Last month, Local Government New Zealand called for charging rates (i.e. local government property taxes) on Crown-owned land. The idea’s also been supported by the Productivity Commission and ACT’s sole MP, David Seymour:
Local Government NZ, which represents the country’s 78 local and regional authorities, is holding its annual conference in Rotorua.
Its members – including Auckland Council – have voted to investigate the possibility, practicality and principle of local authorities extending rates charges to land owned by the Crown.
The same topic has also been covered by a review by Local Government NZ (LGNZ) of local government funding. A manifesto on this will be presented today.
[…]
Act Party leader David Seymour is a strong supporter of charging rates on Crown land. He said that although conservation and recreational land could be excluded, as a matter of fairness schools and hospitals should pay rates because they compete with private organisations.
Mr Seymour said that although there would likely be a slightly lower rates burden on households, better and more efficient use of Crown land would be a bigger benefit.
“We have got this 430ha of Crown land [in Auckland] that allegedly could be turned into houses. Well, why have they waited so long? I suspect one of the reasons is that the Crown can keep land rates-free.”
In June, a draft report by the Productivity Commission, titled Using Land for Housing, recommended the Government start paying rates on Crown land.
It is definitely worth investigating applying rates to Crown-owned properties – and potentially also to Council-owned properties. As Transportblog has highlighted in the past, a surprisingly large amount of land in our cities is owned by governments – for transport reserves, social facilities, golf courses, etc. It’s important to use that land efficiently, and applying property taxes can help encourage that.
By way of illustration, Kent Lundberg recently took a look at a few parcels of publicly-owned land in Auckland, and alternative ways that they could be used. The short story is that there are opportunities that could be grasped if the incentives were right:
Random check of public land in Takapuna: Orange = Council, Red (upper left) = Crown pic.twitter.com/S9LH1LaabF
— Kent Lundberg (@kentslundberg) May 21, 2015
Takapuna re-development concept (of Crown land). 63 affordable apartments. 0 parking. Anzac Ave/The Terrace. pic.twitter.com/S7rV50IcEQ
— Kent Lundberg (@kentslundberg) May 25, 2015
From an economic perspective, not charging rates for publicly-owned land will distort public and private investment decisions. That is, it can encourage government departments to use too much land, relative to other inputs. All else being equal, this will in turn reduce the amount of land available for businesses and households.
Let’s consider a few examples. First: schools, which are funded by central government. Schools have a fixed budget based (roughly) on enrollment and the decile rating of the community they serve. In order to educate students, they buy land, construct school buildings, and hire staff.
However, the various inputs to education are not taxed in a consistent fashion. Teachers are taxed – they must pay income taxes regardless of the fact that they work for the government – but land and properties are not taxed. As a result, there is an incentive for schools to use more land, and fewer teachers, as land is untaxed and thus relatively cheaper. This seems troubling in light of evidence that investing in better teaching pays higher dividends than larger sports fields.
A second example: transport infrastructure. William Vickrey, Nobel laureate and originator of congestion pricing, argued that we should be extremely cautious when allocating land to roads, as land used for roads cannot be used for housing or business:
“a cost benefit analysis can justify devoting land to transportation only when the savings in transportation costs yield a return considerably greater than the gross rentals, including taxes, that private businesses would be willing to pay for the space. This in turn means that an even greater preference should be given to space economizing modes of transport than would be indicated by rent and tax levels. And our rubber-shod sacred cow is a ravenously space-hungry, shall I say, monster?”
At present, local and central government do not pay rates for the land under their roads. While they have to buy land to build roads in the first place, they are under no obligation to account for the ongoing and potentially increasing cost of devoting space to roads rather than alternative uses.
To understand why this might be a problem, consider a case in which NZTA is considering building a road through a growing part of the city. At present, land is cheap, but as the area develops it’s expected to get (relatively) more expensive.
If NZTA had to pay rates on the land it used, it would face different incentives that may lead it to pursue a different road design. It may be more willing to consider putting the road underground or configuring intersections in a more space-efficient way, in the expectation that doing so would allow it to avoid rising rates bills in the future. While this could have a higher up-front cost, in the long run society would benefit as it would leave more land for households and businesses.
