Recipe for Rate Revolt

Mayor Len Brown wrote the 15th February Strategy and Finance Ctte report entitled: "Rates Transition Management Policy – alternative option". He's the signatory, and he writes: "In discussions with many of you, I have heard the concern that the transition policy as it stands has real limitations. On your behalf I followed up with officers over the Christmas break and their work has identified that relatively minor legislative change would enable more flexibility and, in my view, a fairer approach...."

Most Auckland ratepayers have no knowledge of what their rate bills are likely to be after the super city transition, but the data in the officer report gives an indication which I summarise here. Basically, if there was no transition policy, the method adopted by Auckland Council (for the Draft Long Term Plan), envisages the following changes:

• 111,863 Auckland ratepayer bills will decrease by more than 10%
• 80,522 Auckland ratepayer bills will decrease by between 0% and 10%
• 122,806 Auckland ratepayer bills will increase by between 0% and 10%
• 79,368 Auckland ratepayer bills will increase by between 10% and 15%
• 112,239 Auckland ratepayer bills will increase by more than 15%

The main reason this change is happening is because Council has adopted a reasonably pure General Rate capital tax on property value (land value plus improvements). Mayor Brown has stated, "under the new rating system a $400,000 home in Manukau will pay the same rates as a $400,000 home in North Shore..." The scale of the change is such that Council is concerned to spread the impact of its policy change over 2 or 3 years. However, the household whose rate increase is - say - 30%, will be paying 30% more rates than now, eventually. Because of the policy.

But there are questions to be asked over the rightness of the policy. Is it necessarily the best policy to say that every $400,000 house should pay the same rates? It is a sort of egalitarian ideal after all. But are there fishhooks that should be explored and understood. I think so.

Problem one. The problem of choice. Not every household wants, or needs, or can afford the same Council services. You can see this in how Auckland has developed. There are distinct areas, with distinct services, differences in council service levels, and different costs of living. Utopianists may want to iron out those differences. But the price of that uniformity can be the removal of diversity and difference, and the removal of real choice for those who want it, and those who need it - through no fault of their own. Do we really want Auckland's differences to be smoothed over through rate harmonisation to the extent that Auckland turns into Brisbane? Or is it more a Sydney flavour - with all of that diversity and difference - that we want. Beware what you wish for.

Problem two. The problem of a "tax on a tax". Parts of urban Auckland that are 50 years old and older have greater public amenity, and higher quality public amenity than newer parts of Auckland. (More parks and pocket parks, library services, better maintained berms and footpaths and cycleways, community buildings, clubrooms, sportsfields, restored streams, and such like).  These public community assets have a value which is reflected in private property values. They were paid for by rates, year on year, asset by asset, and form an accumulation of community capital. Is it right to charge rates again, on that accumulation of rate value? Perhaps it is. New Zealand may not have adopted a capital gains tax yet, but a pure General Rate is in effect a capital tax on property value. In part it is a tax on a tax.

Problem three. The effect on rents. About half of Auckland households live in rented accommodation. Typically the landlord (who is interested in the long term value of that asset) pays the rates, while the tenant (who is generally interested in shorter term use of the asset and services such as rubbish, wastewater) pays the rent - which covers the landlord's costs. I estimate that about 20 to 30% of rental revenue is expended in council rates. However the rental market has already taken a hit with the removal of depreciation as an allowable loss for tax purposes. I would suggest that most rental property is located in parts of Auckland which will experience the greatest increases in rates. This will translate into inevitable rent increases.

Problem four. General rates versus fixed charges. While the legislation does require Auckland Council to adopt capital value rating (rather than land value or rentable value), it does not restrict the Council in charging a proportion of its revenues from targetted rates and other charges which are fixed, and which are not calculated as a ratio of the capital value of individual properties. In July 2007, a panel reported about Council funding to the then Minister of Local Government. Its letter began:

"Report of the Local Government Rates Inquiry: At the beginning of the Inquiry the Panel undertook to deliver to you by 31 July 2007 a high-quality report based on wide consultation and sound evidence and analysis. We are pleased to deliver our report, which comprehensively addresses the wide range of issues covered by our terms of reference.
Our report identifies many significant issues and proposes many significant changes. We acknowledge many strengths in the existing system of local government funding, but have not adopted a “business as usual” approach. This is a report that creates an agenda for change that needs to be pursued by central government and local government in partnership with other stakeholders...."

It is unclear whether Auckland Council officers or politicians have read this report. Among its main recommendations are the following:

7. The Panel considers rates should remain as the major source of local government revenue but need to be reduced to around 50% of total revenues. As a tax rates have many advantages – efficiency, difficulty of evasion, and low economic deadweight costs – and there is a reasonable relationship between property values and incomes, even though overall rates tend to be somewhat regressive in their impact

57. The Panel favours the promotion of a common system of valuation for rating purposes and strongly favours the capital value system because of the closer relationship of capital values with household incomes.

58. The Panel considers that, in fixing their overall rating policies, councils should have regard both to services consumed and to ability to pay. The changes that it recommends above would likely change the distribution of the burden between commercial and residential ratepayers and between different residential ratepayers.

62. The Panel also recommends that councils make more use of their flexible rating powers so that the rating burden better reflects value in use, rather than potential sale price.

The devil is in the detail when it comes to any form of rating or taxation. There is no silver bullet. However I would suggest Auckland Council spends at least as much time considering flexible rating systems that will reduce the rate change impacts listed above, as it is in trying to lessen the impact by spreading it over a longer time.