collectibles and stock & shares or bonds are not taxed on their assets (other on the gains on disposals (CGT)) but on the revenue, if any, which those assets generate.
CAPITAL OR WEALTH TAXES ON IMPROVEMENTS INCREASE JOBLESS NUMBERS
Capital taxes on improvements are not just discriminatory but also increase poverty and unemployment and so contradict sec 229.1.2 of Act 108/96 which says "that rates or other taxes" may not be exercised in a way that materially and unreasonably prejudices national economic policies".
Both the Government and the opposition economic policies stand for the alleviation of poverty and unemployment but we estimate that this Bill will destroy 100 000 jobs a year in the towns and cities. This is approximately one lost job for every ten hectares of urban land.
Investors have a natural inclination to avoid such taxes and so if improvements are taxed then fewer buildings will be built and more demolitions will occur as investors find investments which will better protect their savings.
This exacerbates the unemployment problem because the building sector is a provider of unskilled jobs as a last resort.
Rates and taxes on improvements therefore impedes the right of Municipalitys to "exercise its powers or perform its functions" (151.4) of "promoting the social and economic development of the community (sec 153.1.a)"
THE CONSEQUENCES OF TAXES ON UNIMPROVED LAND VIZ SITE RENTS OR ROYALTIES
Taxes on unimproved land rents on the other hand actually increase the supply of land by reducing its cost.
This increases employment opportunities as access to land becomes easier. All other taxes have the opposite effect. The classic example was during the industrial revolution when taxes on windows resulted in windows being bricked up.
ROYALTIES – THE PUREST FORM OF RATES
Royalties are the only revenue source which do not "materially and unreasonably prejudice national economic policies" (229.1.2). This is because they are user charges, not taxes. This assertion is so obvious that it is not explained further here. Sceptics are referred to the World Bank Paper "The Role of Natural Resources in Fundamental Tax Reform in the Russian Federation" by Prof Benoit Bosquet.
TWENTY FIVE PER CENT OF VALUATIONS ARE INACCURATE
Mistakes inevitably occur in valuations of this nature. Some 4% of owners in the recent land and improvement valuation in Cape Town objected to the valuations because they were too high. A further unknown number would have objected if the objection costs (including court appearances) were not so high. We judge this number would amount to 8% giving a total of 12% of valuations which were too high. At least a similar percentage would be too low so one in four valuations would be statistically inaccurate.
This is entirely unacceptable and another reason why this bill should be the responsibility of the Minister of Finance who manages 100% accurate assessments other than criminal evasions by tax payers.
BANDING - HOW THE MERATX© SYSTEM AVOIDS INACCURACIES

The MERATX© technique for reducing errors to statistically acceptable margins is to raise the same rates charges against all owners in each registered township or in other like sub-divisions. This is the banding of "like situations" not the banding of "like values" as is allowed in the Bill.
The equity of this MERATX© method is that it is common cause that immediate neighbours benefit equally from State, Provincial and Municipal spending on infrastructure and services such as security, roads and cleansing. This was acknowledged by Jan Steyn’s Cape Town Enquiry into Rates & Taxes and the Brisbane Commission of Enquiry into Rating Systems, in 1987. This is the case regardless of whether the ratepayer has built a palace, a cottage, or holds a vacant stand.
The difference between what MERATX© rates will be levied in the subdivisions of Soweto as opposed to Midrand Khayelitsha, Bishopscourt or Westville etc. is a function of the average rents which lessee’s pay to occupy houses, flats, offices, shops and etc. in each township.
The valuation is therefore based on market rental not market selling values and this avoids inaccuracies. The MERATX© rentals are determined from SARS stamp duty records.
Once the average rent has been determined then a single, across the board, assessment rate is applied just as Mr Manuel applies his 25% corporation taxes. This rate is applied to vacant land as well as improved properties.
POSITIVE SPIN OFF FROM MARKET "RENTAL" ASSESSMENTS
The problem with State spending on infrastructure currently is that they bear the cost but the entire benefit goes to landowners. This would change if the State collected all land rents instead of taxing labour, capital and trade.
