Rates Action Group
The property tax in South Africa.
We will try to capture various perspectives past, present and proposed. There appear to be several schools of thought – some of which have emerged at the hearings:
The income approach is not an ideology or a system but an approach towards intelligent and rational taxation for the purpose of raising municipal revenue. It tries to capture gross income (cash inflow) through property - and not try to redistribute capital through property -a physical difficulty with fixed and illiquid property. If applied as rental value it can be similar to VAT on property income. It can be blended with service recovery systems to optimise revenue - and therefore redistribution. Redistribution flows from raising revenue and not from perverting municipal services and rating notions.
The property tax is notional – some concepts more notional (hairy fairy) than others.
Ability to pay can be dealt with through constructing a system of mixing fixed service costs and tax to resemble what people can reasonable be expected to pay. E.g. New Zealand. Banding and differential rating creates a system of fixed and variable charges (taxes) to achieve a sustainable result. The system flows from the principles or logic of what is intended.
The income approach (ability to pay, affordability) can be applied in principle to all types of property as an equitable common tax. For example the City of Cape Town is already applying the income or ability to pay approach in terms of indigent households (currently being researched). It applies the income approach to Newlands Sports Ground where it has negotiated a percentage of the Gate. Different types of property be it farms, Telkom, churches, houses or whatever have different capacities to pay tax depending on the underlying use and income of property - Market value does not infer ability to pay directly. Good taxation flows from clear and sustainable concepts or from benign tax systems - Not from arbitrary rebates or mental gymnastics (Rating Policy notions).
We have dwelt previously on the need for philosophy. Municipalities clearly have the right and powers to recover services and to rate property. But what are rates? How relevant is market value to municipal services and the added function of redistribution – the answer is not much. Market value or the gross capital invested in fixed property is not cash and does not infer ability to pay tax. The income value of property clearly does. Land for example may not generate much rental value but certainly can be charged relative to services. Can Municipalities constitutionally levy taxes of a capital nature on people’s homes they cannot be expected to pay? Why are houses "asset rich - cash poor "and not other types of property – e.g. farms? Would the Portfolio Committee feel confident about arguing the merits of a capital tax versus the income approach in the Constitutional court? The importance of a property tax reform process is to sift through all these complex issues at a technical level so the perspective and options can be established - For the Unicity purpose. This is not a reflection against the Department or the Portfolio Committee but merely a statement founded on the international experience of countries such as the UK, which has been through the entire painful process (over 30 years) on what we are just beginning. A proper property tax reform process (debate) in SA will run into many volumes. Equity is a lengthy debate.
Rental value concepts Why tax market value and not say rental value when rental income or value infers ability to pay tax? Rates are income tax deductible expenses -a services related charge. Commercial property pay rates from rental income. There is no logic in capitalising rental value done by Cape Town at present. The UK raises a rate on rental value for commercial property. Why should some properties be capitalised to "market value" at different capitalisation rates for the purpose of raising municipal rates as we do here? The integrity of rental value is greater than market value for commercial valuations. Rental values were used in the UK for the system of banding residential property. Countries using Annual Rental Value (ARV) are Singapore, Malaysia, Thailand, Uganda, Trinidad, Hong Kong, Auckland, and Melbourne. Rental value formed the basis of British and commonwealth rating systems – some of which are changing. All countries use either the municipal benefit approach and/or the ability to pay approach or constraint. Ability to pay infers income – not capital. How local government constructs such a system is limitless. Whether you tax income through property via its rental value (ARV) - or modify the capital value (differential rating + service charge) - or treat it as a wealth tax (America) - or some synthetic means - it is the answer that counts – how much people pay in relation to benefit.
The market value lobby
Most politicians, Valuers, Consultants and social engineers have vested interest in market value and argue for a Capital Value tax (CV) mostly based on notions of redistribution and wealth.
Much of the political case for a market value tax stems from the misconception that market value is cash and people who live in leafy suburbs must be rich and rates is about redistribution. Locality indicates market value of land but incomes much less so. The distribution of rental value is much closer to the after tax income profile or should endeavour to do so. Indeed people who buy expensive houses and push up the prices usually can pay higher taxes but tend not to represent the area. Overseas buyers pay extraordinary prices for property in Llandudno but are not representative of the community who are mostly of average middle class income of pensionable age.
The taxation of capital needs to be argued as a Money Bill directed towards all types of capital be it motorcars, equities. Property is a circuitous way of raising taxes against income and many countries use it only in a nominal, historical or usage sense and don’t bother. There are better taxes anyway and the financing of local Government needs to be a more financially integrated process with the Fiscus.
"When you cut through the smoke and mirrors of the tax you find an industry of vested interests. When ‘equity’ lies in the capital value of people’s homes and not in municipal cost –or in the ability to pay – the process is in trouble" – RAG 2002
What constitutes reasonable taxation for the purposes of rates? – Providing we know what rates are in the first place – we can look to developing a system. The market value lobby - Puts the horse before
the cart - without knowing whether the rig is for a wedding or a funeral.
