Productivity Commission’s proposal for a windfall gains tax on property owners who benefit from public infrastructure gets tick of approval from Auckland & Wellington mayors

Productivity Commission’s proposal for a windfall gains tax on property owners who benefit from public infrastructure gets tick of approval from Auckland & Wellington mayors
An artist's impression of the proposed Wellington rapid transit project which Mayor Justin Lester says could be funded using a windfall gains tax.

Auckland Mayor Phil Goff and Wellington Mayor Justin Lester say giving local government a slice of the gains property owners make from public projects is a logical way to help fund infrastructure.

But they both agree it could create a legal minefield without the Government’s support. The Productivity Commission is calling for new funding options for the country’s councils to help them meet a growing range of costs.

The commission’s draft report was released on Thursday and looks at the funding and financing of local government. It says the existing rates based funding model is fit-for-purpose and should remain. But it says rising cost pressures on local government to pay for infrastructure, climate change, tourism and growing responsibilities placed on them by central government, means councils can’t rely on rates alone to pay for them.

'Value capture' funding; Easier said than done

Funding options outlined in the report include the introduction of special purpose vehicles (SPVs), regional fuel taxes, the establishment of a climate change agency and adaption fund, user pays and accommodation levies for tourism, central government funding for local authorities and what it terms “value capture” funding.

Under the “value capture”, or windfall gains model, property owners would pay a limited capital gains tax based on the return they make on their property because of public infrastructure. The report states:  

“This tool would raise revenue because property owners who enjoy “windfall gains” in their property value as a result of nearby publicly-funded infrastructure investment would be required to pay a portion of this gain to the council.”

It says such funding tools, combined with congestion charging and volumetric wastewater charges, would help give councils the means to fund growth. Both Auckland and Wellington's mayors support the idea, but agree that it wouldn’t be easy to introduce.

“If someone gets a windfall profit on their property through public investment then they should contribute towards the cost of the infrastructure and development that makes it happen,” Goff says.

But he admits introducing it would be easier said than done.

“The devil is in the detail. Council lawyers say there would be a litigation risk involved and that’s the advice I’ve got. You could end up spending a fortune in legal fees.”

Goff says there’s been interest in the idea from successive governments.

“Various ministers have expressed support in principle for it. It would be easier to do with greenfields developments, than brownfields. But finding a way to make it work equitably in practice would be hard.”

And it would require Government legislation.

'You need the legislative framework for it otherwise you’ll get caught up in litigation'

Goff's thoughts are shared by Wellington Mayor Justin Lester, who’s keen to use a windfall gains tax to fund the capital’s proposed $2.2 billion rapid transit project announced in May.

“We’ve already talked about that [Wellington City Council] and it’s been discussed at a cabinet level,” Lester says. “But you need the legislative framework for it otherwise you’ll get caught up in litigation.”

The project, which is expected to use an Autonomous-Rail Rapid Transit (ART), or trackless tram system, would connect the central city to Newtown, Miramar and the airport. According to Let’s Get Wellington Moving, an initiative involving the Wellington City Council, Greater Wellington Regional Council and the New Zealand Transport Agency, the project will also be used to support urban regeneration.

Lester says the Productivity Commission’s report raises a lot of questions and provides a number of potential funding options. He says there’s currently a lack of consistency at a national level on how local government is funded and financed.

“It’s very interesting and confirms what local government has been saying for years, so there aren’t too many surprises there. There are too many responsibilities that are being placed on local government by central government with no funding.”

But he says many of the proposals outlined in the commission’s draft report would require legislation.

Goff agrees the Productivity Commission’s report has provided a number of potential funding options. He says special purpose vehicles (SPVs) and a regional fuel tax have already been introduced in Auckland.

“We created an SPV prototype in Milldale and that’s worked really well. And I understand the Government is now looking at legislation to require all developers to follow a model like that.”

While the idea of the Government funding councils based on the amount of growth in their area also gets Goff’s tick of approval.

“As the region with 55% of the country’s growth at the moment we would embrace that with open arms. That would make a huge difference for us in meeting our infrastructure costs.” 

He says the council’s own targeted rates policy on accommodation providers is currently subject to a judicial review. But the idea of introducing a bed tax in Auckland, like it has been proposed in Queenstown, could also provide council with another revenue stream.

“Our view is if the Government is going to legislate for Queenstown [to have a bed tax] they should legislate for other areas too.”

