Rick Caddick: Rates - the Elephant in the Room

Criticism of the property based rating system has become more intense in recent times, as rate demands have outstripped the cost of living, wage increases, and inflation.  But criticism of the system dates back to the 1930s. 

The late Sir Ross Jansen, probably New Zealand’s most experienced and knowledgeable authority on local government, for a long time advocated for the abolition of rates, which he described as “antiquated – long past their use-by date – unfair and unpopular, hurting the elderly and those families on low incomes.”

More recently, in 2003 he said “Between 1945 and 1989 there were five separate commissions of enquiry into local government funding, all have taken the view that rating is not the appropriate way, but nothing has been done.”  Even the once-over-lightly Shand report of 2006/07 damned the rating system with faint praise, but significantly predicted that within ten years it would become unsustainable – a prophecy then, a reality now.

Even LGNZ – Local Government NZ – the group representing all the councils of NZ, realised this, and knowing that they could not continue to increase rate demands ad infinitum, last year set up a Funding Review working party to “Explore funding options and alternatives and review funding mechanisms” – but more of this later.

Change is long overdue, and inevitable, because the self-evident inequities and injustices of the rating system are undeniable and many, for instance: -

All residents are entitled to vote at local government elections, all benefit from the infrastructure, services, and amenities provided by local government, but only property owners are taxed to fund it.

By any definition, rates are a tax, being compulsory, not discretionary, unavoidable, and imposed by legislation.  Making bad law worse, ratepayers also have to pay GST on rates, in effect, a tax on a tax! 

The impact on homeowners of this narrowly based discriminatory tax package is further skewed to the disadvantage of homeowners because all commercial enterprises can claim back the GST content, and also treat rates as tax-deductible items.  Homeowners – who contribute most to rates – cannot.

Furthermore, it is based on a property’s Land or Capital value, arrived at by an arbitrary and questionable procedure that often provides inaccurate results – but worse, not all property is rateable, so the burden on other property owners is increased.

It impinges unevenly on individuals, depending on numbers per household.  It is harshest on low-income families and the elderly on low fixed incomes, who face ever-increasing rate demands.  Property ownership does not necessarily equate with ability to pay.

It is a relatively open-ended source of funds, with little or no control by way of limits or restrictions on spending.  It encourages “Empire Building” and a “Cost-Plus” system of management, because councils have the power to set rates at any level required to cover whatever spending they decide on.  This elastic funding does nothing to impose fiscal discipline, encourage good management, or promote sound selective procedures to differentiate between spending on essentials versus other “nice to have” things.

Central government has devolved many of its responsibilities onto local government, and facilitated this transfer by increasing councils’ areas of competence, but without granting them any commensurate financial resources or support as compensation. 

In view of the above, one would have thought that the existing method of funding would have featured prominently in the recently published Local Government NZ Funding Review.  It didn’t – apart from being endorsed by LGNZ by calling for “A diverse set of funding tools . . . with property rates as a cornerstone”. 

Remember, this review was set up in the first place by LGNZ because it was recognised that they could not keep on increasing rates ad infinitum, yet indications were that increased funding would be required in order to finance their future spending ambitions.  The only logical conclusion that can be drawn is that ratepayers will continue to be weighed down by this unfair rating system, but will be further burdened by other taxes or levies imposed on the wider general population.  We foresaw this, and made representations to the working group advocating that any changes should not be half measures, but rather that the rating system be changed to a fairer, more universal one.

Of all the members of the group, only two of the few more independent members replied to us, and both said that they supported our stance and promised to support it.  They were Auckland Chamber of Commerce CEO and Local Government Forum Chair Michael Barnett, and Federated Farmers Manager General Policy Nick Clark – but obviously their voices did not prevail against the stacked biased membership.  Local and central government obviously intend to continue treating ratepayers as cash cows.  

That is one reason why they continue to ignore this elephant in the room, but there are others.  LGNZ wants to retain its open ended funding mechanism provided by rates, and central government wants to continue to give preferential treatment to big business enterprises.  Many of these are multinationals or internationals, largely overseas owned, that traditionally have paid next to nothing to directly support the nationwide infrastructure here within which they operate and make their profits.

