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Auckland Council's economists investigate the idea of changing the rating valuation process to focus solely on land values

Auckland Council's economists investigate the idea of changing the rating valuation process to focus solely on land values
from the New York Public Library

By David Norman and Shane Martin

• The covid-19 pandemic has impacted employment and preferences about where people choose to live or work.

• Auckland Council has requested that the three yearly revaluation of properties be delayed a year to allow the re-establishment of the market. At current low sales volumes post-pandemic it is extremely challenging to show the medium-term trajectory of the market or credibly revalue properties.

• Auckland currently uses a capital value (land value plus improvement value) based ratings system to collect property rates. The variable component of the rates bill is based on the capital value of the property.

• Given the accelerated change in how people live and work, the challenging financial environment that councils are in from the covid-19 shutdown, the timing of the property revaluation process, and the incentives to more efficient use of land that a switch would provide, one option may be to switch to a land value based rating system.

• A land value based system would see around 59% of Auckland households pay less in rates.

Auckland’s changing patterns

The lockdown, aimed at preventing further spread of the covid-19 virus, brought much of the city to a halt. Up to 40% of economic activity could not occur under Level 4. At the same time, thousands of office workers who had previously faced the daily commute into the city centre suddenly had no option but to work from home. Technological deficiencies were unearthed and dealt with as a matter of urgency.

With open homes cancelled, people staying in their bubbles, and less job security, house sales plummeted by 70% in April compared to a year ago and remained down almost 50% in May. This makes it hard to infer any medium-term patterns from these sales data, much less infer the value of the entire housing stock.

Back at Level 2 and Level 1, workers travelling into the city centre have reduced. Many office based businesses have chosen to adopt a model that includes more working from home and a smaller office footprint. Workers’ preferences for warmer drier homes will also likely strengthen now that they are spending many more hours in them.

These potential changes mean it makes little sense to undertake a property revaluation today; leaving this until we have a better understanding (and more data) on the new economic realities is likely to deliver more credible valuations.

But the impacts of the covid-19 lockdown are widespread. Auckland Council is not immune from these challenges, with an estimated hit to revenue of over $500 million. This means more than ever, pressure exists to deliver development that uses existing or new infrastructure capacity efficiently, and maximises the number of homes the region delivers to house Aucklanders.

Capital based vs land based ratings systems

Auckland’s current property rates system uses capital values (CV) to determine the variable component of a property’s rates bill. This approach, is widespread in New Zealand, but does not incentivise the most efficient use of land. Land owners who use land efficiently by developing on it, pay higher property rates, because the more improvements you add, the more you pay.

Another challenge with a CV based rates system is that because it does not incentivise land development, it creates less certainty about when development contributions and additional rates revenue will be received by councils. In times of financial challenge, the right incentives need to be in place to encourage uptake of new infrastructure soon after it is put in place.

In summary, a land value (LV) based rates system approach has several strengths:

1. It incentivises efficient use of land and doesn’t reward those who do not develop their land.

2. It is easy to administer.

3. It is difficult to evade.

4. It doesn’t distort production in the economy – land is fixed and a tax on it won’t mean less of it is produced.

5. It better aligns timing between infrastructure provision and take-up of that infrastructure.

6. It is progressive. Those with more valuable land pay more.

Who thinks this is a good idea?

The economic advantages of an LV based system have been understood going back at least as far as Henry George, a 19th century economist.

In New Zealand, support from economists for an LV based tax is widespread because of its advantages. An LV tax was favoured by the Tax Working Group that the 2008-2017 National-led government instituted and is favoured by a wide range of academic and think tank economists from the left and the right.

Internationally, support is strong for an LV based tax as well. Here are a few quotes:

• The Financial Times: “In theory, it is not just an excellent tax but the best of all possible taxes. Once the initial valuations have been done, it is phenomenally easy to collect and all but impossible to avoid. It also discourages speculation and stops in its tracks the endless cycle of investment in land and property purely to rent it out. It promises no more property boom and bust. But, as it is not collected on any improvements made to land or to buildings on land, it does not discourage productive activity. Instead, it encourages people to bring idle land into use, to improve land they own and to be as productive as possible.”

• Mirrlees Review of the UK tax system published in 2011: “Taxing land ownership is equivalent to taxing an economic rent—to do so does not discourage any desirable activity. Land is not a produced input; its supply is fixed and cannot be affected by the introduction of a tax.”

• Lincoln Institute of Land Policy: “After surveying the experiences of taxing jurisdictions around the world, we conclude that LV taxation is more than an intriguing and attractive idea. It is a form of taxation that has actually worked since the nineteenth century at national, state and local levels of government… Proposals to tax LVs more heavily than improvement values can find support in both historical experience and economic theory.”

If it’s so good, who uses it?

Several jurisdictions overseas have adopted a rates system based on LVs. In fact, more than 30 countries have some experience with separately estimating LV and taxing it, including New Zealand.

In New Zealand, LV rating was used to some extent in the former Auckland councils of Waitakere, North Shore, Rodney, and Papakura. On amalgamation, a requirement was put in place that until the 2012/13 year, CVs were to be used.

Overseas, a number of developed economies use an LV based tax system to varying extents.

Pure land tax systems

• Denmark
• Singapore
• Taiwan

Land taxes with other objectives

Some Australian states have used land taxes. e.g. NSW and Victoria. The objective appears to be to tax speculative investment on multiple properties, rather than encouraging the best use of all land. In both NSW and Victoria, the primary residence has been exempt from an LV based tax.

