Land tax, council rates, land acquisition powers, value-capture tax & Auckland Council funding: Murray Sherwin chats to Alex Tarrant about improving NZ's urban planning framework

Land tax, council rates, land acquisition powers, value-capture tax & Auckland Council funding: Murray Sherwin chats to Alex Tarrant about improving NZ's urban planning framework

By Alex Tarrant

It’s not often you get to talk about land tax, compulsory acquisition powers, water & road user charges, value-capture tax, encouraging land bankers to develop, NIMBYs and Auckland Council debt in one sitting.

Unless, of course, you’re chatting with Productivity Commission chairman Murray Sherwin about how to overhaul New Zealand’s urban development framework.

I sat down with Murray in the Commission’s Wellington offices to ask about a few subjects dear to Interest.co.nz readers’ hearts that were raised in its 516-page report on our urban development framework.

Land tax (or council rates if you want a calmer reaction)

One of the recommendations the Commission made is to change how rates are levied by local authorities. Rates are a land tax in disguise – it’s just that New Zealanders tend to have an aversion to anything with ‘tax’ in it, so we called them rates.

The recommendation is that we start levying rates on the undeveloped portion of land. Sherwin explained that about 20 years ago, legislation was introduced that recommended levying rates capital value – ie land plus improvements (buildings, basically).

“Actually that doesn’t do what it was intended to do,” Sherwin said. “And in particular what it does is, essentially lets people who are sitting on vacant land off the hook – they get a lower rating base because there’s no improvement on their land.”

These are the people who may be land banking – just sitting there with undeveloped land waiting for Godot to turn up.

Changing how we levy rates to the unimproved part of the land would remove the incentive for land bankers to just sit there, and encourage them to get on with doing something with that land, Sherwin said.

In broader economic terms a tax on land is one of the most efficient ways to raise revenue. “You can’t avoid it, you can’t shift [it]…so it’s an efficient tax in its own right.”

Now, don’t get excited that we’ll see a change any time soon. Sherwin pointed out that Auckland Council was obliged under the Super City Act to move to capital value rating from its previous land-base.

“So I don’t think they’re going to turn around quickly. But as a basic principal we think that [unimproved] land is a better basis for rating.”

One question on individual land owners’ minds is, how would this affect me and the land my house is on? Well, things should work out pretty much the same, Sherwin said. Work done by the Commission suggested the recommended change might be even more equitable than the current capital value rating system.

“People who own the more expensive land, in any event, tend to be the wealthier people. So it all works through,” he said.

Targeted rates

One proposition the Commission kept running up against was that “growth doesn’t pay for itself,” Sherwin said.

In Auckland, for example, a rapidly growing population requires infrastructure, three waters, new roads, you name it. Yet the Council has found it’s not getting the uplift in revenue through its rating base sufficient to cover that.

The Commission explored how to get greater responsiveness of city revenue to population growth. How do you make the investment in infrastructure more bankable?

Enter the conversation about user charges on water and sewers. Roads, too. Make people pay for resources and they’ll be more efficient in their use of those resources.

“We’ve seen in places that have introduced, for instance, water charging, that demand has fallen by as much as 30%,” Sherwin said.

“That means you’re not having to build more expensive infrastructure to cope with growth because the existing stuff will go further.”

“You can give the water away free if you like, but charge a delivery fee.” Do the same on roading – user charges or congestion charges. Put volumetric charges on something and watch usage become more efficient.

Value capture tax

One potential revenue source for councils is the imposition of value uplift taxes. Take an example of any unserviced block of land. Add three-waters and roads, and the value of that land jumps because it’s now usable for dense development.

“So why shouldn’t the council that’s funding the infrastructure claim a slice of that to fund the cost of that infrastructure?” Sherwin asked.

Another example of where value capture tax could work in Auckland is the inevitable rise in values of properties close to new city rail link stations. Could Council target these properties? “Absolutely.”

Melbourne has done this quite nicely with a graduated tax on properties that are near one of their inner city rail loops, Sherwin said.

