Soaring rates: Someone has to pay for Auckland

Auckland City expects to contribute at least $50m to the $322m Eden Park redevelopment and is looking to other local bodies in the region to help.

So you hate rates. They rise inexorably and are used by councils to pay for services you think you hardly ever use. They are based on property values and it is not your fault your property value has risen exponentially over the past few years, so why should you have to pay more?

Throw them out, you cry, especially if you live in Auckland City where rates are going through the roof. Find a better system, people are screaming.

Well, the experts say, that's all very well. But what system? And if you had a different one, would it make you happy?

Whatever system you have, they point out, you will still end up paying.

Some say our rating system is not that bad, even though we have one of the highest dependencies in the world on property rates for local government income.

If you look around the globe there are many and varied systems but none which are necessarily better and many that are similar.

It is not straightforward, says local government consultant Peter McKinlay: "If the answers were easy we would have found them."

there are a bunch of things about rates which make them particularly controversial, he reckons.

"First, they stick out like a sore thumb." The bill arrives in the post, we see it and freak out.

Another issue is the feeling that you cannot control your rates. If you are worried about the electricity bill you can turn the heater off. Not so, the rates.

"You pay your rates regardless of how often you use the library or the playing field or the art gallery or drive on the streets, or any one of a 101 things."

And because you live in the city you see the potholes which have not been fixed and the rubbish collection which was late, or a myriad of other annoyances.

This all gives rates a bad name. But there is nothing new about rates - the ancient Romans and Egyptians had them. Today New Zealand and Australia have them, the United States and Canada have an equivalent property tax and Britain has the council tax, which replaced the failed and controversial poll tax, a tax per person, which was introduced by Margaret Thatcher's Government and which led to riots and contributed to her demise.

The general view seems to be that some sort of property tax makes sense. But there are other options and combinations.

One alternative is a local body income tax. Some states in America have one and they are common in Scandinavia and a couple of other European jurisdictions.

But, says McKinlay, local income taxes are difficult and expensive to run. They can be a huge administrative hassle, such as determining where income arises within council districts. You might live in Auckland but work around the country, or live elsewhere for part of the year. The problem is trickier with businesses which might trade around the country.

In America, while overall taxes are lower, the local income tax funds responsibilities which are not covered here by local authorities, such as the education sector and, in some states, part of the welfare sector. The Federal Government contributes but the systems are controversial and New Jersey is undergoing its own rates revolt.

One of the questions raised in Auckland's rates revolt has been whether central government should contribute more. Central government has imposed many tasks on to local government but has not funded them - such as changes to the building act, prostitution law reform, dog control.

"I think the current list is something like 60 or 70 different items," says McKinlay.

Neither does it pay tax for large areas of Department of Conservation land and other Crown entities and perhaps it should.

But how? If the government contribution is a share of the national tax base, McKinlay says this runs into other problems.

Councils are not equal. Some, such as Auckland, have higher costs per citizen. Some areas are more deprived and some councils have a higher funding capability from their own resources.

And central government contributing more money could mean strings are attached - "do you have central government making judgments about the appropriateness of what local councils are doing?"

Asked if any countries have a better, fairer system, McKinlay bursts into laughter. "I'm not sure if there's an answer to that."

Australian local governments raise only half the amount which New Zealand councils raise from rates, but most do not have the water and sewerage responsibilities. Australians still think their rates are too high - and then have to pay for the water and sewerage by way of a user charge.

Another way to raise cash is to borrow and councils are looking at who should pay for major projects such as a new or upgraded sewerage system - this generation by way of rates or the next generation through borrowing?

Auckland's stance has been that today's ratepayers should pay and that hurts the pocket now. Yet, McKinlay points out people often object to their local authority carrying large debt.

He says further debate is also needed in Auckland on the shifts in property value - do we come to a view that there is a point beyond which a rates bill is too high regardless of the property value? Those on high
incomes will say yes, but those on low incomes, who will end up paying more if rates are capped, will say no.

Councils are also confronted by older people complaining they cannot afford their rates and are having to contemplate moving from homes they have lived in for years. One option is to allow them to put off paying their rates with the amount owing taken from their estates when they die.

Thirteen councils already do this, McKinlay says. Auckland is not one of them but is thinking about it.

The issue of how to fund local authorities has exercised Governments for decades. There have been commissions of inquiry and for the past two years a local government lobby group has been working with central government trying to figure out solutions.

The group is due to report back in October but so far the finding is that rates should be part of the mix.

Mike Reid, governance manager for Local Government New Zealand, which represents the national interests of the country's 85 councils, says the issues are around what other funding tools councils can use.

One issue is whether the Government should pay rates to local bodies - and it should, Reid believes.

"That is looking specifically at how you would go about working out what the Government should pay. For example, how much rates should a national park pay? It's not a simple question."

Another question is whether elected members have the financial knowledge to work out the best revenue and spending policies.

More training of councillors and staff could be needed here, Reid says. The Rating Act 2002 does provide a range of complementary funding tools which not all councils use, or use well. Councils, for example, customarily levy a rate on properties related to value but they can levy a rate not related to value.

"So, for example, a third of your rates can come from a universal rate, so that every property pays exactly the same amount."

This means swings in property valuation do not make such a big difference. The downside is that people with lower-value properties would pay proportionally more.

Hit with the question "are rates fair?" Reid says part of the problem is a misunderstanding in the public mind about what rates are.

They are not a services tax, he says, but a property tax, thus a tax on wealth. The problem is, it does not necessarily correlate to ability to pay.

But people should remember, too, that the average household pays only three per cent of its tax to local government as opposed to between 30 to 40 per cent to central government.

It is easy to scream about rates, says Reid. It's not so easy to sort out.