The municipal death spiral

Richard Spoor says local govt over-valuation of property is killing our towns

Once upon a time a property had three values. The lowest was the municipal valuation, then the bank valuation, for the purposes of a bond and then the market price which was usually higher than both. Today the municipal valuations are often higher than market value.

Once upon a time the value of a property was calculated by a municipality by adding the value of the unimproved property and the value of the improvements. Now for commercial properties they effectively value the business of the property.

This punishes the people who run their properties well and rewards those who run them down.

Many municipalities are in a death spiral, the higher they drive the municipal rates and taxes, the lower the values of the properties in their jurisdiction. But they don’t stop.

Eventually, and we see this in small towns, you can’t sell your property because no buyer is willing to assume the cost of the municipal rates and taxes. Then the owners abandon them because the cost of owning a property becomes more than the property is worth.

The towns become derelict, no one pays their rates and taxes and services collapse, accelerating the downward spiral. The only way to fix it is to cut municipal rates and taxes and the quality of services, then the properties become valuable again and owners start paying.

As originally contemplated the system was supposed to fix itself. Municipalities had an incentive to cut rates and taxes and to maximise service efficiencies, this increased the value of rateable properties and increased revenues.

The logic of the system was destroyed, first by subsidies from central government, which meant that the budgeting process was skewed, in many municipalities rates and taxes comprise only a small part of their income and they have little incentive to look after rate payers.

Add to this the ideology of cross subsidisation whereby the suburbs and the CBD are taxed to death to subsidise services to rural areas, where, as any cursory examination of the valuation roll will show, properties are hugely undervalued by municipalities to win votes.

Build a mansion in the trust areas, where there are no title deeds and you pay almost no municipal taxes, build it in the suburbs and you pay. Cross subsidisation sounds like a good idea but high municipal taxes, without commensurate services destroy value and municipal revenues.

The same is happening on marginal agricultural land. Today the cost of municipal taxes and the Eskom availability charges, if you capitalise them, are higher than the market value of marginal agricultural land. The idea behind the wall to wall municipal system, ...

Whereby all land including agricultural land was rated and taxed was to incentivise the productive utilisation of the land. (Agricultural land is taxed at 50% of the residential rate.) but because the rates and electricity costs are so high it has the opposite effect.

The land ends up being used for people farming in shacks, or it is abandoned and squatted, which economically is its best use. The absence of town planning law enforcement gives momentum to this phenomenon.

One means by which this destructive process can be reversed is by limiting the number of rateable categories of municipal. Ideally to three, residential, commercial and agricultural. The myriad of categories recognised allow rates to be manipulated.

Municipalities design their rating categories to screw those that they imagine are rich and to favour the voter base. In doing so they upend the logic underpinning municipalities where people get together voluntarily to promote the common good. The end up destroying everything.

Curiously the municipal systems finance act gives the COGTA minister (NDZ) the power to intervene and to ensure that the short sighted and destructive abuse of the municipal power to tax is curtailed, but the minister does nothing because she is useless.

There is a lot of scope for creative and constructive legal intervention in this sphere, scope to get down to the heart of it. Unfortunately most legal interventions to date are based on procedural and not substantive issues. It’s a whole new area of law waiting to be explored.

Over to civil society.

This is an amended version of a Twitter thread by Richard Spoor.