Consider the actual net cost of rates to any such large enterprise.  As a proportion of their gross income, the cost of rates would amount to very little, especially when compared to the all-up cost of rates for the average homeowner, calculated as a proportion of his or her gross income.  This great disparity in real cost and affordability could be interpreted as homeowners having to subsidise the rates payable by big business.

Despite propaganda to the contrary, there is a more equitable, affordable, and viable system that could replace rates – and its implementation would be relatively easy, simple, and straightforward.  To quote Sir Ross Jansen once more, he said “Taxes should be fair, related to ability to pay, hard to avoid, and easy to collect”.  This suggested alternative ticks all those boxes, while by comparison the present rating system is demonstrably unfair, unrelated to ability to pay, and relatively difficult and expensive to collect.

THE SUGGESTED ALTERNATIVE

Because local government provides facilities and amenities for every resident and business entity, a more equitable system would require all to pay their fair share.  Based on statistics for the 2010 year, “Ratesnomore” have calculated that if every resident or business enterprise were levied by 2.5% of their taxable income by IRD, and these monies were ring-fenced and used exclusively for funding local councils, property rating could be abolished.

The advantages would be many: -

Property owners – particularly homeowners – would be relieved of an unfair, discriminatory local tax.

It would be fairer, spreading the funding burden more widely and thinly, and would ensure that big business paid its fair share.

It would be easily affordable by all, costing only a small percentage of taxable income, whereas narrowly based rates are too expensive for many, property ownership not being a reliable indication of ability to pay.

It would obviate the need for government to subsidise rates for low-income people, and the humiliation they feel having to apply for this.

It would be automatically inflation proofed.

It would provide security of income for local government, with sufficient predictability to allow for forward planning.

It would require local bodies to exercise budgetary responsibility and tight financial management, as is the normal requirement for running any other business or corporate enterprise.  It would promote the necessity to keep spending within the confines of the available allocated funding – quite the reverse of what happens with rates.

As an income rather than an asset based tax, it would operate on exactly the same basis as is used to fund central government, a system that is accepted as fair and equitable.

Central government would collect more in tax, and eliminate the disparity in taxation rules between individual and business taxpayers, as this levy would not be tax deductible.

It would put an end to the ridiculous post earthquake situation that existed in Christchurch, where some property owners were obliged to continue paying rates on homes or other buildings that had reduced or no services provided, or worse, on properties that could no longer be occupied or used.  Under the present system, that same nonsense could occur anywhere in New Zealand as a result of a natural disaster.

Having widely debated this alternative, it seems to meet with general approval and acceptance.  If there were any reservations, they came mainly from people already involved in local government, revolving around two issues – the first being that it might threaten local government autonomy, the second that allocation of funds to individual councils could present problems, and allow central government to unduly influence allocation of funds.

It would be seen clearly as “hands off” if responsibility for the administration and distribution of these allocations were given to the councils’ own LGNZ organisation. Legislation could set the broader guidelines, to be overseen by the Auditor General, but the detailed work could be left to LGNZ in-house management.  As a suggestion, LGNZ could pay out 50% of the pool to councils on a per capita (population) basis, a further 45% pro rata to what they received for the previous year, with the remaining 5% to be paid out more flexibly, on a compensatory or balancing basis, to meet unique or special needs.  Such a method would introduce some flexibility and year-on-year adjustment in response to any movement in growth, decline, or need. 

The only way this alternative would adversely affect local government’s autonomy is that it would remove individual councils’ power to set the level of local taxation.  In all other respects, it would allow business to proceed as usual, with the added benefit that it would save councils the considerable administrative expense of collecting rates.  They would still be adequately funded, albeit by a different, but more equitable funding method.

Rick Caddick, member of Rangiora Grey Power, and spokesman for the Rangiora based Concerned Ratepayers Group “Ratesnomore”.