Mixed land value – capital value tax systems

In Pennsylvania in the United States, several municipalities use a mixed tax that applies a higher rate of tax on land, and a lower rate of tax on improvements, the so-called “two rate” system. This mix appears to be a compromise, with the tax rate on land being 1.6 times to 44 times higher than on improvements, with most in the range of four to seven higher than on improvements.

The biggest challenge to greater uptake appears to be political. The Economist magazine puts this well:

The bigger barrier is political. LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations.

In Pittsburgh, for example, after a review of LVs that saw strong increases in the value of some land, political controversy ensued. The entire land tax was disestablished after lobbying from those with valuable land. New Zealand councils are fortunate in having a well-established revaluations process, and a robust process for those who wish to contest property valuations.

Is there proof that a LV tax works better?

Theoretically, the argument in favour of an LV system over a CV system is easy to make. But can we show that an LV system encourages more of the much-needed development than would be the case if CVs were used within the same jurisdiction?

The Pennsylvania experience is helpful here. A study of 15 municipalities with two-rate systems and 204 municipalities without, found that two-rate systems had higher rates of construction.

A separate study of Pittsburgh and economically similar cities nearby showed that Pittsburgh experienced a sharp rise in building activity relative to comparators despite its falling population in the 1980s. One factor explaining this difference was the introduction of an LV oriented tax.

But Auckland is not Pennsylvania

LV oriented tax systems have worked well in a US state that experienced slow growth over the 14 years analysed – just 0.2% per year on average across Pennsylvania during that period. Meanwhile, Auckland grew by around 2% a year over 17 years.

If anything, this implies that an LV ratings base would likely be more effective in encouraging efficient land use in Auckland than in Pennsylvania. Growth in residential LVs has likely been higher in Auckland given its relative growth rate, and certainly much faster than growth in improvement values. This makes the skewing of the current tax system in favour of under-used land all the larger, which a switch would overcome.

The Pennsylvania study also provides some scale to the question of how much incentive a switch to an LV based system might offer. Notwithstanding the earlier comments that the incentives to develop under-used residentially-zoned land through switching to an LV based rating system are likely to be higher in Auckland than in Pennsylvania, that study does provide some sense of the scale of the likely change. In Auckland, a further 650 dwellings could be consented each year, on top of the average of 14,800 consented in the year to April 2020, assuming the supply elasticity of a change in tax regime estimated in the Pennsylvania study. This would be an increase of 4.4% in dwellings consented each year in Auckland.

Two further idiosyncrasies in Auckland

In Auckland today, those who use residentially-zoned land for farming purposes are given a discount of up to 20% off their residential zone rates. The rationale is that these land holdings don’t use the services that developed properties do. But the infrastructure services have to be there regardless of whether the land owner chooses to use them.

Further, residentially-zoned land in more rural oriented (as opposed to rurally-zoned areas) areas receive a 10% discount on their rates, the argument being that they don’t have access to the same level of services that urban residentially-zoned areas do. Economics counters that while it is undoubtedly true that land in rural-oriented residential areas have access to a lower level of services than those in urban residential areas, this is already reflected in lower land values.

In Auckland, the largest 0.1% of properties zoned for residential use but used in less efficient ways (farming or lifestyle) accounted for almost 8% of available residentially-zoned land in 2020.

What a switch would mean for Aucklanders

We analysed the impact of switching from the current system that uses a mix of uniform general rates and CV based rates to a scenario that:

1. Assigns all rates based on LV
2. Removes the 20% discount for using residentially-zoned land for less efficient purposes
3. Removes the 10% discount for residentiallyzoned rural properties.

Our analysis was limited only to residentially-zoned properties used for residential or rural purposes and re-assigns the residential rates take for the 2019/20 year by applying the same rate per dollar value across all land parcels included in the analysis. Analysis was using the 2017 residentially-zoned property valuations.

Key findings

59% of Auckland residential ratepayers would pay on average $476 less a year.

• A further 12% of ratepayers would receive a rates bill increase of no more than $200 (less than 10%) a year. On average, their increase would be less than $2 a week.

• Many retirement villages and apartment complexes would see their rates fall as they are using their land efficiently.

• The 5% of properties that would receive the biggest dollar increases have LVs of $2.85 million on average, but improvements are typically only 12% of the property’s value. This compares to 29% across all residentially-zoned properties in Auckland. These high LV but low improvement value properties are being used inefficiently.

• In contrast, the 5% of properties that would receive the biggest dollar rates decreases have improvements worth over 57% of the property’s value – they are being used quite efficiently.

Would this be hard to implement?

First, it’s important to point out that the any switch to an LV oriented system would require consideration of a wider range of factors than those encompassed here to meet obligations of the local Government Act. But an LV oriented system would be administratively relatively easy and cheap to implement. We were able to calculate the revised rates bills for each property in a few hours after receiving the current valuations and rates bills, for example. These figures could then be easily uploaded for use in bill notifications.

Introducing a step-change in a year in which new valuations are implemented would make the task administratively easier as a review is being done anyway.

One way to overcome upfront challenges could be to introduce a gradual switch to an LV based system, perhaps over five years as set out in the example table below.

