South African local governments metropolitan (category A) and district ( category C) municipalities - rely heavily on revenues from the Regional Service Council (RSC) levy. The RSC levy is not one, but two taxes: a flat rate payroll tax and a flat rate turnover tax. This levy allows local governments to tap into the broad revenue bases of payroll and gross receipts, and to generate a significant revenue flow. But the RSC levy has a legal basis that makes it almost impossible to properly administer, and as a result it fails when measured against most of the criteria for a 'good' local tax. There have been numerous calls for its review and reform.

We begin this analysis with a question: How does the RSC levy match up against the norms for a good tax? We then turn to a study of the South African experience with this tax. In order to study the RSC levy, we analyzed available data and conducted interviews in a (non­representative) sample of municipalities. Given the time frame of our work, the basic research necessarily focused on the pre-demarcation municipalities. In the results presented here, we first discuss the administration of the RSC levy. Next, we do a detailed, primarily economic evaluation of its current structure and performance. Finally, we review a number of possible options for reforming the RSC levy, outlining the advantages and disadvantages of each.