Rates Relief

by Bob Keall

A major cause of the current concern over Rates is the recent escalation in land values. A significant factor in this has been the attraction of property investment on the basis of tax set-off or Negative Gearing (lately called Positive Gearing!)

Under this design losses on the property investment are set off against other taxes. Thus the Govt is actually funding and so causing the escalating land values. Lifting the interest rate worsens the problem by increasing the tax loss, so further reducing the tax liability and increasing the attraction!

The revenue loss carried by other taxpayers and fostered by Government should be recovered by:

  • A national Land Value Rate, collected on behalf of Central Government, by and shared with, Regional Government.
  • The reduction and ultimate abolition of G.S.T. and its compliance costs.
—negative Gearing in reverse—to fund Local Government.

The Land Value Rate should initially have interim gradations of income/land value. There should also be greater flexibility for the Land Value Rate to be payable now or be a charge against the property or set off against other taxes—at the payer's option. These are interim accommodations to people not to property (eg: low income earners such as pensioners or beneficiaries).

Infrastructure/Natural Monopoly reticulation is a core function of Central and Local Government which has a direct cost/benefit reflected in land values. The capital cost of this benefit must be recovered in the short, medium and longer term from the land values so enhanced, rather than be privatised. The deceptive conflation of land and improvements as property confuses public and private property. The current sacrosanct industry of privatising public property is destroying society—assisted by tax set-off!

One effect of the national Land Value Rate would be to restrain further increases in land value. Any charge on land value reduces the price by the amount of the charge capitalised at the current rate of interest1. Land price only arises because the community fails to collect the annual economic rent properly due to it, which is then capitalised as selling price. Thus the charge reduces the selling price. It is not passed on!

Land value is a differential value. It has no cost of production. This differential value is reduced by any charge levied on it. Thus any Land Value charge restrains the escalating base which is the underlying cause of both the Rates problem and inflation.

Other Factors

  1. 100% bank lending, available because of our relatively high interest rates. Raising interest rates does nothing to deter or diminish the attraction of negative/positive gearing. It may even exacerbate it by increasing the tax losses and thus the tax rebate.

    Raising interest rates adds to our Current Account Deficit and has been demonstrably ineffective in restraining land values.

  2. Deferred capital outlay and maintenance. For years this has been the aim of Local Government in the interests of keeping the Rates down. This has pushed land values up and adds to the problem.

  3. Increased immigration and used vehicle imports, without providing the infrastructure to cope (see 2 above), now adds to the problem which must be addressed.

  4. Direct charges, User Pays and Uniform Annual Charges have operated to reduce Land Value Rates from about 80% of Local Government revenue to about 40%. Whatever justification there may be in the Local Government context, the lower Rates have contributed to higher land values.

  5. After Land Value Rating was made possible in 1896 changing from Capital Value to Land Value rapidly became popular and by 1986 was almost universal, because the majority of Ratepayers (homeowners) gained a Rate reduction. The average ratio of improvements to land value was about 3:1. Capital Value Rating, had encouraged the speculator but penalised the investment of labour and capital. Land Value Rating reversed that by removing the charge on improvements at the expense of those below the average ratio.

  6. Now after 100 years, or even 50 years, the buildings have depreciated and the land values have escalated. The ratio has been reversed! Many homeowners now live on National Superannuation, with Rates (on Land Value or Capital Value) beyond their ability to pay. Reverting to Capital Value is a minor, misleading alleviation, because the land value is still the major component. Prospective homeowners can neither rent nor buy in. The Kiwi saver plan will perpetuate this.

Land Value Rating on the basis proposed accommodates temporary hardship and assists prospective homeowners. Thereafter it reduces interest charges. i.e. higher Rates, lower interest payments, lower taxes and higher wages.

The Merits of Land Value Rating are:

  • It usually means lower rates for the majority of Ratepayers. A common ratio of improvements to land value has been about 3:1. Properties developed above this (usually homeowners) get a Rate reduction at the expense of those with a lower ratio—usually under-developed or vacant sites held for speculation, and old commercial properties with tax—deductible Rates.