“Property values went up, the marketability and the rents in those properties went up, so the council gets a part of that to help fund the infrastructure.”

Sell us your land (yes, you do have to)

Government compulsory acquisition powers under the Public Works Act have been in the news in the past few years, with a swathe of centrist economists suggesting we shouldn’t shy away from using them to make sure there’s enough land to develop affordable housing on.

Under the Public Works Act there are provisions where the state can claim, with proper pricing and compensation, private property to enable public good activities to take place.

The Commission has recommended we go a step further – local development authorities should also have that power. Sherwin said he envisages the powers would be used mainly when trying to redevelop existing inner city areas where a given landowner might be holding out and holding back a large-scale redevelopment.

Having said that: “We’re quite cautious about this because when you start messing around with private property rights you need to be cautious,” Sherwin said.

“I’m not sure that it’ll be used a lot,” he added. “I think it’s going to be used mostly, if it is, in inner city redevelopment areas.”

Govt covering Auckland borrowing?

Of surprise to some Productivity Commission spotters, was the recommendation that central government could use its creditworthiness to help take debt off the Auckland Council’s balance sheet.

The Commission spoke “quite a lot” with the Auckland Council about its funding constraints, Sherwin said. They see themselves being quite hard up against their limits. How do you get some of the costs off balance sheet or give the council a greater ability to take on more debt?

“Our sense is, for rapidly growing cities, particularly if they can get a bit of responsiveness in terms of revenue flow to growth, then probably the debt limits the credit rating agencies and others are setting are a bit tight,” Sherwin said.

Beyond that it’s really a question of looking to other balance sheets that you can put some of that debt on (or the risk of that debt on) to spread the load a bit more to facilitate infrastructure development.

The recommendation, therefore, shouldn’t come as much of a shock. Clearly the capacity of cities to invest in infrastructure has been a problem and remains a major problem.

Is it politically feasible? About those NIMBYs…

The big question is, what is politically feasible? We’ve already had the major parties trading blows on who’s pro and against development and whose policies best mirror the Commission’s recommendations.

We don’t need to see the complete 64-part package, Sherwin said.

“What we’re saying is that it really is time to start again with the RMA, and the other pieces of legislation that feed into urban planning.”

The RMA has been back to Parliament 18 times since it was introduced 25 years ago. And for all its revolutionary concepts back then, it’s not an urban planning document.

“It’s lost its way, it’s lost its shape.”

Whatever replaces the RMA requires consideration of both the urban and natural environments.

It needs to contain a series of principals and objectives spelling out the framework against which councils should plan, starting with 30 to 50-year regional spatial plan umbrellas under which development is expected to take place.

For example, this would include securing, at an early stage, the corridors for roads and other infrastructure so you’re not trying to buy them late in the piece, Sherwin said.

Borrowing from the experiences of Auckland and Christchurch, the framework could incorporate systems such as having independent hearing panels reviewing plans to take the politics out of things, and checking them against the principals and objectives spelt out in the legislation.

“One of the reasons for doing that is that we’ve seen quite a lot of regulatory overreach…out of the planners and the councils, where they’ve started going beyond their mandates,” Sherwin said.

Due to pressure from NIMBYs? “Yeah all that stuff, and some stuff which really goes well beyond what you’d expect to be able to achieve under land-use planning, which is effectively what [the current system] is.”

The message: We need to push back against some of that overreach; Short-circuit the review processes. It’s still important for Councils to engage with their communities, but the specificity in some of the existing legislation just doesn’t line up; Councils find themselves consulting on particular propositions two or three times under different Acts, Sherwin said.

Not a very good framework. Time to start again.

*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

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.

17 Comments

Comment Filter

Highlight new comments in the last hr(s).