Vacant land tax also on agenda

The Productivity Commission is expected to present its final report to the Government in November.

The commission is also looking at the feasibility of a tax on vacant land. According to the report Finance Minister Grant Robertson wrote to the chairman of the commission, Murray Sherwin, in April to ask for the inquiry’s Terms of Reference to be expanded to incorporate the recommendations of the 2019 Tax Working Group relating to taxing vacant land. But no more details on the proposed tax have been included in the commission’s draft report.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

72 Comments

Comment Filter

Highlight new comments in the last hr(s).
10
up

Capturing windfall capital gains is best achieved through an across the board land tax ..

... maximum cash for the bureaucrats coffers , for minimum fuss , and cheap to administer .

Most Councils (but not the Auckland Supercity because of Rodney Hide) have the option of switching rates to land value only. It is a good idea because it increases the holding cost for land bankers and decreases the marginal build costs. But it is not a panacea for improving local governments fiscal straightjacket.

Would certainly reduce land/property values across the board. Presume the banks would put massive pressure on the RBNZ to counsel against it as their mortgage loan books would take a severe knock on the back of such a tax being introduced.

Would also mean LVRs would have a go down as anyone buying a home would be taking on a second monthly repayment without a maturity date and which presumably increased with CPI.

That said I agree it's the simplist solution.

"Would certainly reduce land/property values across the board"
I'm not that "certain" at all, since when is anything getting cheaper by adding tax to it

When a city increases the cost of owning land more people prefer to buy in other cities. So the city land tax hike will drive away investment and cause prices to fall.

So what you're saying is that a land tax would decrease the Auckland population… Com'on there are a lot of other factors that make a city attractive or not.
Adding a tax to fuel will make running costs of a car cheaper… yeah right!

Nothing to with population, just saying it will make people less attracted to buying land. People will still be attracted to live here for lots of other reasons, it is a nice country.

Increasing fuel tax makes the cost of owning a car more expensive - less people will buy cars. Increasing land tax makes the cost of owning land more expensive - less people will buy land.

Heads up brah, Orckland isn't a country.

Yvil, you make me smile.

Great : )

Would certainly reduce land/property values across the board. Presume the banks would put massive pressure on the RBNZ to counsel against it as their mortgage loan books would take a severe knock on the back of such a tax being introduced.

The number one reason we don't see more of this, I'd suggest. Banks prefer we pay the tax to them instead of to our infrastructure.

Yes because LAQC's weren't outlawed while National was governing. Meanwhile the vast majority of taxpayers own their own homes and it would be great to try and make them suffer because they are so grahhhhhHHHHHHHHH!!!

The number of adults who own their own home fell below 50% about 5 years ago. And less than a quarter of under 40s.
https://www.interest.co.nz/property/69025/census-figures-show-home-owner...

Adults? So is the rest owned by children?

You may like the sound of that but its demonstrably unfair to individuals. Poor people on big sections with a small home, grandma's 1/4 acre, golf courses, the old estates, flower gardens etc. Meanwhile townhouses and apartments get a free ride.
The reality is that the best way to tax capital gains is just that, to tax capital gains.

It's not unfair given the value the land is receiving from the activities of the city around it. Owners of land are able to sell it and receive that value. And as you note, it encourages more efficient use of land closer in to the city.

It is unfair, it produces winners and losers in a way divorced from the real wealth provided by the asset. Ive given you examples but you can even create situations where you are taxing a net loss which is completely ridiculous. If i have a little land and a big building, and that building losses a bunch of value I can have a net loss but still owe tax.
The fair manor to tax capital is to simply tax capital. Nothing complex, price goes up, pay tax. Saying 'taxing land' is simple is simply a way of hiding that you are actually wanting to engineer the social outcome, distortions be damned.

I really don't think Milton Friedman was trying to engineer social outcomes, distortions be damned.

Currently, we have far less land tax than many other cities that also need to fund their infrastructure. And a bunch of betterment accruing to landowners who need do nothing but sit on it, not invest in it.

Just tax capital, land, buildings, whatever, it doesnt matter, tax capital and you will see prices set outcomes on an even playing field. Land tax on its own is a distortion.
Friedman: "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever possible."... Great?

We want to encourage development and capital improvements on the land, not disincentivise them. One of the beautiful things with land tax is that it doesn't change the amount of land available, it's fixed in supply, it only encourages efficient and productive landholdings and disincentivises inefficient and unproductive landholdings. If you are interested in improving NZs GDP per capita, land taxes instead of all of the other economically destructive taxes like GST and income tax is the answer.

