Topic: Application for a Local Business Tax for economic infrastructure and services

Introduction

SALGA and several city governments are intending to submit applications (in terms of the MFPFA of 2007) to the Minister of Finance  for the introduction of a new original revenue source for local governments

The reasons for this are

Local governments face a significant fiscal gap, especially in economic infrastructure and services

There is a need to strengthen local government accountability for economic infrastructure and services

 

 

 

Definition

Local governments face a significant fiscal gap

Local governments face a significant fiscal gap between their expenditure responsibilities and revenue resources

  • Inherited apartheid (basic service standards) backlog
  • Maintenance of existing infrastructure
  • Infrastructure and services for economic growth and development

Because local governments have focussed upon dealing with the apartheid backlog, the maintenance and  growth gaps are now especially significant

The local government sector as a whole may need to spend R775 b over the next decade just on capital investments, and it could possibly finance only around half of that.

Municipalities are responsible for closing some of the fiscal gap, and must do so

  • billing completeness & accuracy, collections efficiency
  • debtors minimisation and management
  • tax and tariff increases for existing revenue sources
  • expenditure efficiencies

But there is nevertheless a remaining fiscal gap, which should be filled by a new local revenue source

There is also some tax room for the LBT, because the abolition of the RSC levies without replacement by another tax meant an effective reduction in total company taxes

A LBT for economic infrastructure and services is required

Where possible the gap should be closed with a new local tax rather than a grant

  • more predictable and less subject to arbitrary national discretion
  • to enhance local accountability for funds

Many potential supplementary revenue sources  have been considered - a local business tax is the most viable in terms of scale, administration, impact, acceptability, and accountability.

 

Key Issues

Objectives

The objective of a `local business tax for economic infrastructure and services’ is to improve our system of inter-governmental fiscal relations:

  • To improve local accountability for economic services and infrastructure
  • To improve economic productivity and efficiency
  • To increase local fiscal capacity, because needs exceed resources available

Improving accountability

  • Assign or `hypothecate’ LBT revenues to economic  infrastructure and services
  • `Reconnecting taxation’
    • increases legitimacy and public acceptance
    • Improves formal transparency and reporting
    • provides clearer budget constraints
    • highlights performance of service providers
  • Establish governance measures to ensure that revenues are used optimally to achieve economic productivity improvements  

Specific possible governance measures

  • the funds should be used only on projects which are able to demonstrate a positive economic internal rate of return;
  • recipient municipalities should account and report separately on expenditure of these funds
  • establishing specifically-constituted forums to which such accounting must take place
  • frequent project audits with pre-agreed interventions in the event of deviations
  • establish an `observatory’ for monitoring and best practise development

 

Critical Success Factors

The LBT should be collected by SARS

  • More efficient  - make use of existing tax infrastructure  & data
  • Better control and accountability
  • The LBT should be based either on  `Company footprint’  (tax important components of local value added, such as depreciation for capital services and (remuneration) for labour services) or on Turnover (tax company turnover)
  • To collect approximately R18.6 b per annum nationally would require a tax rate of 0.757% on the `company footprint’ tax base, or 0.323% on the turnover tax base

The local business tax should not penalise small business

  • The local business tax will be payable only by VAT-registered businesses
  • Exemptions include should be consistent with other tax legislation and include:
    • Small businesses (below VAT registration threshold);
    • Basic foodstuffs as specified in Part B of Schedule 2 to the VAT Act, 1991;
    • Passenger transportation, trade union fees, educational services;
    • Non-commercial supplies by public benefit organisations;
    • Residential letting
    • After-school care by a crèche or after-school care centre;
    • etc

The LBT receipts should be distributed mainly on an origin basis

  • because the logic of the tax is that business should be taxed in relation to its ‘footprint’ and used in the area of its footprint
  • to reflect the bulk of the need for (the growth of) economic infrastructure and services
  • to enhance municipal accountability for use of LBT tax receipts
  • Options
    • eg capital services according to the location of physical assets, and labour services according to the normal work location of employees
    • This will require additional administration by companies

LBT receipts should be used only for economic infrastructure and services

  • LBT receipts should be used only for economic infrastructure and services because of
    • Long-term job creation, economic development and growth depends on the municipal economic infrastructure and services being in place
  • The tax will have negative economic impacts
    • GDP -   short run: -0.0162% long run -0.0086%
    • Employment:  short run: -0.1877% long run -0.0820%
  • Productivity improvement of 0.0505% more than compensates for (ie reverses) these negative impacts

Improve economic and urban productivity and efficiency

  • Funds must be spent on projects which will definitively enhance urban economic efficiency and improve productivity
    • Refurbishment of infrastructure supporting economic activity
    • Provision for expected economic growth
    • Logistics, security, ambiance, etc
    • Next generation city economic services
  • Funds must be spent!

 

Links

Forum: Your thoughts on the LBT!

Practical Knowledge

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Theoretical Knowledge

Title Userranking Popularity
Application for a local business tax for economic infrastructure and services Presentation
Author(s): Roland Hunt
Year: 2011
Format: Theoretical Knowledge
5
 98
Application for a local business tax for economic infrastructure and services Presentation
Author(s): Roland Hunt
Year: 2011
Format: Theoretical Knowledge
0.05
 98
Application for a local business tax for economic infrastructure and services - Presentation to the Financial and Fiscal Commission 20th January 2012
Format: Theoretical Knowledge
0
 38