Totally disagree with Murray about local rates, the principal reason for using Land & property to base tax on is that they don't move so the Bureaucrats have an easy job of collection. Land and property do not use any services supplied by local Councils - neither can Swim, require education or read books, its the occupants that require & use council services so the base should be the occupiers. More difficult to collect perhaps, but all Residents are taxpayers (except children) so the IRD can be used as a collection source and distribute locally based on residential address. Murray clearly recognizes this in user charges so is operating a double standard in failing to at least consider this especially as the IRD can collect the tax at lower cost than the duplication of council rates depts. An added advantage, indeed a productivity gain is to release many council staff and valuers for more productive work if such a system were adopted. The political hurdles still have to be addressed but as in the UK, continue to increase rates and expect an increasingly violent reaction from ratepayers with potentially devastatingly unexpected consequences for those involved.

Rates are low compared to other parts of NZ. And more infrastructure is needed. Rates are a good way of providing infrastructure that is of ultimate benefit most to the owners of the land (it increases the value of the land). Quid pro quo.

Rum pole so you want a Poll tax ?
Not collectable in the past but now we rely on the net & mobile phone it may be doable.
NZs governments have foregone $billions in capital gains taxation & land transfer taxation that never existed yet both should have been implemented .
Try doing the easy stuff 1st before the Poll tax
By the way in real cities like where I live there's a 1.5% land transfer tax & a 1% yearly property tax based on assessed property value. Taxation on property is 3X more .

In Auckland, for example, a rapidly growing population requires infrastructure, three waters, new roads, you name it. Yet the Council has found it’s not getting the uplift in revenue through its rating base sufficient to cover that.

That is due to Auckland consistently choosing to undertake the most expensive mode of development.

Auckland had a choice of building north or south of Dairy Flat - building to the north means adding 15 km to the infrastructure spread. Likewise they could have built east or west of Kumeu - by building to the west means adding 8 km to the infrastructure spread. Likewise Ardmore or Pukekohe - by choosing Pukekohe the council adds 25 km to the infrastructure spread. Likewise Greenhithe or Warkworth. Likewise Whitford or Wellsford. Likewise Swanson or Clarks Beach.

In each instance Auckland chooses the most expensive mode of development and bans low cost proximate development.

“Our sense is, for rapidly growing cities, particularly if they can get a bit of responsiveness in terms of revenue flow to growth, then probably the debt limits the credit rating agencies and others are setting are a bit tight,” Sherwin said.

OMG.

International credit rating agencies are literally telling us that the expensive, wasteful, incompetent development plans of Auckland City are not-sustainable. What clearer signal do you need?

We should pay attention to the credit agencies and not gamble our country's tax dollars on backing Auckland's idiotic development plan.

Melbourne has done this quite nicely with a graduated tax on properties that are near one of their inner city rail loops, Sherwin said.

They looked at Melbourne and their single biggest take away was that Melbourne realises a fairly minor tax gain with graduated rates.

They could have looked at how much lower the cost of infrastructure per unit build is in Melbourne or how much faster the city of Melbourne builds than Auckland.

But no, missing a forest they find a tree.

What? Did he say that councils told him that "Growth doesn't pay for itself." I'm shocked.

Sadly there are people in politics & bureaucracy that believe growth is bad.
These people believe in reductions in everything except their own lifestyles of course !

Land tax- yes.
I'm not sure I agree with value capture as that should already occur through the increase in land value anyway. It looks like double dipping.

We have a high cost market.

Our council have slashed land supply to Auckland City so our land costs more than Melbourne.

This same idiot council is obsessed with building expensive sprawling developments miles away from the city.

Adding more tax or more borrowing is just more kindling on to our pyre.

I largely agree with you. However, I think you'll find that applying a tax paid yearly against the value of land actually decreases the value of that land. Which would have the effect of making council infrastructure spending cheaper.

https://en.wikipedia.org/wiki/Land_value_tax#Economic_effects

Land tax (or council rates if you want a calmer reaction)

Here I believe they are talking about changing the basis of the General Rate (from CV to LV) as a means to incentivise development of unimproved land (i.e., to discourage land banking) - just like the punitive tobacco tax is intended to discourage smoking. I assume they are talking only about unimproved land that is zoned residential. But the article notes that:

Now, don’t get excited that we’ll see a change any time soon. Sherwin pointed out that Auckland Council was obliged under the Super City Act to move to capital value rating from its previous land-base.