Council: "Pay us for under-developed land on your home of 30 years"
Aucklanders: "OK, I'll knock my house down and build 3 townhouses then"
Council: "Great, that'll be a squillion dollars in contribution funds for efficiently using your land".

Yeah I agree the infrastructure contribution charges are obscene. They should be largely funded by the council through land taxes. That would remove some of the disincentives for development. And development of economically important land (including brownfield development) is exactly what we need.

A high land tax does not really encourage people to use the land efficiently. Instead it discourages all land use, but discourages inefficient use more so than efficient use.

Clearly it's about balance, right. Other global cities do not seem to be short of good use of the land there, while having higher tax than Auckland to help fund infrastructure. No one is arguing for a 100% tax on land value that would discourage all investment on top of land.

What - pray tell, exactly is good use of land? May I ask how you are using your land? Shall we then declare you high lord of Good Land Usage? Will you asses all the land and ensure that its use be good?

When you have a land tax the market decides what the most efficient use of that land is. That's one of the beautiful things about LVT.

That'd be the same market that delivered wage increases in line with housing costs and land supply to meet the demand for housing then, I'm guessing?

Are you arguing that no market works ever? Would that make you a communist?

My point is that markets are extremely effective if there are healthy and responsible rules in regulations around those markets, and the correct incentives are in place.

No I'm suggesting that a reliance on a market to resolve housing issues when the fact we have said issues in the first place is a pretty solid demonstration that *the market* (or whatever crippled version of it we produce, which will still have the same lunatics running the asylum) is bjorked and will continue to be bjorked unless the idiots change who are pulling the levers, or not pulling the right ones, or only the ones that work for them.

The market with the added pressure of LVT is likely to motivate more capital improvements.

Due recognition for actually responding to an egg salad comment like that one was.

It doesn't discourage all use. It brings the price down to a level that is suitable (with the LVT factored in) for the most efficient usage of that parcel of land.

Very easy to set a cut in limit below which a land tax would not apply.

Say 1/2 median council value in an area - would only tax the rich pricks !

Loopholes like that are a bad idea. I can instantly see ways in which the rich will abuse that. It should be flat. Want to pay less land tax? Own less land. It's our most scarce resource. Entirely fixed in supply, it's vital for economic efficiency that land be used and distributed efficiently, instead of having family empires that just sit on it for decades because there's incentives for not using it.

Those two have never met a tax they didn't like.

The late great Ronald Reagan sums it up nicely: “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Bit mean of Reagan to describe farmers such while subsidising them: https://www.latimes.com/archives/la-xpm-1985-12-24-mn-20869-story.html

If local government get to tax capital gains wouldn't that give them an incentive to engineer that capital gains occur?

Certainly yes, and likely youd end up with them effectively taxing the expansion of the money supply.

Giving local government who are also regulators of land supply the power to tax capital gains is head slappingly stupid.

When capital gains takes off will the bureaucrats who supported the idea write another report about how the vacant land tax aimed at capturing capital gains introduced a perverse incentive to poorly regulate land supply?

I understand the reason for the proposed tax, it is though yet another way of making property more expensive, the opposite of what the government wants to achieve

Ha govt is merely people. People owning property want property to be more expensive unless they're trying to climb the next rung for themselves

Yawn. These things have been put forward for years.
This all smells of govt wanting to look like it is doing something, even if it isn't.
BTW, did anyone see Doug Fairgray's critique of Twyford in the Herald?

The Herald is not my local paper so I don't subscribe. What was the gist of the article?

Highly (and rightly) critical of Twyford's ideas around opening up greenfield land to 'solve' housing.
It might have come out of the Herald's 'premium' content by tomorrow

It is a long winded article I wouldn't bother reading. If he was right there wouldn't be a Pokeno and the idea of a train from cheaper houses in Hamilton wouldn't be considered. He has mistaken Future Urban zones for residential zones. The housing crisis has been caused by this sort of flawed analysis by this sort of "expert"

The Rating Act 2002 already gives TLA's the ability to differentiate rates on a wide admixture of characteristics: an extract:

14 Categories of rateable land for setting general rate differentially
For the purposes of section 13(2)(b), categories of rateable land are categories that—
(a) are identified in the local authority’s funding impact statement as categories for setting the general rate differentially; and
(b) are defined in terms of 1 or more of the matters listed in Schedule 2.