Lastly, given local governments’ interest in this topic, I’d encourage them to ensure that they are consistently charging rates on council-owned properties, and valuing council-owned land on an equal basis to nearby land in private ownership. At first glance, this seems a bit pointless – councils would just be paying money to themselves! However, if you take arguments about incentives seriously, it’s important for council-owned properties to start to recognise and account for the cost of the land that they occupy.
What do you think about applying rates to publicly-owned land?
Processing...
The theory is interesting, the reality is this would add more public servants, bloated overheads and no real end of day value. With the government effectively paying itself the outcome is simply more wasted tax dollars for inter department accounting.
As for rates on roads or any extra charging on any form for roading (incidentally a vital piece of infrastructure that the author’s articles often demonise) where do you propose this all ends? Maybe rates on each meter of sewage pipe, each meter of storm water drain, even the area of sky above every square inch of land?
As for the discussion re more and better quality teachers, I am in full agreement, but if you start rating schools, guess what budget the government (regardless of which party would be in charge) would expect it to come from?. If you have any association with schools you would already know they are pinged for legislative compliance costs and many other non-teaching / productive overheads. All of this comes out of their budgets. All schools struggle with funding as it is. Many often fund raise just to provide for additional teachers and teacher aides.
1 most public institutions have an accountant, not going to take many hours to work out how much rates to pay per year.
2 talking about crown owned land not air. And exclusive use of it
3 could easily exclude schools if it’s a problem for you.
Some of the arguments for charging rates on crown owned land have merit and are worth consideration. I would be very cautious about applying it to schools though. While the government may provide some increase in funding to cover the additional costs schools would be faced with it is likely that this will lag behind rates increases. And the rates bill for most schools which tend to occupy large amounts of land in desirable areas could easily be hundreds of thousands of dollars under the current rates system. This could easily impact on the quality of education offered to children a most undesirable outcome.
Hospitals, prisons, WINZs (or whatever they’re now called) etc, etc and so on and so forth.
Seems an extreme way of discouraging motorway and state highway building…
Well, yes, there would be an administrative cost in having one arm of government pay another. The suggestion is that the benefits might be much greater, from getting the incentives right so that public bodies don’t waste valuable urban land on inferior uses.
Another example: in Australia the Attorney-General’s department lawyers charge the other departments for their legal advice. This makes the other departments think about how much they really need the advice, so they won’t try to put the AG’s lawyers to work on trivial cases.
I agree this would be a good idea, but it should be extended to include church land too. I suspect a lot of that is sitting idle and underutilized.
Back in the 19th century (and earlier), the British came to Australia and saw all of this land “idle and underutilized”
Perhaps a less monocultural approach to land use would be preferable.
I don’t understand why Victory Church on Beaumont Street pay zero rates for their $42 million commercially operated 2200-seat convention centre and commercially operated 347 car underground carpark?
What makes you think Victory do not pay rates for their carpark? The only part of a church property exempt from rates is the worship area. A property like Victory is normally split into separate rating areas with any area producing an income subject to rates.
Auckland Council’s GIS viewer says it’s non-rateable land.
Hell yeah, is high time churches started paying their fair share in tax.
I agree with a lot of points, but “society benefiting” because of “more land for homes and businesses” is a non sequitur. There is no causal link. Otherwise Bangladesh would generate the most utility in the world
It would depend on how that money is spent. Using central government funds to lower rates would be a folly. It would end up in lower level of services or increases taxes. I also think it would help to inflate land prices because people owning and selling properties is tax free. A capital gains tax would help with this issue but would it be simpler to allow council to collect the capital gains tax and use it internally?
I feel that taxes roads is not a good idea, I am not aware of a country that does that. Would it also mean taxing rail corridors?
I think it could potentially have a lot of downsizes. A more limited approach not involving schools, hospitals and transport corridors ( but including unused transport land ) might be good if the funding is used to support development.
School play grounds do serve and have a social benefit, which is poorly accounted for using traditional economic tools and assessments. They help assist child to get exercise and sunlight which improves there health. A study undertaken in China has shown that spending 30 minutes per day dramatically reduces the amount of children needing glasses. With Auckland potentially developing upwards where will the children play if not in there school grounds? By taxing land owned by schools you run the real risks of developing schools similar to those in inner city New York and in Asia with little or no play areas.
