Financial and Fiscal Commission (FFC)
Financial and Fiscal Commission Submission on the Municipal Fiscal Powers and Functions Bill (approved by the Commission, November 2006)
This submission is made in terms of Section 229 of the Constitution of the Republic of South Africa, which requires the Commission to make recommendations to the Minister of Finance before any legislation enabling the implementation of local government fiscal powers.
1. General comments
a) The Financial and Fiscal Commission (FFC) welcomes the Bill tabled by the National Treasury enabling legislation supporting section 229 of the Constitution. The legislation outlines processes which municipalities (and The Minister of Finance) have to' follow in exercising fiscal powers and functions as stipulated in the Constitution. It must however be noted that revenue raising powers assigned to the municipalities, although subject to national legislation, should be based on the principle of enhancing the fiscal autonomy of the local government sphere. The Bill therefore should h10t go beyond creating the enabling environment for municipalities to exercise their fiscal powers as assigned by the Constitution. While it is appropriate that the Minister prescribes national norms and standards for municipal surcharges, there is no requirement for the Minister to pronounce on how the revenue derived should be spent. The manner in which revenue is spent is the primary responsibility of the municipality as it is accountable to its electorate and taxpayers.
b) The FFC notes that in the section dealing with the general objects of the Bill, reference is made to the Constitution however throughout the Bill there is no reference to the role of the FFC. Section 3 of the Amended Financial and Fiscal Commission Act of 1997, requires any organ of state in one sphere of government seeking to assign a power or function in another sphere of government in terms of a law to first. before assigning the power or function, notify the Commission of the fiscal and financial implications of such assignment and also request the recommendation or advice of the Commission regarding such assignment.
c) As is the case with the Provincial Tax Regulation Process Act (2001), the Bill should include a clause outlining the constitutional role of the FFC and specify a time frame between receipt of tax proposal and submission of comments/recommendations to the Minister by the Commission.
d) The Bill is a fiscal Bill, and should thus deal with taxes first and surcharges thereafter. Taxes are a primary tool and surcharges are secondary tools, the section dealing with taxes precedes the one dealing with surcharges.
2. Specific Comments
2.1 Objects of Act.
a) In section 1, "municipal tax" is already defined to include, "tax, levy or duty", so there is no need to repeat this latter terminology. These two points have obvious implications for sections 2 and 3, which logically (and l1)ore simply) should read as follows:
s2. The objects of this Act are to -
(a) to (d) - no changes
(i) authorising the municipal taxes and municipal surcharges that municipalities may impose under section 229( 1) (b) of the Constitution; and
(ii) regulating the exercise by municipalities of their power to impose municipal taxes and municipal surcharges, if authorised.
b) Section 2 (a) should also include the promotion of "transparency".
c) Section 2(b) should also include differentiation between different capacities of municipalities responsible for the imposition, administration and collection of the surcharges. It should also identify different tax bases and revenue potential.
2.2 Application of Act
a) S4(2) (b) envisages that the imposition of surcharges and the levying of new taxes will be widely differentiated. Specific taxes may only apply to particular kinds of municipalities, outside the constitutional categories AB,C. Surcharges may differ between categories and classifications of taxpayers or service users. This allows a level of price discrimination that may be used effectively , and will enable local governments to develop their own revenue mix appropriate to their revenue bases. Regulation of prices under these circumstances is, however extremely difficult.
b) S5 should include a clause requiring the municipality to include a surcharge in the adoption of a tariff policy as in Section 74 of the Municipal System Act and the relevant amendment in the Section 10 of the Municipal Systems Amendment Act (2003).
c) S6: The Bill needs to link the imposition of surcharges to Section 41-43 of the Municipal Finance Management Act? This link should be cross-referenced to this Act.
d) S6: It is unclear why "organized local government" should make an application for a tax given that organized local government is usually consulted on a proposed local government tax. While it is an organ of state it is not an executive or government authority for implementing taxes- provinces and local government are executive authorities.
e) S 13( 1) should read:
(1) A municipality must within six months of the date on which this Act commences, apply to the Minister in accordance with the provision of this Act for the authorization of any tax or surcharge, other than a regional establishment levy or regional services levy imposed under the Regional Services Council Act, 1985 (Act No. 109 of 1985) and the KwaZulu and Natal Joint Services Act. 1990 (Act No. 84 of 1990), imposed by that municipality and in Force immediately prior to the commencement of this Act
The reason for this is that the current wording implies that it only applies to tax (and not surcharges). and also implies that the paragraph does not apply to tax imposed before the commencement of the new Act.
2.3 Memorandum on the Objects of the Bill
a) Regional Services Councils (RSC) and Joint Services Board (JSB) levies:
Paragraph 1 .2
The Bill finally repeals s 93 (c) of the Municipal Structures Act under which RSC levies were collected. The onus of finding a replacement now seems to rest upon local governments themselves, jointly with SALGA or independently. This will be a heavy burden for local government in the absence of significant resources and appropriate administrative capacity. Furthermore, there is no indication of the status of the National Treasury's own initiatives in this regard. With the repeal of the RSC/ JSB levies National Treasury seemed to be playing a significant role in the process of local government tax reform.
The Bill shifts the initiative for initiating a new tax onto the local government community, but as the Constitution provides, the right of approval is in the hands of the Minister of Finance. The burden of finding a replacement for the RSC levies thus is placed on the shoulders of local governments themselves. This allows local communities greater say, but places heavy reliance on their capacity to undertake a complex process of tax modeling and seeking approval. Currently, it seems that only metropolitan and some larger district municipalities have the capacity to undertake such complex processes. It is also hard to see how a coherent set of fiscal reforms can result without national government, through its authorization powers assisting local government in exercising this function.
The Act requires that all existing taxes and surcharges be subjected to this process within a very short period, or be automatically revoked. The only exemption from this provision is property rates. Such a limited timeframe requirement could be onerous, imposing a heavy "burden of proof "on municipalities. An extension of the timeframe should be considered.
b) Financial implications to the state: Paragraph 5
It is possible that there may be financial implications for municipalities, especially those distributing electricity, where surcharges are already high and used for cross-subsidisation of a range of other basic services. Any lowering/changes to-surcharges could negatively impact on the revenues of such municipalities.