Schedule 2:

Matters that may be used to define categories of rateable land
1 The use to which the land is put.
2 The activities that are permitted, controlled, or discretionary for the area in which the land is situated, and the rules to which the land is subject under an operative district plan or regional plan under the Resource Management Act 1991.
3 The activities that are proposed to be permitted, controlled, or discretionary activities, and the proposed rules for the area in which the land is situated under a proposed district plan or proposed regional plan under the Resource Management Act 1991, but only if—
(a) no submissions in opposition have been made under clause 6 of Schedule 1 of that Act on those proposed activities or rules, and the time for making submissions has expired; or
(b) all submissions in opposition, and any appeals, have been determined, withdrawn, or dismissed.
4 The area of land within each rating unit.
5 The provision or availability to the land of a service provided by, or on behalf of, the local authority.
6 Where the land is situated.
7 The annual value of the land.
8 The capital value of the land.
9 The land value of the land.

What's missing, especially at Councillor (and Mayor) level are the obvious:

  • The intellectual horsepower to conceive of suitable schemes capable of achieving well-defined results
  • The cojones to communicate these schemes to the community and gain enough acceptance to weather the inevitable backlash and social media firestorms
  • The vertebrae to actually carry out the proposals once built into funding docs such as Annual or Long-term Plans
  • The persistence to keep the schemes in place for long enough to shape land-use behaviours (which means getting re-elected......)

There is not one TLA in one hundred with Councils which pass all four tests......

Here we go .. how about:

a. Stop profligate speeding, OR
b. Increase rates to reflect the cost of running your city, OR
c. Zone more land [encourage more building] to increase the number of rate payers

Drop Mic.

Base property taxation on a city like Boston & you’ll have the rich side of town paying the property taxes they should’ve been paying all along
Aucklands leafy suburbs & coastal enclaves have been undertaxed forever
No wonder the super city is super indebted
It won’t happen because the rich side of town is embedded in both the National & Labour party’s

Hahahahahha you think the rich side of town doesn't also own the poor side of town¿ Who the heck owns it then?!

So Councils would gentrify their cities just to squeeze tax out of people who own a dwelling. Excessive money printing is encouraging this behaviour. What happens when the Councils make bad decision and decrease property values? Do the owners get a tax refund from the Council?

The underlying problem is that decades of mismanagement by Councils somehow needs to be made up for by taxing the life out of the city.

All this is is Goff and Lester looking for more money to fund their Grand Designs. Where very few expensive buildings are built so they can put their name on it.

ABSURD.
I expect far better from the Productivity Commission - stop tinkering at the edges. NZ needs their technical leadership.

1) The simplest and proper way to provide additional funding is simply to allow local government to be allowed to charge rates on central government. The PC should have had the gumption to say so and make it a recommendation. Stupidly this was explicitly excluded from the PC scope. Just like the capital gains tax scope not allowing capital gains on the home.

2) No regional fuel taxes. Auckland, Wellington & perhaps Christchurch can have congestion tolls to manage travel demand & defer/delete expensive future infrastructure & provide funding. A flat nationwide fuel tax can cover the rest.

3) No bed taxes except places like Queenstown where the tourist numbers exceed the local population substantially. We already have the proposed tourist levy.

4) No value uplift tax - it piecemeal and difficult. The proper way to do it is to have a land tax - i.e. force councils to rate on land value only (or central government does) and local government taxes on the improvement value only. All the uplift value around stations is the land value (i.e. you could rebuild the same structure at the same construction cost).

5) Where is the recommendation to require local government to undertake proportionate business case & regulatory impact assessment analysis on all spending???

Soon the average home owner will have to pump petrol on weekend as 2nd job to pay for his/her annual rates bill!

This is why it is so much better to live week to week, paying rent and never falling into the trap of being a homeowner like Shamubeel Euqabe.

I think he bought a house at the peak of the market mid 2016

Me? I sold up in Auckland back in 2015

Yay! another tax! Also how about taxing the number of windows you have? KiSS. 1% Financial Transaction Tax.

No New Taxes!

When prices are dropping what land value increase?
I live on the Shore so there are no projects. Phew. Wait for those in Manukau and Henderson to scream!

...which is why these changes should only be grandfathered in to allow for infrastructure built after these areas have the same access to things like Rapid Transit that the Shore already does.

Grandfathering!!!! OMG. Ok, what is the date? Who misses out?

