Council rates most unfair form of tax

By DAVID THORNTON*

Ratepayers are catching on fast to the fact that the introduction of direct rating by their regional councils promises substantial rate increases - particularly in Auckland.

In its draft annual plan, the Auckland Regional Council outlines its policy for setting rates and states "the rating system should be fair, transparent, simple, provide flexibility to respond to future needs, reflect the principle of beneficiary to pay, and take account of the ability to pay".

Despite dozens of presentations by the council to community groups around the region, personal letters to all ratepayers, and a regional newsletter, many people are still convinced they are about to be ripped off - or simply do not understand the complex formula upon which their rates have been based.

The ARC rating proposals are not fair, not transparent, not simple, do not reflect beneficiary pays, and take little account of ability to pay.

Regrettably for the council, the new direct rating system coincides with the need for a substantial rate increase to subsidise a promised enhancement of the public transport system.

Residents of Rodney District and North Shore City have already remonstrated that the bulk of the $27 million increase in regional rates is for a rail network which will serve only the south, east and western parts of the region - not the north. They will be paying for benefits they will not receive.

But ratepayers throughout the entire region are being subjected to a rating system that is inherently unfair, particularly for lower-income groups.

Council rates are the most unfair form of taxation it would be possible to find. And make no mistake, rates are a tax.

They are a tax on assets and not on income. And therein lies the basis of the inequity.

In three out of the four Auckland cities, rates are based on the land value of the property.

In Auckland City, the basis is a formula based on an annual value - that is, an assessment of what the property could rent for annually.

Another option is to charge rates against a capital value - that is, the estimated value of the land and improvements (buildings) in the marketplace.

Whichever basis is used, inequities arise. There is no recognition in either of the ability to pay, or of the number of people who live in particular properties and, thus, the amount of benefit different households gain from council services and activities.

For example, take two houses in the same street, each with exactly the same government land value.

The first house is a three-bedroom brick and tile occupied by a superannuitant widow living alone. The other is also a three-bedroom, slightly larger home occupied by a professional couple, both working, with two teenage children.

The sections on which these houses are built are the same size - 1000 sqm - and, because the rates in this council area are based on land values, both have the same value and, therefore, attract the same rates.

However, one house has an annual income of only $15,000, while the other has a total income of $150,000.

If the rates are $1200 on each property, that represents 8 per cent of the widow's income, but only 0.8 per cent of the professional couple's income.

Naturally the house with four residents is likely to benefit more than the sole-occupant house in terms of using council services and facilities.

A similar anomaly will occur where capital value is used as the basis for rating purposes, and it is certain there will be a significant difference in capital values of identical houses located in different suburbs.

The Auckland Regional Council has chosen to go with capital value for its rates this year.

This will result in some residents paying higher rates in one part of the region for the same or even fewer services than residents in another part of the region will enjoy.

In every case the rating structure is based on the value of an asset and not on the ability to pay.

In Britain, ratepayers pay a council tax. That tax is still based on property values but takes into account the number of people living in the house. There are discounts for a whole range of situations covering sole occupancy, the disabled, students, apprentices, the sick, and low-income earners.

While not perfect, it appears to be fairer than the New Zealand tax on unrealised or potential wealth.

Adding insult to injury is the application of GST to rates - a tax on a tax. The first step towards introducing fairness and equity must be the abolition of GST on council rates.

In Australia, council rates are specifically exempt from GST. Similarly, VAT (value-added tax) is not charged on council tax in Britain.

Of course, no central government would want to lose the income it gets via GST on local rates. That revenue would need to be replaced with an increase in general taxation, probably income tax. But at least income tax has the advantage of an acceptable level of relativity to ability to pay.

The removal of GST from rates would allow an immediate 11 per cent cut in charges to ratepayers - a substantial benefit to those on low and fixed incomes.

The next step would need to be the introduction of meaningful rebates or discounts to cover individual situations.

The existing rebate scheme is pitiful and bears no relationship to today's household budget.

Those two steps alone would at least address some of the present inequity, in particular the ability-to-pay factor.

But the real need is to introduce a system which recognises the basic flaw of the multi-member household paying the same rates as a single-member household.

The British council tax scheme seems to offer the best opportunity to achieve that greater level of fairness. But will any council have the courage to introduce it?

* David Thornton is chairman of the Glenfield Ratepayers and Residents Association.