Tax Working Group proposal for vacant land tax that was referred for further investigation by Finance Minister Grant Robertson has been given a firm thumbs-down

Tax Working Group proposal for vacant land tax that was referred for further investigation by Finance Minister Grant Robertson has been given a firm thumbs-down

The idea of a vacant land tax has been torpedoed by the Productivity Commission in its final report on local government funding and financing.

In essence the commission has decided that a vacant land tax would ultimately prove to be a tax on new housing and would have harmful effects.

The decisive thumbs-down for the tax given by the commission means the idea is probably now dead and buried - at least under this Government.

The land tax was one of the key proposals put forward by the Tax Working Group in February - although of course this particular tax was overshadowed by the proposal the TWG for a Capital Gains Tax.

CGT was ruled out by the Government, but  Finance Minister Grant Robertson subsequently referred its recommendation for a vacant land tax to the Productivity Commission to consider in its report.

 It was one of only 10 TWG recommendations he in April classified as a “high priority” in the Government’s tax work programme. (The TWG made a total of 99 recommendations, including one to extend the taxation of capital gains, which the Government dismissed).

Both Treasury and Inland Revenue had been against the idea and with it now receiving the thumbs down from the Productivity Commission that would likely appear the end of the matter.

The overall report

In terms of the report as a whole, the commission says it has focused on targeted solutions that do not compromise councils’ autonomy or accountability.

Meanwhile though the body that represents local councils, Local Government New Zealand, is lamenting "the lack of courage" shown in the commission’s final report, saying that while it makes many worthy recommendations, its play-it-safe-approach relegates the report "to a mere repeat of the nine rates reviews that have preceded it since 1945". (See full LGNZ release at bottom of the article)

The commission has found that payments from central to local government are justified in some circumstances, and that co-funding will be needed to help some councils deal effectively with the challenges they face. The report sets out guidance about when costs should be shared between local ratepayers and general taxpayers.

It recommends central government co-funding to help councils redesign and possibly relocate infrastructure at-risk from climate change, as well to assist small, rural and low-income councils upgrade their three-waters infrastructure. 

It says the Government should actively encourage aggregation of council water businesses and better governance arrangements. It should also consider having backstop arrangements to deal with councils that fail to lift performance sufficiently to meet minimum health and environmental performance standards.

It also says the Government should place water providers under economic regulation when and where doing so would improve investment performance and minimise costs. 

The Government should legislate to enable any council-owned water provider, incorporated as a council-controlled organisation, to directly charge water users for their services, with provisions similar to those applied to Watercare in Auckland. The Government should legislate to enable councils to set targeted rates for wastewater on a volumetric basis, just as they can set volumetric targeted rates for the provision of drinking water.

Rates

The commission says the Government should work with local government and suitable financial providers to develop and implement a national scheme for postponing rates. The scheme should have a single set of clear and generous eligibility rules, be accessible and have provisions that are easy to understand and work with, have moderate and transparent fees and be nationally promoted.  

The commission says many councils can make better use of their existing funding tools. Improvements to organisational performance, transparency and decision making can also help to relieve cost pressures. Spatial planning would also help to coordinate council efforts as they plan and respond to the various stresses, both regionally and with central government.

Special Purpose Vehicles

The commission also says the Government should expand the use of Special Purpose Vehicles to finance investment in growth infrastructure in fast-growth local authorities that face debt limits. It says, f needed, the Government should promote legislation in Parliament to enable the placement of debt-servicing obligations on existing as well as new residents who will benefit from the infrastructure. 

The report makes 44 recommendations (page 301 to 320) to deal with cost pressures, and to better align council and ratepayer interests.

The commission says by far the largest item that can be estimated is the cost of the Commission’s proposals to help councils whose assets are threatened by climate change. Central government’s share of this cost could be in the order of $150 million per year for 20 years. 

The vacant land tax

On the vacant land tax (discussed on pages 189 to 194 of the report), the commission says that on the surface, taxing vacant properties may seem appealing, especially to address inefficiencies and inequities arising from land banking.

"If the tax were to prompt land bankers to reduce their holdings, this would seem to increase the supply of land for housing," the commission said.

However, the Commission’s research and analysis had led it to conclude that while vacant-land taxes could help reduce land banking and increase housing supply in the near term, these effects "are likely to be small and transitory".

"Indeed, over several years, such taxes would likely prove to be taxes on the development of new housing and have harmful effects. They would likely reduce housing-supply responsiveness by reducing developer flexibility and risk-taking, which is the opposite of what is needed in New Zealand."