I agree that public land is under utilised and some of it could be developed better. However I think the consequences of it should be looked at very carefully. As a first steep perhaps it would be better to look at surplus government land (local and central) and selling that off. I also feel that some of the car park buildings should be sold off. I remember while back hearing that they are losing money and our rates are subsidising cark parking. There are too many sites in Auckland which are just single story undeveloped car parks. Perhaps an undeveloped tax ( maybe as a item on the rates) should apply to the inner city to encourage development?
Anyway just some random uninformed thoughts.
There is a prima facie case for applying rates to land used for transport, as that would, as Peter says, incentivise spatially efficient designs and systems. Auckland is not sitting in the middle of a big empty plain, like, I dunno, Houston, for example, so we have to be cleverer with what we’ve got.
If this can be generally accepted as “as a good idea” the obvious, tho’ much less acceptable next step, is a land tax – all of it!
agree, agree, and that this tax should stay local, ie fund local gov.
Yes it is a distortion in the market, but I don’t see any mechanism to prevent the loss of intangible value. Except relying on politicians and officials to make the right choice. It’s zero sum isnt it? If government paid rates, we would still pay for it somewhere else in reduced services or increased taxes elsewhere. Do we sell national parks to mining companies because we cant afford the rates? Or we end up with fewer parks and smaller school grounds because they produce no income.
I still prefer removing land rates in general and pay for local government via income tax like in Germany.
“Except relying on politicians and officials to make the right choice. It’s zero sum isnt it? If government paid rates, we would still pay for it somewhere else in reduced services or increased taxes elsewhere.”
Yeah, that’s one aspect of it that I’m a little bit cautious about. My sense from reading the article was that councils were interested in charging rates on Crown-owned land as a source of added revenue – effectively, a fiscal transfer from central to local government. (I haven’t been able to find the LGNZ discussion paper, so this may not be a completely accurate impression!)
However, I’m less interested in raising more money for government than I am in evening out distortions between public and private investments in property. If that’s the aim, the right approach might not involve money changing hands. Rates on government-owned land could simply serve as a form of “shadow price” that provided a realistic signal to government departments and council organisations of the opportunity costs involved in their use of resources.
Large businesses that produce services for themselves often use shadow pricing to ensure that their internal resource allocations make sense. It’s a pretty widely used method and probably not one that would be impossible for government finance whizzes to figure out.
Ever hear of tax churn? This could equally apply as rate churn. Less than zero sum game.
The argument of inefficient roading design is an interesting on though and well looking into further. Usually roading takes up as much room as is dictated by the safe speed design + a margin for future-proofing. Simple solution – lower the speed limit (by law, not by design) at intersections. Practical though?
All the same arguments can be made in reverse. Local Government should pay income tax to central government on all operating surpluses. The effect would be local government would have less to invest in new assets. Policy wonk (or wanks) love these arguments but the end result isnt growth just an increase in transfers.
Well local gov does have to add gst to rates, so the transport levy includes an additional 15% that goes to central gov to blow on whatever….
But I think they can claim back the GST on all their inputs (no sure of that though) which would mean they only pass on the surplus. For a Council the inputs will be a higher proportion than a normal business. But income tax is charged on all money where revenue exceeds the current years expenses and depreciation. Councils can generate quite a bit of that particularly if they are buying parks or building an underground rail system.
mwfic i think you’re up a fiscal tree on this one.
Tax legislation is very specific about who/what is subject to the tax, e.g. income tax applies to individuals, corporate tax applies to companies, and GST applies to consumption. In this case the key thing is that rates apply to improvements/land. What taxes are levied on is an independent matter from who owns what is being levied. Of course the tax payable is charged to the latter, but it’s not true to imply that this could cut both ways and suddenly local government would be subject to income tax. As local government is neither an individual nor a company, it can’t be subject to those taxes.
The general point of the post is sound: Loopholes in ratings base distort investment decisions, and not just of central government agencies (who we know are sitting on the hands about land they own) but also churches as others have pointed out. In general initiatives that broaden/maintain the tax base are a bloody good reason for changing something.
