Larnoch Castle, Otago

Rating Systems


by Bob Keall





The Terms:

Uniform Annual Charge (UAC)
is a flat charge applied to each rating assessment for a specific purpose, i.e. administration, water, sewerage, refuse etc. There may be several UACs but in total they may not exceed 30% of the Rates. Whatever the logic, they tend to increase the Rates on the lower valued properties and reduce the Rates on the higher valued properties.

Land Value Rating
means your Local Govt Rates are levied on the Govt valuation of the market value of the land alone exempting improvements.

Capital Value Rating
means the Rates are levied on the Govt valuation of the market value of the land and the improvements. Improving your property means higher rates. The improver pays while the land speculator wins.

Annual Rental Value Rating
means the Rates are levied on the value a property is rented for or would rent for as assessed by the City Council. It may not be less than 5% of the fee simple (selling price). In some cases it is 6% of the Govt Capital Value. To avoid the irregularities which have occurred in the past it would be preferable for any Annual Rental Valuations to be made by Quotable Value (Government Valuation Dept). This would avoid social and political engineering agendas.

Whilst a Rental Valuation Roll prepared by the Council can be amended annually, so too can an annual valuation of the land alone be done by Q.V. It should be.

Q.V. on the Qui Vive

Around the year 1900, the Government Valuation Department was set up to cater for the rapid spread of Land Value Rating after it became possible in 1896, and for the 1878 Land Tax, which by 1922 accounted for 10% of the Budget.

The Department functioned professionally and sometimes challenged its own valuations in the Land Valuation court in order to maintain consistency across the country or to resolve anomalies. The Department here was a matrix for the world. In America, Appraisers are elected by popular vote!

By about 1960 the Dept. could value the whole country annually for land value only. It still did Capital Valuations for the diminishing number of municipalities still requiring it, and for Death Duty purposes and the like.

Around 1990 the Department was largely dismantled as part of the assault on the Socialist State. As an S.O.E (State Owned Enterprise), Quotable Value was retained to compete with private valuers tendering to Local Government. A Ministry of Valuation purported to exercise oversight in a situation where Local Government Rating law required Local Government “... to exercise subjective and political judgement concerning Rating”. (Local Government. Amendment Act No. 3, 1996).

Those tendering for the Valuation Roll would also advise on the merits of Capital Value versus Land Value as the Rating base, if it’s what the Council wanted to hear. Capital Value was of course more onerous, and warranted a higher fee.

Around that time the Progressive Party proposed re-instating and increasing the Land Tax only to discover Local Goverment now had their own 3 yearly valuations at disparate dates. This made a national Land Tax impracticable.

Later there were different valuations for Rating purposes and for market purposes. This reflected the unreal property booms. Contrived Differentials for reasons other than tax-deductibility were thus made easier.

History

Until 2006 Auckland City was the last remaining instance of Annual Rental Value Rating—a relic of last century1. 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 the Capital Value was a more realistic base, because most properties were sold rather than rented. 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 should be 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 from pressure of population and 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. By 1982, just 86 years later, 90% of all Municipalities had, by poll, adopted Land Value Rating which accounted for 80% of Local Government 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.

During 1987 it seems the then Government let it be known it favoured Capital Value Rating—for the wrong reasons. Accordingly, in 1988, devious reversions to Capital Value began. Christchurch moved from partial Land Value back to Capital Value by Council resolution when 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 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 City Centre and 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 by poll had adopted Land Value Rating has been reduced to about 40%. Wherever Land Value Rating applies, it has been adopted by poll of the Ratepayers, and represents 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 wish of the Ratepayers in almost every case.

In 1990 the Minister then introduced a measure which would abolish Annual Rental Value Rating and would make Capital Value Rating irreversible wherever it was in place or might be adopted subsequently. The move failed and the Govt changed at the end of the 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, 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, Franklin and Northland. 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 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. The Differentials should not be extended to allow a hotch potch of inner-city zoning dispensations, or political contrivance.

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

The Merits of Land Value Rating

1. 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 ratio (usually homeowners) receive 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.

2. It promotes employment, because:

  • 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.
  • It deters the speculator and under-user of land with a constant unwearying stimulus for improvement and better land use.
  • 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.
  • 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 seven 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 175,000 would find work. 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—seven fold.

3. It has been widely endorsed by:

  • The Royal Commission on Local Govt. Finance 1958.

  • The N.S.W. Royal Commission 1967.

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

  • The Wellington City Committee 1989.
  • The Internal Affairs Department Coordinating Committee 1989 which concluded
    • " ... there should be a nationwide uniform base for Rating"

    • "That 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."


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

  • 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.

  • 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.

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

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

5. 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 the exchange process expands this 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 prices which inflates/devalues the currency which ... 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 through a Development Levy, eliminates the "business cycle" of boom and bust.

6. 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

1. 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.

2. Those who themselves, or as a front for others, claim 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.

3. Those who claim Capital Value Rating reflects the ability to pay. This specious argument fails to distinguish between the 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 neatly makes this distinction between public and private property.

4 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 UAC. Rates 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 capitalised, 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-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, Waimakiriri 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.)

Finally

The historical sketch shows that by about 1990 Land Value Rating had become an example to the world, and should be made mandatory, on the evidence! Significantly the Government-led assault on this coincided with the privatisation of Telecom, N.Z Rail, and others, largely to foreign interests, ravaging our Current Account since.

Sir Roger Douglas, Minister of Finance at that time, is said to have later become the highest paid agent for the World Bank. It has been reported he went to Mongolia to persuade them to put their natural resources on the world markets enabling "Mums and Dads" anywhere to participate in the World Bank’s initiative.

For years now our senior Reserve Bank and Treasury staff have been trained at the World Bank. To them "Land" (i.e. natural resources) is just another form of Capital². To them, Rent and Interest are synonymous and regulating one regulates the other. It doesn’t. Easy money means dear land and low wages, currently a serious topical issue. Capital should be the savings from the wages of labour. Wages and interest should move in tandem. Labour should be the Capitalist, not the "landowner" collecting Rent disguised as interest.

The assault on Land Value Rating coincidental with the sale of natural monopolies³ exemplifies a contrived coordination of:

  1. relieving natural resources of any public charges to enhance the privatised unearned speculative value.
  2. privatising natural monopoly profits—both wrongfully, at the expense of the public sector.

It indicates an infiltration of the Labour Party by The World Bank to neutralise effective, radical opposition to the new right global agenda of privatising natural resources, ie: owning the earth and privatising the rent.

In 1993, our paper to the Melbourne International Conference was entitled "N.Z. Crucible For The World". It still is, which may account for the subversion above.

In 1997, we widened our purview and where appropriate have made representations, under the heading "Resource Rentals for Revenue and Justice – paying for what we hold or take, not what we do or make."

Land Value Rating is an expression of this and distinguishes public from private property.

 


1 In 2006 Manukau City adopted ARV. The change was fraught with dissent, illogical reasoning and has yet to be vindicated.

2 "The Corruption of Economics"—by Dr. Mason Gaffney, Prof. Economics, University of California. (Download "The Neo-Classical Stratagem against Henry George" from "The Corruption of Economics" by Dr. Mason Gaffney as a pdf file. [Free])

3 Natural monopolies are rights to land, water, airwaves, minerals, fisheries, hydro-power generation and supply, any public utility such as a port, airport, or the monopolistic rights to reticulate wires, pipes, rails, roads and the like; even the right to pollute.

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