Opinion: A quiet revolt is simmering across New Zealand about the rating system, how it is applied, and its effect on ratepayers.?

Local authorities regard the current rating system as past its use-by date. Ratepayers, especially those in asset-rich, cash-poor circumstances, are struggling to meet ever-rising rates demands. The national average rates increase this year is 16 percent, four times the current inflation rate, although some ratepayers in Wellington face increases of 21.5 percent. Moreover, most of these rates have been struck based on property valuations assessed during the boom a few years ago and are way out-of-line with the actual value of properties today, rubbing further salt into the wound of angry ratepayers.

A cynic may be forgiven for thinking it is all part of a cunning plan to use soaring rates to force people out of their long-term homes because they cannot afford to stay. These homes could then be sold more cheaply to those who could afford them or demolished altogether and replaced with multilevel apartment blocks to fit Minister of Housing Chris Bishop’s intensification obsession.

That is unlikely to happen on any widespread scale, but it is just the type of crazy idea that would appeal to the ideological lunacy of some of the nuttier members of the Wellington City Council.

Be that as it may, there are legitimate criticisms of the current rating system from local authorities and ratepayers alike that raise significant questions about its long-term viability. The problem is what to replace it with.

The obvious answer is a system under which people are taxed for the local services they consume, rather than on the value of the land they own. Though it seems a simple concept to apply, it is fraught in practice, giving rise to its own difficulties and questions about inherent fairness. In the late 1980s when the Thatcher government in Britain sought to impose a uniform community charge on residents to replace the rates system, it caused rioting in the streets. This was seen as unfair, with a disproportionate impact on those who did not own land, and consequently had not directly paid rates previously. Alongside this was the inefficient and uneven way in which local councils set about collecting it, further fuelling public outrage.

The imposition of the poll tax, as it became known, precipitated internal revolt within the Conservative government, leading to Thatcher’s fall in November 1990. Within a year of her resignation, the Conservative government abolished the tax. But the upshot of Thatcher’s spectacular political failure in attempting to shift away from funding local government based on land ownership, to a more user-pays basis for local services has meant that since then, no government anywhere has sought to emulate her.

In New Zealand, no political party has dared propose a poll tax or its equivalent, despite the frequent criticisms of the rating system. So, for the foreseeable future, local government funding looks set to be heavily reliant on some form or other of land ownership-based funding system. But with an increasing focus on environmental sustainability and appropriate resource allocation and use, and the development of more sophisticated mechanisms for taxing people based on the resources they consume (or waste), the current system will be increasingly difficult to justify in the future.

A possible option is to replace the current rating system with a uniform national land tax struck annually at 0.5 percent to 1 percent of unimproved land value. Though this could smooth some of the distortions caused by fluctuating land values in different parts of the country, it would give rise to its own problems in terms of assessment and collection - presumably by the Inland Revenue Department - and subsequent redistribution to local authorities. Nevertheless, it is a solution that has been suggested in various tax reviews over recent years, which may be worthy of further consideration.

This gives rise to the wider question of greater revenue sharing between central and local government to ease the rates burden. The imposition of GST on rates has often been criticised as imposing a tax on a tax. When it was being introduced in 1986, the fourth Labour government had agreed, by the narrowest of margins after strong internal debate, that the GST collected on rates should be returned to local authorities, as a form of revenue sharing. This happened in the first year of GST’s existence but was suspended after the recession that followed the 1987 sharemarket crash, and it has never been reinstated.

Although the amount of GST collected on rates would never have been enough to have replaced the rates system entirely, it makes sense for it to be returned to local authorities as agreed by Labour in 1986, to resolve the distortion of the ＆tax on a tax’ argument and to help with more rates smoothing, especially in the larger population centres.

To date, successive governments have treated the rates system as a necessary evil - far from ideal, but the best that can be devised in current circumstances. Revenue sharing options have a short-term attraction, worth pursuing every now and then, but are no long-term solution. Although successive governments have introduced specific regional taxes from time to time for specific purposes - the recently abolished Auckland regional fuel excise being the latest example - there has been a complete reluctance to allow local authorities to independently impose their own additional taxes.

Yet, both central and local government like to talk grandly about being in a partnership.?However, as local government frustration and ratepayer anger about the current system grow, the essentially status quo approach central governments have taken since the abolition of provincial government in 1876 means idle talk will no longer be enough.

There needs to be more urgent discussion between the two arms of government about mutual responsibilities, sound asset management, avoiding inefficiency and duplication, and a fair, environmentally and financially sustainable funding system to achieve this.