In recent years, questions have been raised on whether the current functions and powers of South Africa’s municipalities are sufficient for to achieve the developmental mandates set out in the Constitution. As the representative government closest to citizens, there has been increased demand for the transfer certain functions, such as housing, public transport and land use planning to municipalities. To address these questions, this study sets out to examine the effects of fiscal decentralization on inter–municipal inequalities across the 234 municipalities that constitute South Africa’s local government sphere. To facilitate the analysis, we rely on a theoretical model of fiscal decentralization, where the devolution of fiscal powers away from to sub–national units acts as a commitment device that motivates sub–national authorities to implement policies to reduce inter– regional inequality. The theoretical predictions are tested using a panel data covering the period 2003–2012.