Land tax threshold could reduce effect on farmers

One reason why the Government would be reluctant to introduce a land tax - its impact on farmers - was debunked at the tax working group's conference yesterday.

Arthur Grimes, senior research fellow at the think tank Motu, told the conference that such concerns could be addressed by having a per hectare threshold before the tax kicked in.

If the threshold were set at say $50,000 a hectare, most farm land would escape it. But it would make little difference in the suburbs where land values per hectare (not per section) typically run into millions of dollars.

Such a concession would reduce the revenue yield of a land tax, but that is potentially quite large, Grimes said.

It is the epitome of a broad base, low-rate tax. A rate of just 0.5 per cent would bring in around $2 billion year.

Two-thirds of the base would be residential properties (including lifestyle blocks), while farms and forest land account for about a quarter, and commercial and industrial sites the rest.

Such a tax is familiar, in the form of local body rates, which meant the valuations required to levy a land tax for central government purposes are already done.

Grimes said the present land taxes in New Zealand were less than 2 per cent of GDP, while in the United States, Britain and Canada they were around 3 per cent. A land tax rated highly for efficiency, he said, in that land could not leave the country, unlike labour and capital, and the level of the tax would not reduce the amount of land.

But the real efficiency gains would come from the reductions in income and company tax rates it could fund in a fiscally neutral package.

"It is also okay for progressivity in that families with kids tend not to have high-value homes."

The disproportionate impact on superannuitants who owned their homes but had limited cash incomes, could be addressed by allowing the build up, with interest, to be paid from their estates.

A land tax would on its introduction reduce the wealth of landowners, in theory by the present value of the future tax stream, Grimes said.

But the same could be said of any tax on property, including others the working group had considered like a capital gains tax or a tax on a deemed return from investment properties.

While in the short term it might push up rents, as landlords sought to recover the cost from tenants, in the long term it would mean property investors paid less for land.

Property investor Andrew King was more convinced about that short-term effect than the long-term one.

Deloitte tax partner Mike Shaw raised a number of objections to a land tax. A previous version was abolished in 1992 because the list of exemptions had become so long it was no longer worth the effort of collecting.

Disputes over the accuracy of valuations, and the split between land and improved values, were likely to become more common.

The initial impact on land values would inevitably mean some insolvencies among highly geared landowners. "The last thing we need to do is trigger another financial crisis,' Shaw said.

Even with a threshold some agricultural land, that used for horticulture for example, would be caught.

A land tax is only one of the base-broadening options the working group is considering.

The working group is expected to report to the Government in the new year.