  • It promotes employment, because:
    1. It reduces the price of land which means a lower outlay, a lower mortgage and greater accessibility for home-builders, farmers, developers and property improvers of any sort.

    2. It deters the speculator and under-user of land with a constant unwearying stimulus for improvement and better land use.

    3. It ensures the optimum use of land free of further penalty—truly an incentive tax, both stick and carrot. Thus it tends to bed in and become accepted.

    4. It generates steady urban renewal as in Sydney and hitherto in Wellington, rather than deferred boom and bust as in Auckland. Renewal in Wellington has slowed noticeably since reverting to Capital Value.

    Given these incentives every person who gains employment in primary industry or property improvement of any sort generates four more job opportunities downstream in secondary and tertiary industries. If another 10% of our primary work force, i.e. 25,000 were employed in housing, farming, forestry, fishing and transport another 100,000 would find work (ex Auckland Star, 1.5.88).The labour market finds its rightful, dominant place.
    In these ways Land Value Rating reduces the disparity between the easy rich and the unemployed. Any other form does the opposite—four fold.

  • It has been widely endorsed by:
    1. The Royal Commission on Local Government Finance 1958.

    2. The New South Wales Royal Commission 1967.

    3. A Brisbane City Enquiry 1989. It is mandatory throughout Queensland. By the late 1980s 92% of all Australian municipalities used Site Value Rating.

    4. The Wellington City Committee 1989.

    5. The Internal Affairs Department Coordinating Committee 1989 which concluded "... there should be a nationwide uniform base for Rating" and "... undifferentialled Land Value Rating is the only rating system fully consistent with efficient resource allocation. It encourages an optimal use of high-value sites because rates based on land penalised inefficient usage of the site ... a landowner is nonetheless required to contribute financially to the community on the basis of that property's potential."

    6. The 90% of municipalities in N.Z. that by poll adopted it and likewise could have rejected it.

    7. All the newer areas of Auckland—North, South, East and West which have long enjoyed it and clearly intend to retain it. The recent change in Manukau is not yet vindicated.

    8. The Cities and Districts of Palmerston North, Waitakere, New Plymouth, Horowhenua, Kaipara, Tararua, Waimakariri and Franklin, where proposed reversions to Capital Value were rejected, most of them heavily, by as much as 8:1.

    9. The growing number of American cities that now employ the 2-Rate system levying 5–6 times more on the land value than on the improvements with startling effects on building permits and employment.

  • It is environmentally friendly. By optimising land use it maximises the natural, undisturbed environment. It discourages urban sprawl.

  • Inflation
    . Capitalised annual "economic rent" (land price) is the underlying cause of currency inflation.
    Money is a measure of value for the labour content of goods and services, for the purpose of exchange now, progressively or later. Introducing the capitalised future value of a gratuitous licence which has no labour content into that exchange process expands that measure, but with no corresponding increase in goods and services. Too much money chasing too few goods = inflation. Over time the value of the labour products diminishes, whereas the licence value appreciates, compounding the effect.
    The inflated/devalued currency is most rapidly reflected in higher land price which inflates/devalues the currency. It creates a pernicious spiral on which some live high whilst the majority strive to survive on the treadmill. Easy money accelerates the process. Collecting the "economic rent" annually (Land Value Rates or Land Value Tax) or by a Development Levy, eliminates the"business cycle" of boom and bust.

  • It recovers some of the community-created land value for community purposes. There is thus a unique, important, moral imperative in Land Value Rating which is entirely consistent with its other virtues.

The Main Opponents of Land Value Rating are:

  • Those who seek to shift the charges off the land onto buildings, alcohol, petrol, people—anything, thereby increasing the eventual unearned, tax-free gain from speculating in land or under-using it, rather than putting it to its optimal use now.

  • Those who themselves or as a front for others (above) claim that Land Value Rating leads to over-intensive use of land and/or the destruction of the ambience of yester-year, and/or undue pressure to change. It doesn't and it needn't. Old buildings can be protected with Preservation Orders and Town Planning Ordinances. We don't have to put the whole of society into a strait-jacket of decadence to accommodate a few relics, however worthy. Special Valuations for Rating purposes can accommodate those caught with a zone change entitling them to an Existing Use valuation until the use changes.

