Local Government Financing

Local Government New Zealand is looking for alternative funding mechanisms.

Basing rates on property values alone may soon no longer be sustainable as the sole taxation form for many councils, says Local Government New Zealand (LGNZ).

Instead, it would investigate other forms of taxation such as local consumption and local income taxes as "complementary alternatives".

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The LGNZ Local Government Funding Review comes as an ageing population contributes to an increased number of asset rich/cash poor ratepayers who struggle to pay their rates.

Some councils also face major growth pressures to fund large-scale infrastructure investments to meet the needs of future generations and sustain economic growth, with limited funding tools at their disposal. Yule said this would place severe pressure on a pure property tax model.

Oh dear.

As we've noted before here, there are two very good ways of dealing with this particular problem while maintaining a reliance on property taxes.

First, the wealthy elderly could be encouraged to take out a reverse mortgage. These are available in New Zealand. You lose equity in your home, but you pay your taxes. The wealthy elderly would then provide a smaller bequest to their middle-aged kids, but that's hardly the end of the world.

Second, it doesn't seem like it would be crazy hard to set up a scheme in which the wealthy but cash-poor elderly could defer rates on the house, with interest, so long as the accumulated bill is less than the value of the house. When the owner dies, Council gets the house, sells it, and pays any remaining amount to the Estate. Alternatively, the estate's beneficiary could buy out Council's interest in the house. Either way, we're not "forcing" politically important constituents out of their half-million-dollar-plus homes, although there'd be important implementation issues around ensuring that the scheme is only available to those fully agreeing that the house could be sold on the death of the registered owner if the estate's beneficiary couldn't pay the accumulated tax bill.*

So, the problem isn't really that bad, if we're willing to contemplate that ageing property-wealthy-but-cash-poor Boomers might might be called upon to consider paying their bills.

Because LGNZ has put taxing the wealthy cash-poor elderly into the too-hard basket, they're starting to draw funding ideas from the too-silly basket.

ALTERNATIVES

Potential taxes for councils

Local income taxes – an extra tax on income

Local consumption taxes – an extra tax on goods and services

Congestion charges – a charge for a vehicle using congested roads at certain times

Visitor charges – taxing visitors, typically through accommodation bills

Payroll taxes – extra tax collected by an employer when paying an employee

I had a call from Jim Mora's producer asking if I could talk about some of this stuff with The Panel yesterday. I'd written up my notes before noticing that the time clashed with my son's swim lessons and so I wouldn't be able to do it. Stephen Hickson capably filled in for me [hit around the 20 minute mark]. But I'll copy my notes below anyway.

On local taxation, I could note a few things:

1. Local income taxes are pretty much always a bad idea. If there were a 10 Commandments of Local Government Finance, "Thou Shalt Not Implement A Local Income Tax" would be one of them. Andrei Shleifer and Ed Glaeser had a great paper about a decade ago called "The Curley Effect". The basic model is as follows: where a mayor can use local tax policy to drive out those who would vote against him, he'll do it. And so Coleman Young hiked local income taxes, driving richer voters out of Detroit and funding programmes for his poorer supporters. He also implemented a pretty hefty commuter tax. Detroit's current prosperity owes no small part to his local tax policies. The Curley Effect was named for James Michael Curley, who ran similar policies in Boston to drive out the rich protestants, leaving him with an electorate of poorer Catholics who supported him.


2. Congestion charges are a great idea, if you can make them implementable. They're not a great idea because of the revenue that they raise, though. Rather, they're a great idea because they help fix local congestion issues. Further, they're a great idea because they might help attenuate some of the current opposition to sprawl and densification. If those who wind up contributing to congestion through sprawl and density wind up bearing the bulk of the costs of that through congestion charges, maybe people wouldn't oppose sprawl so much. But, again, the point isn't revenue-raising. Maybe you could put it in instead of hiking other taxes, but the fees should be set entirely to try to get towards optimal levels of congestion rather than to raise money. Where it's seen as a revenue grab, or where it's likely to be a revenue grab instead of a congestion abatement mechanism, it's less likely to be supported or to be run properly.


3. Local sales taxes are a bad idea. We have a great clean GST currently. A local sales tax on top of it would mess things up. Local bodies would be tempted to exempt all the feel-good stuff like kids' clothes, vegetables and the like - that makes a hash of any sales tax. Or, if it were just a levy on top of the GST implemented by local government, is it levied on all businesses in the local district? What if they're selling mail-order to folks outside of the city? What if folks outside the city are selling mail-order to those inside the city? We get all of the stupid transactions costs of implementing GST on imports except across all of the local bodies. Bad idea.


4. One potentially interesting idea, though, or at least worth thinking about: a capitation payment from central government to local bodies. Right now, there's a pretty strong local interest group equilibrium barring development. Homeowners oppose any densification near them and any sprawl on the urban limits because of the reduced amenity value to them and because more houses would reduce the value of their houses. So the nay-sayers hold sway. But imagine if we had a transfer from central government to local government based on the number of people living in the jurisdiction. Do a better job of attracting more people to your city or town and your budget increases. That could provide at least some counterveiling force to the current "don't build anything anywhere ever" pressures. The New Zealand Initiative suggested something similar last year: a payment to local councils from central government for each new dwelling built in their area where that dwelling was able to be built within a specified time from initial consent application. These kinds of things are worth thinking about.

Land use issues are pretty badly messed up in New Zealand. Most of what LGNZ's here proposing will substantially worsen things. And all because they're scared of having the soon-to-be-elderly take out reverse-mortgages.


* Otherwise you get the inevitable sob story about the widow forced out of her house because she wasn't on the title.