However, I'm not sure there is a need to change the General Rating base from CV to LV in order to achieve the objective. The General Rate allows for a differential to be applied under s.13(2)(b);
http://www.legislation.govt.nz/act/public/2002/0006/latest/DLM132218.html

Theoretically, one could retain the CV rating base, while charging a differential based on the component value of the improvements on that land. So, if the value of the improvements on that land is less than a certain percentage of the overall CV, then a differential (a different tax on the dollar of value associated with that property) would be applied. Meaning, vacant residential land would have a higher factor in the dollar value applied to it in comparison to residential land with improvements (i.e., building(s) already on it).

This differential would apply to an inner city undeveloped (or underdeveloped) piece of land, in the same way it would apply to an outer fringe undeveloped (or underdeveloped) piece of land. That is why you would use a percentage of the overall CV of the property, so that a landowner cannot build a garage (for example on a single section) as a means to avoid the tax.

It would also perhaps solve some of the NIMBY/regeneration problem - in that a single unit dwelling on land of an extremely high value (e.g., land very close to the CDB) might also be captured by the differential tax - depending on what value of the improvements as a percentage of the overall value of the property is chosen as the point at which the differential kicks in. In effect, a decaying dump on a highly valued property, zoned for intensification, could also be captured by the differential tax.

The beauty of using a differential is that all else remains the same for all properties not being land banked - or to put it another way, such a differential tax encourages all residential land to be put to its optimum use.

That sounds beautifully efficient.

Thanks! Point is - why didn't the PC think of it?

Alex, you should ask them.

Hey Alex,

Zach pointed out an example of a property that would potentially be subject to a proposed differential rate as per above. This property which just sold for $2.93 million;

https://www.barfoot.co.nz/592367

Its current valuation is broken down as follows:

Capital value = $2,150,000
Land value = $1,930,000
Improvement value = $220,000

The improvements equate to 11% of the overall value of the property - and would thereby meet the differential threshold (if say that differential were set at catching every property with an improvements value less than 20% of the overall property value).

Setting such a differential would encourage re-development and discourage land banking. Of course once re-developed (i.e., once the improvement value exceeds the threshold), the differential no longer applies.

We have an artificially restricted supply of land, prices are about 3 times as much as Brisbane, by world standards all of residential Auckland is land-banking (apart from apartment buildings in the CBD).

The optimum use of Auckland land is to sell and invest in Brisbane or Melbourne.

We struggle to attract investment in construction, adding a new tax will not improve our attractiveness. A differential tax encourages all residential land to be put to its optimum use.

Value capture tax

This is to my mind what is called a "betterment" tax. And the ideal urban land use/planning system should (to my mind) have a corollary "worsenment" tax credit.

Take the Kapiti situation where a new SH1 has been designated and built. The majority of properties in Kapiti received a "betterment" - as commute times to Wellington should be improved (altho I hear there is a great deal more congestion at a choke point where the four lane highway SH1 goes back to two lanes) - but generally, the new highway will likely increase land values and accessibility in the Kapiti District.

That said however, there are a much smaller subset of properties that once did not have a SH in their near vicinity/backyards - and they have experienced a "worsenment" in terms of increased traffic noise and in some cases reduced visual amenity/pleasantness - yet they receive no compensation for this. Same goes for commercial properties once located on SH1, but no longer located on or near the new SH1 off ramps. Again, as the planning system stands, they get no compensation.

If an urban planning system recognised and accounted for both "betterment" and "worsenment" it might be a more equitable tool as part of the tax/revenue system. One would assume that most new developments provide betterment for more landholders than worsenment - therefore, it seems such a system would likely generate excess revenue from betterment tax (that was not offset by worsenment credits), and that could be used as an additional revenue source for infrastructure projects.