  Contribution to rates bill calculation
  Land value Improvements
Current system 100% 100%
Year 1 of change 100% 80%
Year 2 of change 100% 60%
Year 3 of change 100% 40%
Year 4 of change 100% 20%
Year 5 of change 100% 0%

The benefits of this approach would be:

• It would still be relatively easy administratively.
• The suddenness of the change would be reduced, meaning those with under-used land would have the opportunity to consider their options.
• The change would occur across at least two three-yearly revaluation process, which would provide an opportunity for those who dispute the value of their property to have their say through a routine process.

On the cost side, this gradual approach would mean one of the key benefits of a switch to an LV based tax – increased housing production – could be delayed for a few more years.

* David Norman is chief economist at the Auckland Council. Shane Martin is a senior economist at Auckland Council. This article was first published here. It is here with permission.

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All sounds very sensible to me. So there's no chance of it being brought in then! (NB: Not just for Auckland, but apply that nationwide)

I’m not so sure. Not that long ago they were preventing people from using their land better. Now they want to punish people for not doing so. Is it fair to force people to have big sections and then charge them for having big sections?

To build a case support what is logical, one needs to understand on the core role of local authorities. This is the provision of an extensive range of public services in your area. In addition, local authorities promote the interests of your local community, including the social, economic, environmental, recreational, cultural, community or general development of your area (in the most efficient and cost effective way possible).

I added the most efficient and cost effective way possible, because its glaringly obvious local authorities, and for that matter central authorities, are not delivering this. There are a range of reasons behind this, however the biggest hurdle to achieving this is corrupted officials and decision makers. This has been going on since the ages, and only changes when the societies they dictate to have been bankrupted; resulting in these dictators being overthrown.

I would suggest the current divide between the rich and the rest indicates we are not far away from a peace change, and ironically we will probably thank Coronavirus for bringing it on sooner. It may be wishful thinking, but the local authorities can then implement a land value rating system, which will be cost effective and encourage land efficiency; rather than the hybrid system of universal charges and postponed rates used under the capital value rating system that creates the distortions we now have.

Ask yourself why Singapore, Denmark and Taiwan are amongst the wealthiest nations in the world.

It would be a sensible thing to do for Christchurch's struggling inner city businesses. It could be the mechanism that provides rates relief for business whilst its overall effect being rates neutral -so it does not force local government into austerity economics.
There is more information about the issue here
The key thing to know is two plots of land (about 1200sqm) in the city centre, about 100m apart. One being a hotel catering for a 100 guests -it has a bar, café, restaurant and 48 staff. The other being a carpark for 36 cars. The hotel pays $153,453 in rates and the carpark $14,139.
It is obvious from this example that capital value rates is a disincentive on improving city land.

For Christchurch the suggestion is to move towards land value based rating in the city centre. That is where most of the benefit of switching the rating base will occur and it minimises the opposition from little old ladies on large suburban properties (valuable land) with small old houses (not very valuable) complaining about how high their land value based rates are compared to the previous system of capital valuation.

Here is a good video explaining Denmark's experience with taxing locational rents (LVT)

Here is an academic study showing land value based rates is more progressive and more economic efficient (it encourages capital formation/construction) than capital value based rates.

Brendon: Brilliant video on progressive Denmark but you do realize that the Anglo-Saxon world has mostly been in the grip of inequality; the mass of us are too obtuse and short-sighted to follow Denmark's lead.
Francis Fukuyama is an American economic philosopher of Japanese descent; I have, sometime ago, watched another Fukuyama video on you tube which look's at another of Fukuyama's books: "Towards Denmark", but I can't track it down again.
Basically, Fukuyama point's to Denmark as the model the world should be following: the least corrupt country, the happiest people, high standard of living for all, least inequality, etc, etc. NZ used to be up there near Denmark but now we are getting more inequality with the Labour government virtually encouraging a certain demographic of solo mothers to have a lifestyle of conveyor-belt baby production with the fathers not obliged to contribute to their upbringing, and political corruption as in the current scandal of Winston Peters and his NZF doing the bidding of their mates, the Talley's fishing corporation, in stymieing the implementation of cameras on all commercial fishing vessels in return for bribe-like contributions to NZF member and Foundation.

Dont be dumb Auckland. Hamilton already tried land value rating, it didnt work that well.

Hamilton rating system to switch from land to capital value |

The amount of money needed by the council to operate and fund their project plan remains the same or increases from year to year but is always spread across all ratepayers on some basis and saying that the "value" of properties cannot be ascertained accurately is a misleading smoke and mirrors statement by council, if all the current valuations were cut by 50% it would make no difference to the amount of money needed by council and no difference to each property's amount that would be requested via rates, it would simply change the calculation base from some smaller percentage of the property value to some larger percentage of the lower value, the outcome is the same, QV is not and has never been an accurate valuation of anything, it is just a scaled reference number for the basis of calculation. So do it every 3 years or every year or every month, it will not make any difference.
What the council want to achieve by making the change in the way it is calculated is to make themselves look good in the eyes of 59% of their voter base so they can get re-elected.

Yes, a lot of people don’t get that. But rating on land value is an excellent idea.

At its simplest going from a capital value rating base to a land value one is about taxing land more and buildings less. This reduces the marginal cost of constructing taller buildings on a given sized plot of land. Therefore it incentivises construction compared to the status quo.

In certain suburbs, more efficient use of land is restricted by Council unitary plan rules!

Correct. Auckland Council should remove unnecessary constraints on building more residential and commercial floor space.

There are so many vested interest groups and costs associated with development that until there are new construction methods there will never likely be cheap/low cost built homes/terrace homes. I notice the govt writes it's own advantage by introducing legislation to avoid following the process.

