By Gareth Vaughan
The Government's Tax Working Group, the Productivity Commission and the OECD have all suggested New Zealand should consider introducing a land tax.
But heading into the September 23 election none of our major political parties are proposing one. Instead the tax debate is focused around the possibility of a Capital Gains Tax, excluding the family home, possibly being introduced if Labour win.
Greenaway-McGrevy says many taxes come with bad unintended consequences usually as people try to avoid paying them. This happens because tax influences peoples incentives and behaviours, often in counterproductive ways.
"We tax income, we tax work. That reduces the return for working and that could act as a disincentive for people to take on additional work," says Greenaway-McGrevy.
"If we think about taxing capital through say a capital gains tax, that affects a person's incentive to invest. And as a consequence they may invest less in new residential construction, they may invest less in businesses, less in companies. Arguably that would be a bad outcome."
If you tax a particular activity it reduces the incentive to perform that activity, Greenaway-McGrevy adds.
"When it comes to land, however, the amount of land is fixed. So if you are going to tax landowners they can't turn around and say 'well we are going to react to that by making less land.' So we're not going to affect the total amount of land in the economy if we choose to tax it. So that's one of the reasons why I favour it and a lot of other economists favour it [a land tax]. It's a very efficient form of taxation. It's one of the reasons why the Tax Working Group was in favour of it. Essentially because it minimises those bad unintended outcomes [and] it could also potentially result in some good unintended consequences."
So how would a land tax be structured and paid?
"Usually it would be levied in the land value embedded in a property. So if you think about your typical residential home [with a] freehold land title, if it's worth $1 million according to the assessor perhaps the improvements or the residential structure's worth $300,000. Subtract that off [and] you're left with the value of the underlying land of let's say $700,000. The land tax would be levied on that...[at] say 1%," says Greenaway-McGrevy.
"Back in 2010 it was estimated that would bring in about $4.6 billion, taking into account that land values would fall after the tax is implemented. The Tax Working Group thought they'd fall by about 17%. We've seen massive price appreciation in the value of residential land, so we might see more money being raised these days."
Greenaway-McGrevy says land values falling would be a good thing in the context of tackling housing affordability problems with many potential first home buyers deposit constrained, because they require 10%, or in most cases a 20% deposit under the loan-to-value ratio (LVR) restrictions.
"So bringing down house prices through reducing the value of land could get more first time home buyers into a home. However, you have to recognise that it's only those individuals that are deposit constrained that are going to benefit from it. Because as soon as you buy that house you have this tax liability going forward, - the land tax," Greenaway-McGrevy says.
Additionally he points out a land tax could hit both landbankers and wealthy foreigners buying up New Zealand land.
"It creates a tremendous incentive to develop land to its full potential because any improvements that you add to the land will not be taxed. And any improvements that you make will help you offset that tax liability. So right now we arguably have a landbanking problem in Auckland in particular and this [land tax] would disincentivise that option value of sitting around and waiting to develop that piece of land. You really want to do it [develop] sooner rather than later when you've got this tax liability," Greenaway-McGrevy says.
"For better or worse right now we allow foreigners to come in a buy some of the most pristine parts of the country. I'm of the opinion that if we are going to do that, we should be taxing these individuals. Why? Well right now their contribution is rather small to New Zealand through council rates, and if they're buying goods and services through GST. If you think about why New Zealand's so attractive, one we've got a lot of natural beauty. We're also a stable, liberal democracy that's developed. So these people are benefiting from the fact that the New Zealand economy is stable and relatively prosperous. They should be contributing to it one way or another. A land tax would achieve that. It would do so in a very efficient way as well because it's very hard to avoid."
Greenaway-McGrevy says a land tax would be levied by the central government, meaning it would come on top of rates land owners already pay to local government. But to compensate for the addition of a land tax, tax would be offset elsewhere.
"We'd implement a land tax and perhaps reduce income tax or reduce GST. And the goal would be that the average New Zealander would be left no better or worse off," he says.
Here's the Tax Working Group's 2010 report.
Here's a 2009 Motu paper from Andrew Coleman and Tax Working Group member Arthur Grimes on property and land taxes.
Here's Productivity Commission chairman Murray Sherwin talking to Alex Tarrant about land tax and other topics.
And the OECD has suggested New Zealand ought to "implement a capital gains tax and boost environmental and property or land taxes to facilitate a more efficient and equitable tax structure."