Councils should use targeted rates to help fund investment in local infrastructure, wherever the benefits generated can be well defined, the Productivity Commission says.
It also favours greater use of user-pays mechanisms like toll roads and charging for water, to supplement development contributions in the funding of infrastructure needed to deal with supply-side constraints in fast-growing cities like Auckland.
These are among 23 recommendations in a draft report, Better Urban Planning, on which the commission is seeking submissions.
Targeted rates, for which there is already statutory provision, would help ensure that those who benefit from new infrastructure contribute to the cost, rather than having it socialised through general rates.
The commission sees targeted rates as a way of filling funding gaps arising from restrictions on the development contributions which developers pay and which get front-loaded into the purchase price when they sell properties.
It is a way of capturing some of the spillover gains flowing to people or businesses outside the development area.
Defining that larger area would be tricky and contentious in practice, but it is hard to quarrel with principle of beneficiary pays.
"A future planning system should enable councils to levy targeted rates on the basis of changes in land value where this occurs as the result of public action, for example installation of new infrastructure or upzoning," it says.
Land bankers, beware.
The commission is inclined to accept the argument councils run that "growth does not pay for growth." In other words, the eventual increase in the rating base is not enough to cover the cost local authorities face in enabling that growth.
One question on which it seeks feedback is whether alternative funding systems for local authorities, such as local taxes, would improve their ability to provide infrastructure to accommodate growth. The New Zealand Initiative will no doubt have plenty to say about that.
The commission's brief in this inquiry is wide ranging: to review the urban planning system and identify from first principles the most way to allocate land use.
The review has been commissioned by a Government which is fond of scapegoating planners for the social carnage which is the Auckland housing market, and which is struggling to get reforms to the Resource Management Act through Parliament.
The commission has concluded that existing planning legislation lacks clarity and focus. Broad and ambiguous language in both the RMA and the Local Government Act has led to regulatory over-reach in urban areas on the one hand, but also a lack of stringency in the regulation of the natural environment on the other, it says.
The national interest is under-represented in planning decisions - including the interest in avoiding runaway land and house price inflation - while narrow local interests prevail too easily. Nimby 1, New Zealand nil.
The commission says the legislation governing urban planning should make it clear that the primary purposes of the planning system are to enable development and changes in land use; to ensure there is enough development capacity (land plus infrastructure) to meet demand, and to promote the easy movement of people and goods to and through cities.
Unsurprisingly for a bunch of economists, the commission emphasises the usefulness of price signals, not just to users of roads and water, but to planning authorities themselves.
When price separation along a rural-urban boundary, for example, exceeds some threshold, that should trigger action to increase land supply for development.
"Where price differentials between land zoned for development and non-developable land at the fringe of cities exceed thresholds set by central government, local authorities will be obliged to provide more development capacity, either through "upzoning" within established areas or through rezoning and servicing new greenfields land," it says, echoing a recommendation from its report last year, Using Land for Housing.
"Ensuring that the commitment to bring land price inflation under control is credible, and to act where the land price threshold is exceeded, will require the Crown to have the powers and capacity to ensure land is rezoned and serviced if necessary." The commission considers the current planning system slow to adapt to changing circumstances and risk averse. Processes for updating land use rules are slow and uncertain, and regulation overly prescriptive.
It recommends making independent hearings panels, like the one which has just delivered Auckland's Unitary Plan, a permanent feature of the system.
And it would narrow rights to appeal planning decisions, especially by those not directly affected.
Some of the report's most trenchant criticism is directed at the planning profession itself.
The commission detects a tendency to see urban design as a means of shaping a better society or of achieving other goals, like climate change mitigation, which should be left to other areas of public policy or to public preferences as expressed through markets.
At the same time, a myopic preoccupation with process and procedure can see desired social outcomes slip out of focus.
Many councils, the commission says, have capability gaps in areas such as economic and environmental science which hinder their ability to examine rigorously the costs and benefits of alternative policy options and planning proposals.
So overall, the commission argues for an urban planning system which replaces a bias in favour of the status quo with the clear priority of enabling development and ease of movement within cities.
It calls for a greater use of pricing mechanisms rather than command and control regulation.
It favours measures for funding infrastructure which reduce cross-subsidies from the wider community and which supplement front-loaded costs (development contributions) with ongoing finance from user-pays and targeted rates.
And it favours a greater role for central government, both to reduce the capture of decision-making by local vested interests and to reflect genuine national interest in having well-functioning cities that people can afford to live in.