Goff ran on cutting the inflated operating costs of the council and has made no head way in doing so.

Aucklanders have no qualms about paying for essential services and well considered projects, but the knife has to be taken to the inflated teams at Auckland Council.

In terms of the methodology of calculating the rates.. either capital value or land value would result in decreased rates revenue this year and be problematic for the council...which tells you it isnt the correct approach either.

I would much rather have a re-rating process every decade and then in subsequent years rates increases are capped at inflation. It would give ratepayers a degree of certainty regarding rates and would ensure the council has to properly manage its cost base.... cos at the moment it has no incentive to.

Auckland is short of money for a number of reasons.

1. Inability to borrow money freely, despite its cheapness
2. Lack of direct government funding from tax
3.Dependence on consents for income

4. bloated non essential teams and expenses

5. Every mayoral election being run on "no rates rises!" while expectations of services remain high.

This analysis is 'spot on'! New Zealand has a long and successful history of using land value (only) rates. Even on a national scale the Land Tax was pro rata to land value. However, as pointed out, rates/taxes based on land values alone are NOT a land speculator's friend. And let's be frank, land speculation in this country is BIG business! So much so that lobbying from major beneficiaries brought about an end to the Land Tax in 1992, and have continuously/relentlessly worked on local authorities and Local Govt NZ to dilute the the land value component of local govt rates in favour of the more regressive UAGC's, waste collection charges, etc.

Land speculators hate the idea because their holding costs for land banking goes up and the marginal cost of creating 'new land' by building floor space on top of floor space goes down. In general most other people like it. Businesses like it because there is more competition to build so commercial leases are more competitively priced. Environmentalists like it because it promotes a more compact urban form. Housing activists concerned about inequality like it because land efficient multi-unit dwellings become more affordable and it is a progressive tax.

Councils around NZ should move towards land based rating systems -especially given the economic situation we are in. Options to improve the economy, inequality and the environment are few and far between. When we have the opportunity to improve these three outcomes, like we do with a land based rating system we should do it.

Georgism is a mind virus.

Gee, that was helpful.

Only too happy to help.

It's viral for a reason. It's brilliant.

"...Men like Henry George are rare unfortunately. One cannot imagine a more beautiful combination of intellectual keeness, artistic form and fervent love of justice. Every line is written as if for our generation. The spreading of these works is a really deserving cause, for our generation especially has many and important things to learn from Henry George.

With friendly greetings,

I said virus, not viral. It is as politically palatable as a cup of cold sick.

Winston Churchill said it all better then we can... "Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains -- and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived."

They pay tax on the income earned from the property and arguably should pay tax when any capital gain is realised upon sale. The State charging people rent for their own land creates a nation of tenants.

Many asset classes go up in value without any input from their owner, other than the initial investment.

Depends on what outcomes the country is after. Land value tax is good in that it cannot be avoided so is a good way to address the ability to structure income out of the picture. It also then allows income tax to be reduced.

As Milton Friedman stated: "There's a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. ...So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land..."

I prefer the views of Milton's son, David.

Taxing an asset creates a fundamental disconnect between requirement to pay and ability to pay. E.g. A retiree paying tax on their land despite the fact that it is earning them no income. And the land is giving them no greater utility than when they purchased it, at a time that it was worth much less. Or farmers having to pay high tax even in years that they earn no profit due to the likes of drought.

It also creates a market distortion for industries that use land as a factor of production, e.g. agriculture. Essentially shifting the supply curve to the left.

In terms of residential property - it creates a nation of renters as I said previously. It also distorts free market land use decisions that would otherwise result in land being used for greatest human prosperity, not just economic gain. For example, if taken to the extreme, Georgism would result in the population living in shoebox apartments, on land that is for all intents and purposes owned by the State. Under free market conditions, this is not how the vast majority of people choose to live. Besides this, opportunity cost and profit motive incentivise productive use of land without LVT.

Georgism is also based on technical falsehoods. For a start, productive land (i.e. improved land) is not fixed in supply or perfectly inelastic. Nor is residentially zoned land.

Again, the income from land is already taxed, and the capital gain should arguably be taxed too. Land is just another resource, and it isn't getting special tax treatment currently. To be logically consistent, Georgists should be advocating a tax on all natural resources, like gold and iron.

I don't have any particular "sort" of retiree in mind.

Yes, we all inevitably slide down slippery slopes.

Also, Milton addressed the discussion of mechanisms for those issues of when/how to pay.

An income tax on any realised gain in the land value at the point of sale is fine, except it creates an element of uncertainty in govt/council income streams. I think money could be better spent on having annual revaluations instead of the present triennial ones.
We are already a nation of tenants. Look at your title deed. You only hold your land in "Fee Simple", which makes it ultimately the property of the Crown. Or, in most cases, your mortgage makes you a more direct tenant of your bank... rent paid as interest. It's not about tenancy, it's about a land owner being a direct beneficiary of community investment in infrastructure, schools, hospitals, roads, etc. Increase in land value is attributed parallel to the benefit derived from those investments. Therefore it makes complete sense that a landowner should pay their fair share back to the community on the same (land value) basis.

Fee simple meets any reasonable definition of full ownership. I have a title identifying me as the proprietor. Do you have such a document for the shirt you are currently wearing? No? I own my land more than you own your shirt.

