5 ways government could introduce new ‘local taxes’ in South Africa

Research foundation, the South African Cities Network (SACN), has released its annual State of City finances report.

The report looks at the finances of the nine largest cities in South Africa including Johannesburg, Cape Town, eThekwini, Ekurhuleni, Tshwane, Nelson Mandela Bay, Buffalo City, Mangaung and Msunduzi.

It also makes a number of recommendations for tackling the challenges facing these cities – especially systemic issues.

One of the key focuses of the report was the possibility of introducing local taxation.

Local taxation

Under the current local government fiscal framework, metros are allocated a lower per-household equitable share and conditional grants than other municipalities because they have higher levels of economic activity.

However, despite better revenue management and debt collection than other municipalities, metros have a funding shortfall, or a structural funding gap, which means that metros would not have sufficient funds to fulfil their mandates even if they collected all revenues owed to them, the SACN said.

“One solution is to assign greater powers to metros, to give them greater autonomy to manage and fund their mandates.

“The SACN, in partnership with National Treasury and the City of Tshwane, has conducted research into alternative financing models for metros. The principle underpinning revenue assignment in a decentralised fiscal system is ‘finance follows function’, whereby expenditure is assigned before revenue instruments are assigned to a sphere of government,” it said.

Five revenue options were assessed, based on their potential revenue and administrative impacts on city governments, as well as the economic rationale and ease of implementation within the current legal and policy framework.

The five options were:

  • A surcharge on personal income tax (PIT);
  • A surcharge on corporate income tax (CIT);
  • A surcharge on transfer duties (property taxes);
  • An occupancy tax/tourism levy;
  • Alocal business tax.

“The PIT, CIT and transfer duties would be fairly easy to administer but the PIT and CIT would require a constitutional change and would have a negative economic impact, while transfer duties would be unlikely to be assigned to local government because of national fiscal constraints,” the SACN said.

“Of all the options, the occupancy tax is the most viable one, while the local business tax requires further research.

“The recommendation is to pursue a tourism levy in the short term and explore options for implementing a business tax in the longer term.”

Tourism levies and occupancy taxes

According to the SACN, tourism levies are a potential revenue source for cities – either through a surcharge or a share of the levies.

An occupancy tax (hotel or transient occupancy tax) is charged to guests temporarily occupying a room in a hotel, bed-and-breakfast, boarding house or Airbnb and in some instances camping sites.

“It is a tax because taxpayers experience no direct benefit from the municipality, and it can be used to fund municipal general revenues,” the SACN said.

“Most cities in the USA have this tax – in New York City, the tax is based on the rental amount of the room and is paid by the person occupying the room and collected by the person providing the service of the room.

“To properly assess the revenue potential of an occupancy tax would require estimating the revenues that could be generated and comparing these to municipal budgets and the fiscal gap requirements,” it said.


Read: Why a ‘tax revolt’ is unlikely in South Africa

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