I am not suggesting it would be automatic but if local government were allowed to tax central government then why wouldn’t central government offset that by imposing a tax on earnings by local government? As for the idea of the post being sound I disagree. If we followed this idea then everyone except local government would be subject to rates. But if there is truly an efficiency argument then how could that be supported? Surely to achieve this claimed efficiency then local governments land holdings should also attract a land tax to avoid a situation where they are encouraged to squander land resources on things like park and ride.
My main objection is simply the idea of layers of government taxing the bejesus out of each other creating huge levels of transfer payments for little or no gain.
“the end result isnt growth just an increase in transfers”
It’s worth distinguishing between static and dynamic efficiencies. Static efficiencies refer to opportunities to reallocate existing resources to more productive uses. An example might be selling off an underutilised Council-owned carpark for commercial development.
Dynamic efficiencies refer to longer-term opportunities to raise productivity by changing the way that investment decisions are made in the future. This may entail investing in innovation or new technology – e.g. the intersection design and road tunnel examples I mentioned in the post. The Waterview tunnelling process is an example of this process at work. A combination of high property prices and citizen pressure raised the cost/difficulty of a surface motorway, which in turn incentivised NZTA and civil engineering firms to look for innovative solutions.
In the long run, dynamic efficiencies dominate – getting the environment right for people to look for ways to raise productivity is the single greatest determinant of living standards. I would argue that charging rates on government-owned land could contribute to that.
Of course, if charging rates on government-owned land results in an excessive increase in administrative overheads, the dynamic efficiencies may be outweighed by the added costs. I’d be surprised if that was the case, but then I’m not an accountant so who knows?
“I would argue that charging rates on government-owned land could contribute to that” Not sure I agree Peter. If the government had to pay rates then maybe they would choose to provide smaller school grounds or schools only in low cost areas and expect children to travel right across Auckland each day. On the other hand some government agencies dont care about costs as its not their own money. That might explain why there is still a rail corridor beside the south-western motorway. It has been designated since the late 1940’s but will never be built.
One of the primary reasons for not charging rates on government land is that it lowers holding costs. Government often buys land for public purposes which can take years to develop, but the land may only be available once every 5, 15 or 30 years. The longer the wait the higher the cost to the taxpayer. In the long run, it’s cheaper for government to hold land since they are not bound by the marketplace – what in the development finance business is called patient money – which is a traditional role of government. Of course, this does not accord with David Seymour’s far-right libertarian unrestrained market ideology, but so what.
That’s a fair point. However, I’d argue that governments _already_ have sufficient advantages when it comes to land-banking for public purposes. In particular, interest rates on government bonds tend to be considerably lower than interest rates for private developers, which means they can afford to take a longer-term view.
A quick look at RBNZ statistics (series B2 and B3) shows that at present, 10-year government bond rates are at 3.38%, while business lending rates are 5.93%. This is a big difference. I’m in favour of government leveraging that advantage where appropriate, but I don’t think they necessarily need additional tax advantages piled on top of it.
I own a share of a private road. I have to pay for the upkeep of this road, allow the public access to this road and pay rates on the road. If roads are zero rated for local and national governments, shouldn’t they be also zero rated for private individuals?
That’s fascinating. I was not aware that private roads were assessed for rates. Definitely a distortionary practice!
That is correct Yimby, I’m in a similar situation. However, the rateable value is quite low relative to land area (<$10/sqm) so the rates are commensurately low. Oddly, the uniform annual charge and the transport levy still apply! Council does sweep the gutters occasionally but we have to meet all street-lighting costs. The LGA requires that the general public has access (ie it can't be gated), although parking rules can be, and are, applied by the owner. So essentially we receive zero value for these rates.
If rates were charged on port land, equal to adjacent commercial areas….imagine how that would incentivise a different outcome…
Sounds like a solution looking for a problem. As indicated by Stevenz this could have a very perverse impact on Councils proactively purchasing land for parks or roads or other public works while still rural zoned meaning far more cost to ratepayers later down the track. Also, shouldnt the sheer maintenance costs of large roads act as a handbrake on excessive designs?