Raising costs

The commission said the main effect of imposing the tax is to raise the cost of holding vacant land for developers (or other landowners) who would therefore reduce the amount they choose to hold.

"Selling off the vacant land they no longer wish to hold would give a small and transitory boost to housing supply, but it would not solve the undersupply of housing relative to demand in New Zealand." 

The commission says beyond the "first-round effect", vacant-land taxes would likely reduce the responsiveness of housing supply to changes in housing demand, exacerbating the underlying problem with New Zealand’s housing market.

"The taxes would likely shift the scale and timing of steps in the development process from their before-tax chosen settings – choices that are likely to be efficient. For example, a smaller stock of vacant land after-tax might entail converting farmland in inefficiently small chunks and holding inefficiently small inventories of vacant land to cope with demand fluctuations. These inefficiencies will raise risks and costs for developers with knock-on adverse effects for residential development and house buyers."

The property development process and how it interacts with demographics, the construction sector, other economic forces and the market in existing dwellings is a complex, evolving system, the commission says.

'Not a cure'

If housing supply is not responding to housing demand and this is causing harmful land and house price inflation, then that may be caused by any number of variables in the system.

"The Commission’s investigation strongly suggests that the problem will not be cured with vacant-land taxes."

More likely causes of an unresponsive housing supply include poor land-use regulations or slow infrastructure provision.

"These can restrict the ongoing supply of usable land, push up land prices and increase development costs. Imposing additional taxes on development through vacant-land taxes is not going to counteract these effects and will likely exacerbate them."

The commission's official recommendation is that the Government should not further advance the idea of implementing a vacant-land tax. Councils should tackle the problem of lack of housing supply by reducing regulatory and infrastructure barriers to development. 

This is the full Local Government NZ release in response:

Prod Comm hamstrung by playing it too safe

Local Government New Zealand (LGNZ) is lamenting the lack of courage shown in the Productivity Commission’s Local Government Funding Report, saying that while it makes many worthy recommendations, its play-it-safe-approach relegates the report to a mere repeat of the nine rates reviews that have preceded it since 1945.

“The report underscores the well-understood point that property rates are an efficient mechanism for charging and collecting local government taxes. We don’t disagree, especially where councils are operating in a stable environment,” said LGNZ President Dave Cull.

“But we’re not in a stable environment. In 2004, Stats NZ predicted our population would hit five million people by 2050, but we’re on track to hit that number in 2020. That’s 30 years ahead of schedule and our critical local infrastructure hasn’t kept up with this growth.”

Mr Cull noted a major reason for this is because rates confronted local communities with the costs of paying for growth infrastructure upfront, whereas the short-term tax benefits of population growth wash up exclusively in central government’s coffers in the form of GST, salary and profit taxes.

LGNZ has long argued that local government’s revenue tools need to be broadened and linked to the economic cycle, either through a share of GST, local capital grants, resource rents, or tourist taxes.

“We’re not calling for rates to be scrapped, but for this mainstay of local government funding to be augmented with revenue tools that give communities a clear reason to vote for pro-growth initiatives. Until we tackle the political incentives at the ballot box created by the rates system, New Zealand’s infrastructure will continue to fall behind.”

“That’s what makes the Productivity Commission’s endorsement of the status quo so disappointing. If the Government entity charged with coming up with bold new ideas for New Zealand can’t think courageously, then who can?”

“They’ve played it extremely safe, and haven’t left an inch to try something different at the margin - the irony being that only by trying something different can we find new and innovative ways to be more productive as a country.”

The local government peak body welcomed many of the suggestions put forward about how councils can lift their performance, noting that much of it was already in train through LGNZ’s work programme.

What was less certain was the Government’s willingness to accept the recommendations in the report as they relate to central government, particularly on the need for central government to tally up the invisible costs it imposes on ratepayers through the legislative process.

“We’ve been highly critical of central government’s unfunded mandates for years, and economists and governance experts up and down the country all agree that government should at a minimum disclose the costs they impose on ratepayers when making laws,” said Mr Cull.

“But as vocal as we’ve been on this issue, we’ve seen successive governments simply refuse to be transparent this. The challenge on Ministers Robertson and Mahuta – as sponsors of this report – is to have the courage to finally grasp this nettle.”

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?

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51 Comments

10
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Just keep it simple and make it a flat land tax for all holdings. 2% would do it.

Pressure on landholders to utilise their land productively and efficiently would definitely increase housing supply and reduce rents. Use some of the money to reduce income taxes and GST and actually reward economic activity and work instead of simply rewarding monopolising our most important natural resource.

