New rates ratios proposed by the national Department of Provincial and Local Government (DPLG) will take away the power of municipalities to adjust their property taxes according to their unique circumstances.

Instead, the new regulations will force all municipalities to apply the same formula to levy property taxes, despite municipalities having varied growth and development challenges. In addition, increases for each category will be limited to the annual consumer price index (CPI), which does not take into account the massive growth in the market value of property over recent years.

A report by Johannesburg's Rates and Taxes Directorate in the City's department of finance, issued on 7 February, confirms that the new ratios will shift the tax burden to residential properties and drastically reduce the City's operating and capital budgets.

The Rates and Taxes Directorate has raised its objections to the national draft regulations on rates ratios for residential and non-residential properties, and has requested that recommendations be submitted to the minister of provincial and local government. If the proposed rates ratios remain unchanged, the City of Johannesburg hopes to gain exemption from the DPLG.

The draft regulations determining the rates ratio for different categories of properties were gazetted by Minister Provincial and Local Government Sydney Mufamadi in December 2007.

Joburg's report notes that the draft regulations will affect the City's ability to remain revenue neutral. The effect the new regulations will have on its objective to ensure equity and fairness to all categories of properties is also of particular concern.

Churches will be able to apply for rebates on the rates The City was planning a rebate for sectional title owners through a lower rand rate than the proposed 0,005 cents in the rand for residential properties, to encourage high density development. Instead, the proposed ratios do not distinguish between various forms of residential land ownership.

The City is hoping to discourage property owners from sitting on vacant land by levying higher taxes on these properties. The DPLG suggests a ratio in which vacant land owners pay only 25 percent of what homeowners pay, much less than the four times more than residential properties proposed by Johannesburg.

Other categories that will benefit from the proposed rates ratios that are lower than those proposed by the City are business, mining, state and municipal properties.

The result is that the burden will shift to another category of property. For example, the DPLG ratio proposed for business has been lowered by more than 20 percent, from 3.4 to 2.

"In the case of the proposed ratios, the burden of property tax is shifted from the other categories on to the residential sector." What's more, property taxes are tax deductible for business enterprises, a benefit from which residential properties are excluded.

In addition, the City was hoping to find mechanisms to mitigate the huge tax increases individual property owners will be paying as a result of the implementation of the Municipal Property Rates Act. Instead, with 75,5 percent of properties falling in the residential category, the effect of the new ratios on the individual will be significant.

"… when the ratios are applied to the draft general valuation roll [of Johannesburg], over 17 percent of all properties in Johannesburg will experience a rate increase in excess of 50 percent", the report points out. Another 14 percent of residential properties will have an increase of more than 100 percent.

Under the City's current funding policy, residential property is allowed a 58 percent rebate. Commercial properties receive no rebate. The proposed residential ratio "will lead to a reverse subsidisation by the residential property owner in favour of the owner of business property".

The City is concerned that the uncertainty caused by the new regulations will affect the property market as well as investment.

It is alarmed by the immediate effect that the reduction in the property rates will have on its cash flow. For the operating budget this will lead to a R710-million deficit; the capital budget will shrink from R4,7-billion to R3,8 billion in the medium term.

The City will not be able to raise the funds needed to meet local needs. "No further policing officers would be employed and various other initiatives would have to be discontinued."

It will slow down the process of addressing service backlogs while still maintaining a service level that makes economic investment in the City attractive. The delivery of special infrastructure projects will be at risk, while economic growth and job creation is bound to suffer. The City's liquidity ratio will also be at risk.

The DPLG has defended its rigid formulation on the basis that there are 283 municipalities and that it will be impossible to come to individual arrangements with every municipality. Earlier in the month, the director-general in the department, Lindiwe Msengana-Ndlela, confirmed that flexibility would be added as the new rates regime matured.

"We are also quite willing to adjust some of the ratios." The proposed rates ratios are intended to benefit the poor, households and agriculture, the DPLG has confirmed.

Johannesburg's Rates and Taxes Directorate has requested that a gradual approach be followed to limit the impact of the new regulations. "It is thus deemed to be more appropriate that more feasible ratios be published, with an opportunity for local government to gradually phase in such changes rather than the abrupt implementation of the new system, ratios and increases."

It suggests a timeframe of four years. The rates policy has to be reviewed annually.