How effective is the local government revenue system in South Africa? Research from Georgia State University finds that local governments have access to tax bases that are productive, and urban councils finance a significant share of their budgets from their own resources. However, rural councils lack resources and are more dependent on intergovernmental transfers. Reforms to existing sources of revenue and the adoption of new ones should be based on decisions made about the assignment of powers and functions and about the government’s goals for fiscal decentralisation.
In South Africa, larger local governments have been given signficant revenue-raising powers. As a result there is the foundation on which to develop a more efficient intergovernmental fiscal system than is typical in lower-income countries. There are two categories of current revenue for local governments: own revenue, which includes taxes and user charges, and transfers from other spheres of government, which include an equitable share of revenue collected nationally and categorical grants. There are four potential sources of capital revenue: (1) own source revenue, which includes both taxes and the Regional Service Council (RSC) levies collected by metropolitan and district municipalities; (2) ear-marked grants from higher spheres of government; (3) borrowing; and (4) private sector equity in infrastructure provided by municipalities.
The South African tax structure has both strengths and weaknesses:
- Local governments have managed greater revenue growth than expected given the basic structure of their tax system. The equity of the local tax system is relatively good.
- In terms of efficiency and local autonomy, the system has some positive features. The local government sets the property tax rate and base. It decides exemption and incentive policies for economic development and for general relief. It sets its own user charge levels.
- The share of expenditure by national government is too low. Finding the proper shares of national, provincial and local governments is a priority.
- The heavy demands of serving the former black townships have caused fiscal stress even in the cities. There is also a significant unmet demand for services provided by the national government.
- The RSC levy on turnover and payroll creates an unwanted distortion although the tax rates are quite low. The property tax is levied on structures in some localities, which discourages property investment.
- The tax burden is not always borne by those who benefit from its expenditure. The RSC levy on turnover is not paid where the sales take place so there is some exporting of tax. There are problems with the administration of taxes.
The South African government is considering reform proposals for all the major components of the local government revenue system. These reforms and restructurings are likely to continue for several years.
- The administration, if not the revenue structure, of the RSC levy must be modified in order to modernise it and make it conform to the notions of a good tax.
- The restructuring of the property tax is positive although it could limit local autonomy.
- The proposed tax on electric utility consumption and the local government levies on motor vehicles should be developed.
- The present local government revenue system performs well. However, there is substantial room for improvement. New sources of local government revenue should be considered.