A fundimmental flaw with your argument is that not all value of land is due to surrounding amenities. E.g. an avo orchard with good soil is valuable because of the land itself, not it's location or surrounding amenities. Similarly, high density residential zoned land is worth more than the low density residential land next door, even though it is located on the same block. Moreover, much of land value increase is due to higher population competing for the same area of land - nothing to do with improvements to surrounding amenities.

If my land goes up in value because someone builds a cafe next door, I owe nobody a cent on account of that fact, and certainly not the government. Just like my neighbor owes me nothing if I pretry up my property.

I have no objection to targeted council rates for local council infrastructure to ensure that beneficiaries pay, provided that the rate comes to an end when the infrastructure is paid off.

If my land goes up in value because someone builds a cafe next door, I owe nobody a cent on account of that fact, and certainly not the government. Just like my neighbor owes me nothing if I pretry up my property.

While that is true, few seem to abide by that when it's put in terms of the reverse. Folk are quick to screech for compensation if the city or the neighbour does something that reduces the value of the land. Wanting it both ways.

Yes, agreed. And if those folk happen to be wealthy with too much time on their hands, they’ll drag you through a costly hearing, then the Environment Court, and then judicial review for good measure.

What if the cafe burns down?

ALL land value is INDEED attributed to activity (and therefore demand) by the surrounding community. The value of IMPROVEMENTS is not. Example: you could have the most fertile and arable piece of land in the middle of nowhere in the Sahara Desert. Land value = $0. The nation decides to build a highway between 2 cities that passes adjacent to your plot of land. A land value becomes established. An oil company decides to build a petrol station a few hundred metres down the road from your property. Your land value is increased. And so on. Land value (residential, commercial or agricultural) is always created by the activity and resultant demand of the surrounding community. Therefore it is not unreasonable that a landowner contribute, through a land value-based rate/tax, to the development, repairs & maintenance of any infrastructure that facilitates such activity.
Your avo orchard example is incorrect. How does the orchardist get services or get their product to market? Through roads built by the community. Take the roads away and the avos rot on the tree, and the land is worthless.
Your high/low density zoned example is incorrect.The community (through the District Planning process) has bestowed more development potential to the higher density zone, therefore the land value increases. Whilst increased population may be a driver, I doubt any such a zoning change/difference would be contemplated without the increased capacity of required infrastructure.
Your cafe example is incorrect. None of us live on a desert island, but if that's what spins your wheels.... please feel free. You DO owe the cafe owner for increasing your land value. Similarly the cafe owner owes YOU for any development activity you perform that enhances their land value. We do that accounting exercise through a 'clearing house' that is land value based rates/taxes.
Your final comment is a dream. Council infrastructure is NEVER paid off, and as a town planner you should know that. Infrastructure will always need to be expanded, updated, repaired and maintained. That continuous process sustains and increases land values and, therefore, it is entirely appropriate that land values should be used as the mechanism to fund it.

None of this is true. Top marks for mental gymnastics though.

Yes it is true and you know it. Stop being obtuse. The land in the centre of NZ cities is 10+ times more expensive on a per sqm basis compared to the outer suburbs. That's not because anything the landowner has done. They haven't done anything special entrepreneurial wise to achieve that. The difference in locational land rent/price is because of the activity of the community and their collective actions to improve that urban area -streets, parks, the 3 waters etc. It is not unreasonable for the community to get a return from the wealth they create.

And if land values drop (as so many on this site hope & predict they will), the owner should be compensated by the government because the drop is the doing of "the community"? No, such an argument is very tenuous. If I improve the neighborhood by developing my land am I entitled to a special payment from the "community"? Again, no.

Most asset classes increase in value with no action on behalf of the proprietor, other than the foresight to allocate their capital wisely. Land is no different.

Much of land value increase can be attributed to higher population pursuing the same area of land, and other factors of supply and demand, not neighborhood improvements. And much of land value is utility/amenity of the land itself, not its location. Even if pure locational value of land could easily be separated for taxation, the idea is deeply flawed. If any increase in value is realised upon sale of the land after the brightline period, the "community" gets CGT. And the "community" gets a cut of all income earned from the land in the form of income tax.

The question that this report addresses is whether for Auckland a land based rating system is better than the current capital based system.

The evidence when land versus capital value rating systems are compared is that a capital rates system discourages construction because it taxes the capital value of buildings -this is not complicated to understand.

This can be best seen in Christchurch where inner city landowners who took a risk after the earthquakes by constructing something face much higher rates bills than those who did. There are examples in Christchurch of two similar sized plots of land in the inner city within 100m of each other. One was built on -being a 5 story hotel -it pays $153,00 in rates. The other was not built on -being a car park -it pays $14,000 in rates.

So land based rating systems is a shift towards enterprise and egalitarianism (equality of opportunity) whilst a capital based rating system is a shift towards speculation and land owning privilege.

P.S User pays is not the issue -I am not sure why you are bringing it up. No one is suggesting more of that. That ideology has played its hand and for the most part found wanting. But if you like it so much maybe you could write up a paper on how Auckland's current capital rating base system can be replaced by a user pays system.

You may be a town planner, but you are certainly NOT an economist.

Actually DD your argument regarding the avo orchard is just as flawed. The orchard is worth more due to its earning capacity, as is the land. I have a lifestyle block in two titles - 1 is about 13.5 Ha, the other 1.4 Ha. They're divided by a fence so exactly the same land type. No council supplied services at all to either. The larger block's LV is 305K, the smaller-170K. The trouble with valuation based rates of any kind (CV/LV) is they are completely out of kilter with either services supplied/used or the actual value of the land. IMO a fairer way would be to divide the councils expected budget for 3 years into the number of registered allotments - regardless of use or valuation, and set the annual rates on a rolling 3yr average budget expenditure.