It feels like a lot of the comments there are intentionally obtuse to not understand the implications of land tax, as if it was said by vested interests. "It is difficult to get a man to understand something, when his salary depends on his not understanding it.” - Upton Sinclair

The bit arguing against a vacant land tax doesn't make sense. Why would it have "over several years, such taxes would likely prove to be taxes on the development of new housing"? Their arguments don't stack up. If land is purchased for development, then it is not vacant land until any development is stopped and it is no longer applied to another use, i.e. grazing. The small packages of land commentary is just gobbledegook.

Just have a clear definition of what "Vacant Land" is for the purposes of development and taxation. Thus land purchased and set aside for residential development cannot be held indefinitely with no progress.

11
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More like Torpedoed by large scale developer lobbyists, who have captured the future supply market.

The nobbies and muppets that came up with this torpedo are just part of the yes minister crowd, and need to get a real job.

There is a very big "if" in your argument - "If land is purchased for development". The effect of a vacant land tax is to increase the cost of holding land for development and in so doing persuades some developers not to purchase land in the first place. Obviously preventing some competition for land supply brings down the cost of land to developers who do purchase. However since developers never pass on their cost savings to the consumer - less developers active and developing less housing in a marketplace means the price of housing goes up irregardless of whether the cost of development has fallen. A vacant land tax is a way of driving some developers out of the market and makes the remaining developers more profitable by increasing the price of housing.

I disagree. If a developer purchases land, it would then be reasonable to expect he would go into a planning phase which would then lead to consents and on to building. this should in effect be easy to demonstrate that it is happening, so would not constitute 'vacant land'. That is what i meant in my other comment about defining what 'Vacant Land' constitutes. Such a definition should cover off such issues of planning (must be progressing), consenting, and then actual building. While land may appear 'vacant', much could be happening in the background to progress it's development. But a developer not doing anything for an extended period of time to effectively 'bank' the land would then be at risk of incurring additional costs. I would consider each of these steps to be reasonably easy to demonstrate.

such a change would not keep smaller developers out of the market. It would just require that they be organised. Mostly it would treat all developers the same.

Lots of sections in Ak can be subdivided now. Would you tax these places prior to them being subdivided? Force the people who own them who do not have the ability, desire or finances to be able to subdivide, to pay more tax? What if they are very steep sections and very expensive to build upon? Would you put a vacant land tax on them? What if someone wanted to subdivide but no bank would loan them the money to do so because the costs of subdivision would be huge? Tax those people?

No, why would you? You are imposing a perspective on others that they may not agree with. Older models of subdivision were based on 1/8 acre and even 1/4 acre in some areas. Besides - how can you claim that the property was purchased for subdivision and is effectively being land banked? You are making too many assumptions that are flawed. As to your last question, then their project would not go ahead. The tax would be on people holding back land that could and should be subdivided or developed. Close to your position would be someone who buys an empty section, as per an initial subdivision, but then doesn't develop and build on it - this should be taxed. Have heard in the past where someone has purchased land to prevent it being subdivided, protecting it or a feature in someway. there may be a need in the rules to recognise this in some way.

11
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And, of course, making an exception for new developments would be completely impossible. It would entail adding an entire additional sentence to the legislation. Alas.

Indeed. Reads almost as if it's acknowledged it would work, but we don't want to recommend it so...

Gosh, well done the productivity commission. Who knew that anti-capital taxes might have adverse effects? Does this not rather challenge the anti-capitalist findings of the sacred TWG, chaired as it was by a chap who thinks anyone who earns more than him is a "rich prick"?

Land isn't the same as other forms of capital. It's fixed in supply.

Not entirely true. For all practical purposes, apartments and multi storey office blocks create acres of new land just where it is needed.

For all practical purposes, NZers don't use land efficiently

Taxing land will not make its use more effective. The rather crazy interest in property and the horrid increase in prices is not NZ specific. It is a global phenomenon, with US being somewhat an exception. People love to point out that is is credit availability and QE that has led to this. Sure. No credit, no absurd increase in house prices to seriously unaffordable levels. However, this is the somewhat undesired outcome of an underlying issue: there is no economic potential to invest in in the developed economies (except US to a degree with their super advanced tech industry).
This will mean that all the money that is made available (hoping to propel the economy i guess) ends up in the only place that it really can: property. If your objective is to reverse this trend, you can more effectively close the credit tap. But then you will have to face the consequence of that: stagnation and decay and a significant loss to average NZer quality of life.