    "Mining" is more likely to occur when an excessive, speculative price has been paid, propped up by a mortgage with cheap money leaving little over for wages. Bringing the price back to reality with an ongoing charge in favour of the community distributes prosperity and eases the pressure.

  • Those who claim Capital Value Rating reflects the ability to pay. This specious argument fails to distinguish between that "ability" derived from the investment of private capital and labour which is no concern of local Government, and that "ability" or benefit which is derived from holding natural resources serviced by the Council, which is the legitimate concern of local Government. Personal income is no concern of Council.

    The failure to make this distinction between individual rights and the community's rights characterises the Marxian solution to wealth disparity. From this the world now turns. Making this distinction correctly is the issue of this age as it provides the only equitable basis for the operation of a free market economy. Land Value Rating makes this distinction neatly, between public and private property.

  • Those who claim Capital/Rental Value Rating distributes the Rates more "fairly". A fair Rating system is not one which merely distributes current costs equally—to the disadvantage of the poor, incidentally, as with a Uniform Annual Charge (UAC). Rates are related to property held. It is therefore important that they are related to those unimproved land values generated by the community not the capital values generated by the private investment of labour and capital.

User Pays and/or Cost Benefit

Court actions against councils have recently been brought on the grounds there was no equitable relationship between Rates paid and the benefits enjoyed. These actions, until recently, had only ever been taken in areas Rating on the Capital Value—quite rightly. There is no connection between the private investment of capital and Council services. Reticulation of any sort is better used by high-rise improvement than extended for miles. Community services and other advantages are more accurately reflected in site values than in Capital Values. Land Value is itself a cost/benefit measurement.

Moreover, as a Land Value Rate reduces the price by the amount of the charge capitalized, the site user either pays initially to a vendor or progressively, to a small degree, to the Council. The principle of User Pays is eagerly directed at as many Council services as possible by those who seek to relieve property of Rates, thereby increasing the land values. However the principle of User Pays applies first and foremost to the user of the site (and other natural resources) either as purchase price, or progressively as Rates in favour of the rest of the community, as a means of recovering the community-created land value to pay for Council services available to all. Land Value rating is a significant step along that road.

Litigation, outside the provisions of the Rating legislation, has established:

  1. a minute cost/benefit analysis with apportionment accordingly is not the intention.

  2. a Council has to use the dispensations available to achieve an equitable cost/benefit relationship.

Quote: Cr. Joceline White, Waimakariri District Council (in the vote retaining land value rating), "... favoured land value because she regarded the rates paid on her land as rent for the privilege of using it during her lifetime"—The Press 8/6/95.


Until 2006 Auckland City was the last remaining instance of Annual Rental Value Rating—a relic of the 19th century2. The original Provinces of N.Z. drew their revenues from the sale and lease of land. When the Provinces were replaced by Local Government in 1876, Rates were based on the Annual Rental Value, as in England. Within 6 years it became apparent that with most properties being sold rather than rented, the Capital Value was a more realistic base. Accordingly Councils were permitted to switch to or from Capital or Rental value by resolution. Both are based on the composite value of the land and improvements and are but the capitalised/annualised version of the other.

About this time the writings of John Stuart Mill, Henry George and others drew attention to the unearned increase in land values generated by growing communities whether from pressure of population or derived from public works. As a result, Sir George Grey and his associates not only introduced a Land Tax but also a measure allowing local Rates to be collected from land values alone if a poll of ratepayers required it. The measure was blocked by the Upper House for three years but, in 1896, it became possible for 15% of ratepayers to demand a poll be held to decide if the Rates should be collected from the Unimproved Value only, exempting the improvements.

Under this dispensation, hundreds of Rating Polls were held, so that by 1982, just 86 years later, 90% of all Municipalities had, by poll, adopted Land Value Rating, which accounted for 80% of Local Govt revenue. The main dissidents were remote rural areas, a few Counties with a dairy factory carrying a big proportion of the Rates, the old Boroughs on the Auckland isthmus largely parasitic on Auckland City, Lower Hutt, then a dormitory suburb of Wellington without its own hard core of land values, and Queenstown—a Wild West-type speculators paradise.