For example if the State instructed Transnet, its own transport company, to radically improve the Cape Town railway system it would increase its revenues in two ways. Firstly more people would use the railways at higher ticket prices. Then land rents throughout the City would surge forward. These rental increases will pay for the up-grade! The bibliography on this is thoroughly compelling and available on request.
The proposed new bus transport system along Klipfontein Rd, for example, would not be necessary if the rail system was up-graded and the State was able to collect the improved royalties. But currently, neither the State nor Transnet nor the Municipalities benefit from transport or any other infrastructural improvement.
Quite stupid other projects would also fall away if the State could benefit exclusively from its spending. For instance there would be no need for toll roads, if the increased land rents which new roads generate are paid to the Finance Department.
The Katz Commission too has undertaken to review its position on the Royalty Tax on land which is called the Single Tax as the letter to Judge Denis Davis attached. No response has yet been received by the South African Constitutional Property Rights Foundation who solicited this undertaking.
THE EXCESSIVE COST OF IMPROVEMENT VALUATIONS
Over a ten year period we have calculated that the requirement to value and rate improved properties in accordance with the Bill will cost Municipalities R250m p.a. or a total of R2,5bn more than if they used the MERATX© system. That is what it costs to build 10 000 houses annually. This is a real loss because improvement rating will attract no more revenue than user charges on land or royalties.
REBATE POLICIES AND DIFFERENTIAL RATES, EXEMPTIONS REDUCTIONS AND REBATES
(Sec 3.2.a +3.2.b.(I to iv)3.2.d (effect of rates on the poor) sec 3.2.f.
The bill allows a different rate for different categories of property based on their use or situation. This is to satisfy the tax canon and the equity clause that properties should be equally able to pay their rates from the rents that they generate, whether these are imputed or not.
The Cape Town example is that for every R1 of Municipal value, dwellings generate an average annual rent of 8 cents, whilst shops, offices and factories generate 13 cents. If all properties were rated at 2c then dwellings would be paying 25% of their rent in rates and commercial properties only 10%. Cape Town therefore grants residential properties a 40% rebate so that on average all properties pay the same percentage of their rents to the Municipal fisc.
The Bill however allows rebates on twenty different categories of property (sec 8.3) ranging from farms to protected areas. We have established that the rent generated on farms in Constantia is probably 1% of their market value and the highest rent is a factory in Philippi which yields 25% in rents.
There are also different rentals due to situations. There are nearly four hundred suburbs in Cape Town and each of these will generate different residential rents ranging from some 2% in Clifton to 15% or 20% in places like Bonteheuvel. These differentials are a reflection of risk.
But in spite of what the market says about rents and values (Capital value = Rents –Interest rate) the Bill prohibits the levying of different rates on different categories of residential properties; that is those in different areas.
So a rate of 2% levied on residences across the whole of Cape Town will expropriate the entire rents of a house in Clifton whilst it will only take 8% of the Bonteheuvel rents.
This is not only unacceptable because it is inequitable but it is also an administrative nightmare to try to set the rebates on twenty different property types in four hundred different areas. These will become arbitrary determinations and so all the professional valuation work will be rendered superfluous by these interventions and adjustments.
PUBLIC SERVICE INSFRASTRUCTURE EXCLUSIONS
The exclusion of public service infrastructure from the rating Bill is surely only acceptable if that infrastructure is genuinely public owned.
The full or partial privatisation and or corporatisation of public infrastructure such as Runways (ACSA), Railways and Ports (Transnet), Telecommunication Towers (Vodacom, MTN and C Cell) and Fixed Lines (Telkom), Pipe Lines, Toll roads, Electricity, Generation and Distribution (Eskom) have transformed these services into private not public service infrastructure.
These are therefore businesses like all others which make profits and distribute dividends whilst occupying or using SA natural resources. There is no rational reason why they should not contribute to the Municipal Fisc because they depend as much on that infrastructure to operate as factories in Epping or offices and shops elsewhere.
They also tend to enjoy Monopolies or duopolies and therefore create significant surplus revenues.
Yours Truly


Peter Meakin (AIVSA) Valuer
member citres cc (1996/07820/07)
2003 Rates Bill Objection.doc Print Date 06/05/2003