Market Valuation is an expensive and inaccurate process.
There is a whole Industry of Valuers and property tax consultants and even politicians arguing the case for market value because of the business this infers. It cost Cape Town R120 million for its (failed) GV 2000. The City is not defending its CAMA valuations during the objection process – choosing its own valuers to go round and inspect in loco. Consequently only the 16 000 objections will be properly valued – most of the others undervalued or reasonable by chance.
To infer that market value offers greater integrity than rental value in the case of residential property is something of a misrepresentation. In the context of a rental value tax – a higher level of ratepayer tolerance is acceptable and it is more suited to data collection and modelling -based on number of rooms and facilities etc. It is also a "flatter tax" more allied to incomes and ability to pay. Flat tax systems or jurisdictions with flatter demographics work much better than for example in Cape Town where the problems with the tax are directly proportional to the inequalities in market value. The purpose of rates is not to redistribute market value.
The tax payable is more important than the system
Residential ratepayers are not that interested in the system (few understand it) as long as the tax they pay is reasonable in relation to their services and relative to other taxpayers. The system fails and becomes exposed when it becomes unreasonable or threatening and gets challenged. Ratepayers are concerned about what they get for their rates. The integrity of the tax as it relates to municipal benefit and ability to pay is more important than the notion of market value. Market value was an orchestrated political campaign in Cape Town as was site-rating and did not indicate good taxation or process.
A "municipal value" is a "Valuation for the purposes of raising rates" – The perception and indeed the reality of Cape Town’s unreasonable, unfair and unaffordable market value tax have made everything to do with the tax an issue. The Bill should use the term "a Municipal Valuation for the purposes of raising rates" until the nature and purpose of the tax has been established. Market value or a uniform rate does not infer equity or common taxation within the context of ability to pay – or good taxation.
Banding and Differential Rating.
The UK banding and differential rating system recommended by McCluskey –"works" because it is accepted and has public support. What people are expected to pay is perceived as reasonable in relation to their income and level of services. Everyone enjoys the benefit of the City and everyone should contribute. Public support – "acceptance" is fundamental to the tax.
The late Professor Labuschagne of Cape Town City did work on banding and differential rating and it provided a fairer and sustainable system allowing a higher level of taxation and consequently more revenue. It supported McCluskey’s views.
The taxation of capital – or exploiting the market value of property (peoples homes) – is not best practice – whether overt or covert. This has been addressed more than adequately in previous submissions and in the media.
The position of the Institute of Valuers.
The Institute appears to support the concept of market value without taking a position on the tax. They maintain that the tax is a function of Rating Policy and is political.
They maintain that the integrity of the Valuation roll is the rationale for market value. We therefore accept that Valuers have little interest or opinion as to the nature of the tax but market value is fundamental to their Industry interest. As the depreciated cost system was a Municipal departmental determination the adoption of market value was actively supported. The inquiry into the 1990 General Valuation overturn (1993) in Cape Town reflects the Valuers opinion.
Was the adoption of the 1993 Provincial Valuation Ordinance a political or Valuers decision? How did a capital tax come into being without Public analysis? Understandably, some perceive the introduction of a de facto wealth tax as being a conscious political plot. This may not be entirely correct.
The politics of change – The transformation of municipal rates a British/colonial consumption tax into a property wealth tax for funding the African Unicity or mini-state by incremental means does not imply good process or sustainable taxation. The concept of "wall to wall municipalities" sustained by "exploiting the market value of property" for "developmental purposes" suggests the underlying limitations of the property tax needs revisiting. The process relies on rebating "ability to pay" and "equity" into the system as a local political "discretion".
The nature, history and purpose of change requires perspective and objectively. The concept behind the Bill is evidently flawed as reflected by public opposition. There are alternatives not yet evaluated. The perspective yet to be established. The system flows from the principles – not the other way around.
We cannot engage the legislation intelligently without engaging the process and the logic behind the tax. Everything is conceptual and dependent on what the other party means. This requires common perceptions, common understanding and a suitable discussion vehicle or process - A debate. Is the legislation there simply to enable municipalities to wealth tax properties as an unfettered local Political "discretion"? Investors, not only in property, are deeply concerned.
Unfortunately, the property tax is limited. It tends to be a prejudice and perversion of logic as everyone talks to their own book. Most countries largely ignore the property tax or use it in a limited usage or consumption sense even when based on capital values. The property tax is very different to what many people in their frustration perceive it to be – Hence the importance of perspective and credible analysis. It is a mature economy tax where flatter characteristics exist - It has limited application in developing countries precisely because of the inequalities. You can redistribute the income from property - Not property per se.
R Bosomworth RAG