It seems that during 1987 the then Government let it be known that it favoured Capital Value Rating—for the wrong resons. Accordingly, in 1988, devious reversions to Capital Value began.

Christchurch moved from partial Land Value back to Capital Value by Council resolution. We believe a poll should have been held.

Dunedin fragmented its General Rate into Separate and Special Rates so they could then be changed by Council Resolution without recourse to the Ratepayers and despite their vociferous protest march. The Mayor Sir Clifford Skeggs threatened to take his Council to Court. The Council action was not, in fact, illegal but clearly a misuse of its powers. In 1953 the Dunedin Ratepayers had voted for Land Value Rating with a dramatic increase in building permits as a consequence.

In Wellington, a year-long Rates Review Committee came down firmly in favour of retaining Land Value with an adjustment to the Differentials between the City Centre and the suburbs. Nevertheless, the then Mayor contrived to have Capital Value narrowly adopted but needed an Order in Council to validate his procedures, which a Q.C. and the local press regarded as illegal.

In The Rating Powers Act 1988/9, the Government withdrew the traditional right to demand a poll, at the same time as it propounded the merits of "local decisions locally made"!

Since the time of restructuring in 1989, the 90% of municipalities which had adopted Land Value Rating by poll, has been reduced to about 40%. It must here be pointed out that wherever Land Value Rating applies, it has been adopted by poll of Ratepayers, representing a lot of work and profound social concern. Wherever Capital or Annual Value Rating applies, it has been imposed by Government or Councils, contrary to the express wishes of the Ratepayers in almost every case.

In 1990 the Minister introduced a measure which would abolish Annual Rental Value Rating and make Capital Value Rating irreversible wherever it was in place or might be adopted, subsequently. The move failed and the Government changed at the end of that year. Since then, there have been several moves by Councils to revert to Capital Value. All have been so vigorously opposed by Ratepayers, even without the right to demand a poll, that the Councils have backed off. A recent instance of this was the postal poll in Waitakere where a determined attempt by Council was rejected by more than 8:1, in line with others in Palmerston North, Horowhenua, Dannevirke, New Plymouth, Kaipara, Tararua, Waimakariri and Franklin. One or two moves have succeeded but have later been reversed. One or two changes have stuck—uncomfortably. Some have compromised with a mix of Land and Capital Value for no apparent reasons.

A valid confusing consideration in the moves to revert to Capital Value arises from the amalgamation of urban and rural areas which previously raised and spent their own Rates. Amalgamation can mean a highly valued rural property might be paying for urban facilities. The solution is not to revert to Capital Value Rating, but to apply a Differential Land Value Rate which relates income to expenditure in both town and country, so that each enjoys the advantages of Land Value Rating but not at the expense of the other.

Land value in rural areas is related to overseas prices. In urban areas it is related to civic amenities. Differential Rates reflect this.

The practical consensus now seems to be a basic Land Value rate with Differentials to distinguish between Residential, Rural and Commercial zones and to offset the advantages of tax-deductibility enjoyed by some, supplemented by UACs. N.B. The Differentials should not be extended to allow a hotch potch of inner-city zoning dispensations, or political contrivances.

Rates now required to meet the widening cost of Regional Government due to devolution from Central Government, should be accompanied by the shared Land Value Rate proposed. Revenue sharing, they call it! Local responsibility for the allocation of funds is preferable to politically motivated Government grants.

Auckland Regional Rates

All Rates in the Auckland Region should be based on valuations—by the same authority—as at the same date—annually. This is both possible and imperative; a basic essential for any co-ordinated rationalisation of all functions by all parties.

The principle of progressively reducing GST as a set-off against a comprehensive Land Value Rate is the same principle as Negative Gearing. But in this case would be used to fund Local Government instead of crippling it.

1 By contrast any tax on the products of labour—goods and services e.g. buildings, petrol etc., increases the price.

2 In 2006 Manukau City adopted ARV (Annual Rental Value). The change was fraught with dissent, illogical reasoning and has yet to be vindicated. Land Value in rural areas is related to overseas prices. In urban areas it is related to civic amenities. Differential Rates reflect this.