Bernard Hickey: Land tax is long overdue

A land tax would send the right signal to developers. Photo / Paul Estcourt

Now that the Prime Minister has let the land tax genie out of the bottle we should all have a good close look to see which version suits us best.

Key has suggested a land tax targeted at non-residents, but with some sort of three-year exemption for expatriates who own houses here as the best way to take some of the heat out of the housing market and comply with our trade agreements.

It is already looking like the sort of highly targeted tax shot through with exemptions and loop holes that killed off the original version of a land tax in the early 1990s. Foreign investors must already be calling their tax planners for early side-stepping tips.

It is not the version of a land tax that was proposed in 2010 by the Tax Working Group that Key set up and which he has already rejected once. That was a broad tax on everyone owning land. No specific rate was proposed, but former Reserve Bank chairman and tax working group member Arthur Grimes put forward a paper in late 2009 that estimated a 1 per cent land tax would raise $4.6 billion and cause an almost-overnight reduction of land values of 16.7 per cent.

However, that "bill shock" figure seemed to be enough to discourage Key from adopting the plan. Instead, he chose to increase GST to 15 per cent and use those increased tax revenues to cut the top personal and corporate tax rates.

But times have changed and it's worth looking again at what a land tax could achieve and cost. A big fall in property prices must have appeared particularly dangerous in 2010. New Zealand was barely out of the Global Financial Crisis and land prices had already fallen as much as 10 per cent through 2008 and 2009.

A deliberate and immediate engineering of a fall in land values must have seemed difficult, to say the least.

Since then things have changed. The taxable land base has risen in value at least 45 per cent to $670 billion. The Reserve Bank has also made banks more secure and less vulnerable to the risk of negative equity by limiting the amount and proportion of high loan to value ratio lending.

A 16.7 per cent fall in land prices "overnight" would simply reset values to where they were a year ago.

Also, the sharp and sustained fall in interest rates, the biggest net migration surge in more than a century and a massive shortfall in house building has generated a mis-match of demand and supply that has driven up the value of houses and the land underneath. So a 16.7 per cent fall in land prices "overnight" would simply reset values to where they were a year ago.

The benefits of a 1 per cent land tax on that engorged base of land values shouldn't be sneezed at either. It would generate $6.7 billion of tax revenues that would allow either income taxes to be cut across the board or for the GST rate to be cut back to 10 per cent.

Key could engineer a massive new tax cut switch that would help address the housing affordability crisis and reset the incentives for business investment in one swoop.

The politics of it would be awkward, but not insurmountable. It would be progressive tax (ie, it hurts more as wealth levels rise) that falls more heavily on some more than others, in particular richer and older people, and especially those on New Zealand Superannuation.

The benefits are obvious. It would finally send the right signals to investors, that capital gains are not completely tax free, that more productive and intensive use of land makes sense, that land banking does not make sense, and that investing in equipment, research and development would be as sensible as gearing up to buy land.

It would be the biggest leg-up for first-home buyers in a couple of generations.

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