The average NZer is experiencing poorer quality of life anyway by paying higher living costs

The productivity commission seem to do a lot of good, detailed work. Their reports are far too long winded for me, I think I went as far as page 20 in one of them, but it was all introduction that to me should have been in an appendix as background material. However, the issues they wrestle with are central to how NZ has stagnated and become reliant on a business model of continual shareholder dilution based on a yearly increase in foreign ownership of NZ assets (producing assets and debt). The way forward is to give priority to the alternative business model of actually running at a profit, thereby increasing shareholder value. The shareholders in this case being NZ residents. Changing the emphasis is a delicate process though, as the effects of each change are somewhat unpredictable.

I think they're coming at housing problem from the wrong angle. As this article mentions "A vacant land tax would ultimately prove to be a tax on new housing and would have harmful effects".
Better solution: Tax Empty Homes! We know how many vacant homes we have from the 2018 census. For our large cities like Auckland, it's already at outrageous levels in comparison to other large cities around the world that already have an Empty Homes Tax.

Auckland has 39,393 empty homes, that's 15 x more empty homes than Vancouver did before they introduce an Vacant Homes Tax a few years ago. Vancouver found that it had 2,538 vacant properties and made a huge amount of revenue in their first year of the scheme, triumphantly bring in $38 million by taxing vacant homes at 1% annually of their property value. Can you imagine how much revenue a similar scheme would bring in if it was introduced for Auckland's city and commuter districts, it would be HUGE!! :)
And that new revenue could be used for new builds for Kiwibuild etc.
An empty homes tax is certainly worth introducing for our larger cities and would suggest running a pilot version in Auckland first. Here's an article on Vancouver version: Opinion: What Vancouver’s impressive Empty Homes Tax revenue tells us. https://www.vancouverisawesome.com/opinion/empty-homes-tax-vancouver-rev...

Queenstown would be an even better case study, I suspect, if using census data as all of the short term/tourist rentals would be captured. Seems to me to be better than a tourist tax.

Yes that could work as long as the properties are vacant for longer than six months within the year.

There are lots of vacant rundown houses dotted around Southland here. Nobody wants to move into them. So you would charge a land tax on them to make them even more worthless? negative worth?

No just in major city commuter zones where empty homes really push up house prices and exclude wage earners.

Why stop there?

What about all the empty bedrooms in houses? Or the empty beds in partially occupied rooms?

What about all the beds that are only slept in for only 8 hours a day?

All this is ambulance at the bottom of the cliff stuff.

Unwilling to upset any voters in an election year, and unwilling to make any effort to address the problems they were voted in to solve.

Spot on

You realise this was a government department that wrote the report, you know the people who aren't politicians?

And it was Grant Robertson who asked them to investigate further, against the advice of both Treasury and IRD?

So many lies. They say the vacant land tax would disincentivize new building - but what the reality is, is there are a few big players who buy up all the land around cities that eventually are re-zoned into residential - and those big players make BOATLOADS of money off the development of that land. A vacant land tax would EAT into those profits, so no way is that going to happen. It should read:

A vacant land tax would mess with the business model of a few vested interests in the property game in NZ, so they had a word to us and we changed our minds, but we won't tell you people that because we believe you don't know s***.

Taxcinda has the solutions to all of the problems.... she thinks she does and she told us so. One out of every three voters even believe that. The Nats had no clues for the pike river recovery and pike river 2 is going so well for this lot, it's funny watching nash squirm while the poor families are being dished up bullshit answers.

Taxing things tends not to make them cheaper

With land it does because it's fixed in supply.

Communism also works in theory. I’m withTreasury, IRD and the the Productivity Commission on this one - bad idea. Taxes distort the market and lead to inefficiencies.

Indeed, and putting too much of the tax on to productive labour is disincentivising entrepreneurship. Time we reduced some of that and leveled a little on land instead to balance things out and reduce the distortion in the market for productive enterprise.

It is no more fixed in supply that most other earth resources we use. Most of the restrictions are man made ie zoning restrictions.

True if you're talking about a tax like GST or stamp duty. Completely false if you're talking about an ongoing tax to own something, as in this case. An extra cost to own something drives down the purchase price, all things being equal - would you be willing to pay more for a piece of land with no carrying costs, or an equivalent piece which costs you 2% every year?

In the long run it would increase the risk and costs incurred by developers, thereby reducing supply of houses and increasing prices. From the Productivity Commission “Indeed, over several years, such taxes would likely prove to be taxes on the development of new housing and have harmful effects. They would likely reduce housing-supply responsiveness by reducing developer flexibility and risk-taking, which is the opposite of what is needed in New Zealand.“

Let's simplify this to a simple land tax. Make it 1% of its value at a certain date per annum, for say a decade, for a start. Then let's see.....
How hard can this be?