Folks,
$80K haircut-

2/32 Patteson Ave., Mission Bay. sold for 1.07 million on 2016. now asking price 0.990 million.

cheers.

Mayors agree to get moar tax dollars!.......... how unexpected¿

If you're old I suppose you'd be happy running the city on borrowings for the next generation to pay. You not only avoid paying the societal cost associated with your property, but you get to enjoy higher property values because of the lower taxation on it

I'm not happy that my area has chronic under-investment for the amount of housing going in, but when it does finally get the infrastructure that's badly overdue, I'll be taxed again on it. At some point, you're just basically pulling the ladder up after the inner-city and wealthy areas have already had their values uplifted from the infrastructure they got before everyone else, while fighting tooth and nail to reduce any prospect of further intensification in their area.

You've got it backwards. Higher land taxes makes the ladder lower. The properties are more affodable to purchase which means less debt against the land. It's pretty much a transfer from interest to the banks to taxes to the local authority. I'd far rather the local authority get it than the banks. That way it gets spent on improving the city rather than just going off to Aus.

Also, all land in the city gains value from the growth of that community. That's why all landholders in a city should participate in funding of the infrastructure and maintenance of that city. Landholders are the beneficiaries of the development of the city. And the fact that the tax is levied against land values also directly measures how much the land is benefitting from the growth of that community. It really is such an elegant solution.

Is the local authority going to actually spend money in the area? Or is it just going to restrict the supply of land, watch the prices increase and collect the tax on the *uplifted* value? Compare and contrast what the inner North Shore or the Inner Isthmus gets in infrastructure as a baseline to what West Auckland gets. West Auckland gets slugged with an uplift tax to simply achieve the same access to services that other areas already get, after funding the infrastructure other residents benefited from. But of course, because the land supply is artificially strangled, there's no consummate reduction in the purchase price of the properties in North West Auckland; because all the systems you're going to relying on to deliver efficiencies can actually produce effectively is shortages.

But sure, the same idiots and problems that got is into this jam are *suddenly* going to come right if we just adopt a land tax or whatever. I'm sure the council will just magically stop hiring more and more people too. And Duncan's horses will just magically stop eating each other while we're at it.

The only, only way I can see this working is to have land taxes are levied lower rates in areas with less access to services (see: South/West areas taking on most of the housing development burden); I can't understand why people in Massey should be taxed for not intensifying given that Grey Lynn and other inner city suburbs refuse to on 'character' grounds.

Why would restricting the amount of land available to the public generate more revenue? They would likely make more money from liberating more to the private sector.

The more they spend on an area, the more valuable the land, the higher the revenues, there's good motivation there. If you really think the council is motivated by revenue the same way individuals are.

But that's not how it works. Look at Hobsonville Pt. Tiny pockets of land. Public transport is a meandering bus that sits in SH16 traffic and a ferry that didn't run on weekends until about four months ago. There is no relation between Council services and the price of land there, the main driver is the lack of any available land under current planning rules that is any closer to the City. The driver of the price isn't the services, it's the strangled supply of land.

Ha read between the lines. Govts both local and central are broke, as they are merely representatives of the collective, society is broke and up to its eyeballs in debt (not only in monetary terms). But hey as long as a few individuals are "rich" it's all good, we can solve the problem with a capital gains tax, we can keep consuming and polluting and we can all be "wealthy". Mwaaaahhh. Insanity. Hubris at its finest.

The Chappy who heads the commission is an insular one eyed bureaucrat, that has bought into the lies of Neo Liberalism and seeks to create poverty in NZ. If anything should be disbanded by this government - it is this commission. I dont normally get passionate about people - but this person - and I have met him - is so divorced from every day reality that it is eye-wateringly challenging to talk to him on a real level.

Actually - the best way to tax to fund meeting the building of infrastructure is a poll tax. But a modified poll tax so its based on the ratio of heads permanently accommodated on the land unit, by the size of the land unit - so more intensively used land for housing is taxed at a lower rate than low use land for housing - reflects the cost of running infrastructure out to the suburbs, and the efficiencies gained from infrastructure serving reasonable areas of population density. - perhaps with a reducing benefit at a certain level to reduce the chance of slum creation or high rises etc

Typical Labour thinking, more tax.
It is high time they were both voted out, Lester will be gone soon.
As others say, councils need to curb their spending.
I don't want a trackless tram, was never asked and yet will end up paying for it.