Your concerns are understandable, but you must also understand that there are more than just council services that make up the value of a piece of land. For example, one may have a more desireable (say sea view) aspect than the other. Did you create that?. Of more concern to me is that council valuations are so delayed. My desire is to have at least annual valuations so that everybody can have a more realtime understanding of land values.... and therefore be able to make more informed decisions.

Actually I must apologize apizap for not explaining myself very well. The point I was trying to make (as a counter to DD) was two identical pieces of land with the same earnings capacity (per Ha) had ridiculously different LVs due to the "community's demand" effect. Nothing whatsoever related to actual "value", hence my dislike of valuation based rates

I was criticising the principles of Georgism (land value tax). I don’t disagree with you. Rates should ideally be based on the council services received/consumed, not the value of the land or improvements.

And there we disagree. Although improvements value should never be taken into consideration, and I understand George does not even propose such, I believe that land value is by far and above the fairest and most expedient method by which governments (esp. local) can appropriate the monetary responsibility for the services provided.

In my opinion you've yet to put forward a convincing argument for that belief.

I believe this article and the comment section do convincely argue the case for land value rates being an improvement on capital value rates.

You have got to hate those idle land owners. It is much better to be an idle share investor sitting back clipping the ticket for all the goods and services that the people need. I especially like the ones that corner a life saving medical treatment and charge huge prices. You have to love good old fashion price gouging and the cleaning out of the desperate.

From your comments I take it you are neither - landowner or share investor. Noone "corners" any medical treatments. They come from years (sometimes decades) of painstaking and extensive research, none of it free. Easy to throw stones when you have no skin in the game

So for leasehold apartments the leaseholder pays zero ? For freehold apartments the freeholder pays a tiny fraction ? And anyone else gets to pay a princely sum. Doesn't seem either fair or workable.

Perhaps a more simple explanation would be: the owner of the land pays the land value rates or tax. Any person who rents/leases that land pays rent to the land owner. Whether the land owner uses that rental income to help pay the rates/tax is up to them.

I'll keep my cheap portable shoebox over an expensive one thanks!

....CV....."does not incentivise the most efficient use of land."
Oh so you mean intensive build, concrete, almost zero lawn and trees I presume. Great..... Not.
The reason why the North Shore City Council went from Land to CV was that lots of people were putting huge expensive houses on tiny plots and they would pay very little in terms or rates compared to old grannies who lived in small houses on large plots. So it was a matter of fairness.

The urbanism of the far left is not particularly conducive to human flourishing. The free market may deliver suburbia, but believe it or not, that's because suburbia in one form or another is what most people want. The free market is the answer, not government meddling through Land Value Tax.

With the free market being the answer it's surely time to abandon zoning. It may not deliver suburbia but at least it'll provide.

At the risk of doing myself out of a job, I’d certainly advocate RMA reform. I’m a planner (one of the very few that recognises the virtues of the free market, despite the indoctrination I was subjected to over the course of my degree), so I have plenty of experience with the perverse outcomes it delivers. Not sure I’d do away with zoning entirely though.

That's a large part of what they did to solve the housing crisis in Japan in the 1980s and 90s.

The free market does not deliver suburbia, subsidies do. If the true costs of large city suburbia were proper user pays (motorways, trains, pipes, etc) it would be much more expensive.

Transport choices, particularly private motor vehicle use, would change without subsidies. Reticulation isn't as subsidised in NZ as you may think.

Most people have a strong preference for spacious living and a yard. It takes a lot of government meddling to get a high proportion of the population into shoeboxes.

The "most efficient use of land" can only take place within the framework of the District Plan (impervious surface coverage, height in relation to boundary, etc), and the District Plan is open entirely to public discussion/contribution. Rates based on land values only does NOT mean we will all be living in bleak concrete boxes stacked one on top of the other to Mars. That's just silly nonsense.

"efficient" use of land and "best" use of land are two separate things.

It is district/unitary plan provisions that limit best use of land, not the absence of a land value tax. Profit motive and opportunity cost is sufficient incentive for "efficient" use of land.

And then the commissioners say: The effects of this this non-complying Resource Consent application are less than minor....
And everyone else goes: "Bullshi^". And thus, the precedent is set...

Yes and also in regards to land; What about only paying tax on "usable land" not managed forest or bush which in some areas (West Auckland, Titirangi for example), You're not allowed to cut down the tress and bush to make it "usable". Or in a lot of cases, your property maybe on a steep incline which again can make it unusable land.

I am assuming they mean a tax on the value of the land, and those things would make it less valuable. I certainly hope they don’t just mean a tax on the amount of land.

Yes that is how land values are assessed Jimbo

And that's precisely why we need far more clarification on how the "land value" is assessed for tax purposes.

Brilliant article thanks. Even right wing economist Milton Friedman favoured land tax as "the least bad tax".

And it appears that land taxes motivating the increase of tenancy space supply would have the effect of reducing rents.