The case against the vacant land tax is pretty simple. Suppose NZ brings in a land tax/vacant land tax and a developer has $x millions to invest in developing land. Will the developer?
A- Risk developing in NZ and expose themselves to high taxation.
B- Develop anywhere else.
Well done the productivity commission for being able to spot the obvious.

Missing the obvious is what commenters on this site do best. “Taxes make things more expensive, but developers are different!” (No they aren’t)

But if they are developers, they are developing it- right? Not keeping it as vacant land.

Suggestion: Annual Land Tax of 10% of a LANDS Rentable Value would be appropriate. This would apply to both vacant and built upon lands [not structures].

Labour are fools, deriving almost all government funds form Businesses and Workers - the very people they claim to be for.

I can understand torpedoing the Capital Gains Tax, maybe even not having a stamp duty - BUT, this is a poor decision. Businesses and Workers are shouldering a huge tax burden and this decision is not welcomed!

All National need to do to be elected government .. could be .. offer tax cuts and promise to introduce a Basic Land Tax. Blame the Land Tax policy on Act and watch both parties gain in the polls.

Great way to stuff up the housing market beyond all recognition. Although it doesn’t go as far as TOP’s insane proposal - they want to tax all major assets annually.

Firstly this is about a report that a government department wrote after being requested by Grant Robertson to investigate it further, against the advice of Treasury and IRD.

Secondly there's no indication what the government thinks about it. They haven't said whether they're going to support it one way or the other.

If this government does take the recommendation of the report, it would be very surprising if National were to go against it as well as IRD and Treasury who don't want this tax.

"Vote for us, we WILL sort out the housing problem,
- we'll build 100'000 affordable homes
- we'll reduce immigration substantially
- we'll look at introducing CGT, VLT and other taxes
We WILL sort out housing"

As opposed to National's one trick pony of "We will sell off NZ to the highest bidder". The Nats certainly have shown us that they don't really give a rats ass about creating a false economy that locks younger Kiwis in to a life of mortgage loans that they can't pay back, or locks out of the property market altogether.

At least it's honest and not misleading

LOL National honest! What by allowing blatant money laundering to shove up house prices out of the reach of wage earners.

Er, yeah it was: https://www.scoop.co.nz/stories/PA0708/S00336.htm

John Key campaigned on addressing the housing crisis (above) then turned around and pretended for the next nine years that no such crisis existed. That's dishonest and misleading and unfortunately rather too cynical.

Well, I voted for TOP .. but yeah, people did swallow Labour's half-baked lines.

As many as one voter in every three voters believed in the unbelievable.... crazy winston got labour over the line.

To all the commenters here - am I beginning to see a trend in the comment stream where there appears to be an underlying assumption that if you own property, even if it just your own home, then you are considered wealthy?

The calls for a land tax seem to reflect that? This is possibly a development from the current situation where residential property has become increasingly unaffordable for many, on low and median incomes (including boomers). If this is so then i suggest you re-examine that position as it is based in resentment, and blames a perceived beneficiary but not the true cause.

The owners of property are not at fault here, it is successive Governments who have put their collective heads in the sand to avoid having to recognise and do something about a risk to Kiwis basic living rights. Even this Government persists in tinkering on the edges, doing no more than other Governments have already tried, and failed at, while avoiding doing something that is specifically targeted at making accommodation costs affordable for all.

I would agree, but I think it's more the case that people that don't own their own home are raging against those that own more than one. I don't know anyone that rents that has a beef with someone who owns just the one home they live in. Being an owner-occupier is a goal that most New Zealanders aim for.

What I've never understood is, why, when a New Zealander has enough money to invest, they choose to purchase a residential property over all the other forms of investment.

Was it only because the returns on investment far out-performed all the alternatives?
Was it the perception that owning multiple properties was a more obvious display of wealth?
Was is that the weekly/monthly rent payments into your bank felt more real?
Was is that property is far more easily leveraged to buy a new car or boat?

Most of these commissions, and everyone's effort in reply is over rejected solutions that would not be needed if the problem was not created in the first place.

Allow a presumptive right to build up and out, with land environmentally sensitive lands, future highway designation, public lands etc. ring fenced, and then there would be no need to worry about land banking as there would be no financial benefit to do so.

This also leaves the opportunity for purchasers to buy into developments that have covenants of the development density that they prefer.