An association of local councils has asked the central Government to consider returning the revenue earned from GST charged on property rates to local authorities.
Sam Broughton, president of Local Government New Zealand, said council responsibilities had been increasing but its share of overall tax revenue had stalled 50 years ago.
“It’s no secret that the funding system for local government is broken. Relying so heavily on rates is unsustainable,” he said in a press release.
Councils needed new funding and financing tools, and returning the GST charged on rates would be an “excellent place to start”.
Analysis by economic consultancy firm Infometrics has estimated this policy would have cost about $1.1 billion if it had been in place during 2022 — the latest available data set.
That extra revenue could have covered 9.2% of total council operating income, or 8.6% of operating expenses, and cost the Government 0.9% of its total revenue.
Brad Olsen, the principal economist at Infometrics, said it would be a significant shift in revenue that would affect the Crown’s ability to balance its budget.
“Although the GST collected on rates isn’t a huge part of total collected tax, it would make large changes to the balance of central government finances,” he said in a newsletter.
Returning the Government accounts to surplus is a high priority for the Coalition Government, although it is secondary to delivering tax cuts and maintaining frontline public services.
Wayne’s world
In March, Auckland mayor Wayne Brown asked the Government to begin paying rates on the land it owns inside the city. This bill would have been $36.3 million in the 2023 fiscal year.
“Why should the central Government get a free ride? They use our infrastructure but don’t pay the bill,” Brown said.
The Auckland mayor also asked for GST on rates to be given back to the council, as the central Government had been taking more than its “fair share” of tax revenue.
Households could have saved $506 on their annual rates in the coming year, if the $415.3 million in GST paid into the central coffers in 2023 had been returned to the local authority.
“Aucklanders and people across the country are struggling. If the government wants to promise tax cuts – this is one,” Brown said in a press release.
Prime Minister Christopher Luxon ruled this out almost immediately.
Olsen said local councils were responsible for about 25% of the country’s infrastructure deficit but were only able to access a small portion of total tax revenues.
“Central government will pay either way, either by providing support through to councils or by having to pick up the tab when things are already broken,” he said.
Refunding GST on local rates would be an “easy way” of redistributing some taxes to local authorities, especially relative to the more complicated funding tools be considered.
Simeon Brown, the Minister for Local Government, said on Wednesday the Coalition was open to sharing a portion of GST earned from building new housing.
It was also working on other funding and financing tools related to toll roads and value capture rates. However, none of these tools are available yet.
Affordability question
Broughton said dismissing the idea wouldn’t solve the problem. Councils were currently under stress and ratepayers were facing an average increase of 15% this year.
Rates are based on the valuation of a property and don’t factor in people’s incomes or levels of discretionary spending. This made it difficult to hike rates indefinitely.
“Rates don’t take into account affordability. It looks at what people have managed to purchase in the past but there is still an affordability question”.
The stereotypical example would be a retiree who bought a house decades ago and was now living off superannuation. Low income renters also pay rates indirectly.
New Zealand was “the most over-centralized country in the OECD” and it needed to have a discussion about how best to shift tax revenues between the two tiers of government.
Credit rating agency S&P Global agrees New Zealand councils have been being lumped with new responsibilities and costs without being given a larger share of tax revenue.
Elected officials were faced with “uncomfortable decisions” to either take on more debt or push through politically unpopular rate increases.
This arrangement had resulted in too little investment in infrastructure and much higher debt levels than similar councils in other parts of the world.
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