Disagree with your basic ideas - all of them. Local Councils are charged with providing basic amenities Water, Sewage, Roads etc and I guarantee that during my absence my house consumes or uses none of them so the tax base should be the individual and this is quite practical in NZ. All resident in NZ are taxpayers so not difficult to tax them the equivalent of a councils budget and for the IRD to distribute the proceeds to the council based on the taxpayers. Here are some inherent advantages and efficiencies, staff and resources in council offices dealing with rates bills are not required and COULD be deployed more productively elsewhere, all taxpayers become ratepayers so more likely to consider the value received from council activities so more likely to vote based on the perceived value and efficiency of their council. Next remove all councils certificates of general competence given by the Clarke Govt (Helen) to relieve councils from dabbling in matter utside of core duties as they generally lose money - Hamilton $48 Million on street racing, ChCh $80 Million on V Base running event. Some issues on different amounts to be paid through tax but not insurmountable. Next is issue of business premises which could be taxed on their Sq Footage and payable irrespective of profitability.

Spot on Rumpole. Endless discussion on taxing techniques are far less important than deciding how much tax is reasonable to enable our local civil servants to carry out the essential task of administering the "commons" those services and facilities which are impracticle for individuals to provide to meet their own individual needs.
Unfortunately, local bureaucracies have infiltrated hugely into private affairs, and to be fair, mainly because there is huge demand from ordinary citizens for all manner of stuff they would like...but fully expect "someone else" to pay for!
Local government is a game played by vastly over remunerated public officials, aimed firstly at assuring their own comfort, and secondly providing public services whilst trying to pretend only the "rich pricks" will pick up the tab.

Local government regulate the land market system via the administration of the RMA and by the rating system. It is their duty to ensure the system is fair, efficient and sustainable. Personally I think they do a poor job and that is contributing factor into why NZ has some of the most expensive housing in the world.
I think it would be stupid when a Council is showing some understanding of how they could better fulfil there regulatory duties that they are criticised for it.

Is it a sensible idea? How are Real Estate Agents going to be able to justify massively inflating AKL's house prices for those million dollar town houses? Or is it that the Council just recognize that house prices are indeed falling without overseas investors to prop them up and are just trying to cause price confusion (Since everyone bases a property price off the CV and when it was issues).

Trying to purchase a home in Auckland is already a game of pin the tail on the donkey when it comes to a justifiable property price.

RE agents don't inflate Auckland's house prices - the laws of supply and demand do.

Land is made "cheap" if the government charges you 100% annual rent for the privilege of "owning" it. The land becomes a liability, not an asset. The only down side is that you'd have created a nation of renters, with the landlord being the government. A nation of serfs. Not going to happen.

I'm taking about the CV which is what REA's use to mainly base the house price!

DD thank you for your comment which quite honestly tables points I had not previously considered. A question then. The use of government valuations to calculate rates has compounded into distortions that are grossly inequitable. In Christchurch a retired couple have a new house, a rebuild from the EQs. Yet they pay more than twice the rates of next door. Same sized house and section. All they have done, and involuntarily so, is replace their home. Would not a rate on land only, flatten that out? And if the local councils already have a component in their rates to charge you for your land, then is not that “rent” aspect already in play? This whole area to me seems to me to be as perplexing as it is overdue for a complete overhaul to restore some commonsense and balance.

I'd say that these households should pay the same rates, even if one the sites is 50% larger than the other. If the households are the same size, their demand for wastewater, stormwater, water supply reticulation, parks, rubbish collection etc. is the same. It would be unfair to charge one household higher rates even though their consumption of council services is the same. In the same way that a four person household in Papakura consumes the same council services as a four person household in Ponsonby, even though their land values are very different. Consumption of council services is not linked to land value, so why link council rates to land value? I'm no fan of poll taxes/rates, but this seems fairer.

Councils are not a business providing customer services. Their job is to boost the communal benefits and reduce collective harms for their particular jurisdiction. This includes ensuring that land markets are fair, efficient and sustainable. For example I am sure you have read on this website at length that local government should be doing more to prevent the harm caused by unaffordable housing.
P.S local government infrastructure costs are related to spatial area so land value rates are appropriate.

No. As defined in the Local Government Act 2002, the purpose of local government is:

- to enable democratic local decision-making and action by, and on behalf of, communities; and
- to meet the current and future needs of communities for good-quality local infrastructure, local public services and performance of regulatory functions in a way that is most cost-effective for households and businesses.

And the cost of council services is almost exactly the same for an existing 400sqm section as it is for the 1,000sqm section next door.

Re: And the cost of council services is almost exactly the same for an existing 400sqm section as it is for the 1,000sqm section next door.
Nope -the 3 water underground pipes are longer, the footpath is longer, the street is longer for the 1000sqm section compared to the 400sqm. All of that costs money which comes from ratepayers.

A 400sqm site could have a longer road frontage than a 1,000sqm site. And the length of the reticulation all the way to the processing plant is almost exactly the same in either case. Moreover, the processing capacity consumed at the plant is exactly the same.

For new subdivisions, developers pay for construction of the water reticulation, footpaths etc. The council rates are for the processing capacity at the plant and ongoing maintenance of the network.

Quite so. Case in point the rebuild my above post. No street frontage, a back section. All utilities and services to road side newly installed, all at owners cost.

Quite so, and any level headed developer who wants to remain in the game quickly adds the cost of that infrastructure into the price of the section (ie. land value) when s/he sells it.

Anyone who thinks the ongoing local governments costs for a residential developments consisting of 1000sqm properties is the same as another residential consisting of 400sqm properties is clearly peddling a disingenuous argument.
The residential development consisting of 1000sqm properties will clearly be much bigger and require more underground piping, more street lighting, longer streets and footpaths etc
Land value is a good proxy for this cost. Although it is not the only argument for land value rates.
The users pays methodology is flawed when it comes to dealing with locational rents. It creates perverse incentives that penalise land owners who improve their land (which benefits the wider community) while at the same time it gives land bankers a free ride to speculate and hoard (at a cost to the wider community).

