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.
19 Comments
Government to pay rates. Yes. That eliminates a fiction. Corrects a distortion.
Charities to pay tax. Yes. "Charity" is minor in the sector . Tax the commercial activities. Most of which is contracting to government.
GST for Councils. No. That just conceals the cost of council activity.
Councils are just trying to avoid needing to fix productivity. Central govt cant afford to lose money and is getting its own house in order... councils need to do the same as the wastage is huge. Overdone traffic management, 3 or 4 rubbish bins per house to empty (when the plastic goes in landfill anyway and people can sort their own compost etc etc).
Personally I would like to see councils get limits on rate increases , limits on borrowing and kpis for delivery to include things like traffic flow, minimum standards for asset maintenance and upgrades. The same world as a private business lives in where they have to do more for less and the workers work.
It's like school principals whining about central govt banning phones, truancy rules and insisting on time for main subjects - if they had their houses in order the govt wouldn't need to step in.
The GST on rates must continue to be collected, and go to the central government ... until a proper land tax is introduced.
New Zealand needs to move some of the burden of taxation away from taxing income and on to taxing wealth, specifically wealth in the form of fixed property. TOP, The Opportunities Party, tried unsuccessfully to make this a political issue, advocating income-tax reduction in exchange for introducing a 0.75% annual tax on the unimproved value of residential land. That's what New Zealand needs to do as a step towards moderating the unsustainable rise in house prices. Once we have a real annual land tax going to central government, then the GST on local-body rates should be abolished.
"That just conceals the cost of council activity" Sums it up perfectly. We now have agitators in NP wanting council to get involved in social housing. I can see Chris Bishop rubbing his hands in glee egging the agitators on to relieve central govt of their responsibility to provide social housing. Gets a monkey off their back.
Its a close call as to who is more wasteful in their spending direction. Central govt or local councils. My perception is that local councils are more profligate but depends on which party occupies the beehive. Labour as wayward in their spending as a local councils.
GST is collected because rates are described as being charges for goods and services. That maybe what they are in purpose but because the formula to arrive at the charge is calculated largely on value the compounding nature of that has distorted that original premise. However the councils may try to obfuscate it, the fact is, regardless of relative goods and services actually received, the higher your property is valued, the more rates you will pay. In its own right it exists as a virtual wealth tax and as you say, GST then becomes a tax on a tax.
Fair enough, they should hike up rates to get the infrastructure work done.
But ratepayers aren't entitled to have central government take working Kiwis' taxes and put them into infrastructure to benefit landowners. That's precisely what rates are for, and rates have been kept lower than they should've been by deferring necessary infrastructure.
Absolute bollocks.
Local Government is up against the same Limits-to-Growth problem that Central Government is.
And Health. And Tertiary Education.
This is the beginning of the downside - on beyond GROWTH.
Pity so many people decided to believe we could continue discounting the future, indefinitely.
And furthermore one would hope that if the present government is to provide any financial relief in any shape and form to any local council that they make damn sure that it is spent and accounted for on the essential services that may be designated rather than vainglorious and pipe dreamy nice thingys to have.
The previous lot tried to address an unanswerable question - tried centralisation. This lot will try the 'free market' ideology. Both miss the point; the issue isn't 'funding' - you can do that until the cows come home; just keystroke more debt. The problem is physical; decay is now outpacing our ability to address it.
So easy to see, if you're a physics type - apparently so hard if you are used to thinking in 'money' - which, of course, is an artificial construct related to nothing more than notions.
Interesting: at one point the GST was effectively rebated to local councils (it was part of the central funding equation), but I can no longer find a reference to it. Maybe it was informal, which would be stupid practice so quite possible I guess. It was how the 'tax on a tax' argument was easily defeated (even though rates aren't tax, they are a fee.)
I wonder when it changed? Can anyone help?
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