By Eric Crampton*
It turns out that you can both agree with Local Government New Zealand that we need to change how local government is financed, and with the Taxpayers’ Union that a lot of local governments could be more efficient.
I think we can manage to hit both targets with one instrument in this case: fixing how local government is financed can help to make local government more efficient.
I recently argued that even those who think that councils are terrible and wasteful should support giving councils more money, so long as that funding stream is structured to provide appropriate incentives to encourage growth.
The LGNZ report released this week investigates a few new mechanisms for improving council finances.
They very correctly note that central government offloads a host of regulatory compliance costs onto local government with little in the way of compensation for those costs – as central government also does to the private sector, I might add.
They also correctly note that tax exempt land, often owned or managed by central government, adds distortions and imposes a burden on other property owners then loaded with higher taxes to make up the difference.
But the meat of the report is in its discussion of mechanisms for funding local government.
And, there is a lot there to like.
As in any report that canvasses a wide array of options, there are some that are really terrible ideas, like new locally levied taxes on billboards. Local income taxes can also prove very expensive in terms of the bad incentives then created for people to move just outside of the jurisdiction’s borders – as the report itself notes.
How can we provide a better funding stream to local government without introducing pernicious effects or bad incentives?
First, assess how much of central government’s tax take – GST, income tax, and company tax – comes from each of the different districts.
Then provide each district with a percentage of any increase over that base level. Councils that do a great job in encouraging development would be rewarded for it; those that do not, will not.
Councils then would have stronger incentive to compete for new firms and new housing developments.
To get more residents and more businesses, and thereby increase their share of the flow of funds from central government, they would have to do a better job than their neighbours in providing speedy and effective consenting, appropriate levels of public amenities, and reasonable property tax rates – basically, all of the things that firms have to do in competing for customers. And central government could finally stop worrying so much about local government performance.
Central government would have to be willing to share a bit.
But the returns could be well worth the investment.
The report deserves more than Prime Minister John Key’s peremptory dismissal.
*Eric Crampton is head of research at the New Zealand Initiative.