So a 3 bed 150sqm house on a 450sqm site in Papakura consumes less council services than a 3 bed 150sqm house on a 450sqm site in Ponsonby? Because land value is a good proxy for council servicing costs? No.

The servicing costs for a 1,000sqm site are the same for a 400sqm site. What extra infrastructure do you think is involved exactly? Again, developers deliver the reticulation etc as well as paying development contributions.

Lifestyle blocks are another example that disproves your claim. Many are completely unserviced other than by a rural road, but the land value is much more than a fully serviced suburban site.

The Ponsonby house is already paying more in rates under the capital value rating system. So what is your point.
I never argued that the service cost argument is the sole reason land value rates is preferable to capital values. I prefer land value rates because it decreases the marginal cost of construction thus helping us build out of the housing crisis. It is not a silver bullet but it would help.
If you like the service cost argument for funding local government write a user pays paper and explain why it would be better.
I have my doubts -30 years -all my adult life that myth has been peddled. What has it achieved? Has it helped or hindered the housing crisis?

You argued that land value is a "good proxy" for council servicing costs. It isn't. That is my point.

And as for why Georgism/LVT is deeply flawed, see my other comments.

We are not getting anywhere in this argument DD. I disagree with your points. You cherry pick which of my points to disagree with and you don't engage with the main advantages of LVT/Georgism that I and the author of the post articulate. I think we will never agree. Lets agree to differ.

And generally speaking local councils have failed every one of those purposes, NZ is following in the UKs footsteps were rates became Council Tax whichg failed to address the underlying problems which are now re appearing.

Once again your view is myopic. Land value is not based on council services alone, but it still retains the closest parallel to the monetary benefit of those services, plus anything else the broader community bestows to an individual landowner to receive in cash upon sale. The ultimate conclusion of your way of thinking (obviously "user pays") is a poo meter on every toilet bowl, a weight meter for every time a wheelie bin is collected, a timer for every time someone walks in a park. Do you understand how ridiculous that is??? The three key components of rates/taxes is that they should be fair, easy to understand, and easy to administer. Your ideas do NOT pass the sniff test!

So a council tax per head address's those problems simply , QED

Land value correlates poorly to the benefit of council services received.

I’ve been pointing out the flaws of Georgism, not suggesting an alternative rating system. But a poll council rate/tax would be fairer. Or a flat rate per property. Or simply tac it on to income tax at the marginal rate, and do away with council rates all together.

You may be surprised that user pays is already in place to a large extent. We have water metres. In Auckland, water volume consumed is used as a proxy for wastewater discharges last I checked. Many (maybe most) parts of NZ don’t have “free” council rubbish collection - you pay for expensive council rubbish bags with a sticker on them or you pay a private company for a bin collection service.

So a council tax per head address's those problems simply , QED

Good points DD. The starting point in levying rates should be a simple division of cost between the number of properties...assuming they all have access to the same council services. The next step, if one accepts (as local government avers) that rates are simply taxes and principles of"ability to pay" are applied , is to find a proper system of assessing graduations of wealth.
I believe that is best calculated through the income tax system. To use size of section/which suburb/value of house/ etc., is an extremely hamfisted method. Perhaps in days gone by when one judged by which side of the rail tracks one lived on it might, just might have had a degree of validity...but today, you might as well levy rates on the quality of the car owned,...the size of the waistline, (to be a little silly)
The simple fact is that property values as a means of assigning the costs of running council functions, is unwieldy, excessively expensive and fails any test of fairness.

Yes, agreed.

1) Finally an article by the Auckland Council's economists I agree with

2) Central government should legislate to require it countrywide.

Hamilton was the odd man out using land valuation until about 3 - 5 years ago they decided after plentiful hand-wringing to use improved value. Phasing in over ten years

Some farms in the Selwyn District pay as much as $60k in rates yet receive less in council services than do urban properties in Rolleston which pay about $3k.

About 50% of local government expenditure is local roads. In Selwyn most of those local roads are in the rural part of the district. So are you arguing for these roads to be dropped from the maintenance schedule?

No. They are pointing out that Selwyn farmers are clearly paying for services they do not receive.

Local roads are very expensive services paid for by local councils. If the farmers don't value these roads then they can petition their Council to stop maintaining them.
But farmers don't do this -instead they whinge about a minor local council expense like garbage collection.

So Auckland want to switch to land value rating ? To me, you have the added complication of splitting up the apportionment of value of land (LV)and value of improvements (IV) which leaves the door wide open for those who want to game the system. Ie Object to the valuation and change the split and therefore lower the rates bill thus playing the council like a fiddle. I know someone who did that and they profited handsomely. QV does the objections and they dont care that much about the individual figures only the overall CV figure is what matters

Seems all very logical till you realise that the billions of dollars of CBD building improvements become tax free and that is spread back out across landholders. I would like to see what the percentage split of those households that benefit are if you excluded apartments and other higher density housing.

The simple fact you're all missing, is that regardless of rating process, Goff will be out for every cent he can get to continue funding pointless ego projects, Skypath, Americas Cup, etc, and no way on Gods green earth will any ratepayer have their rates reduced. Smoke and mirrors will ensure that.