The case for CIV Rates — decoded!

Why is the Monash City Council rushing inexorably towards Capital-Improved-Value rating? In this open letter to the incoming Councillors, dated December 17, Gavin R. Putland explains it far too clearly.

Dear Councillors,

The case for changing Monash City Council's rating system from Site Value (SV) to Capital-Improved Value (CIV) is based on the following premises:

1. The home owners who have received the biggest windfall gains in the values of their homes are the ones most in need of a tax cut.
2. A home owner whose Rates bill increases by a few percent of the increase in the rental value is more deserving of relief than a renter whose rent bill increases by 100% of the increase in the rental value.
3. The match between the Rates bill and “capacity to pay” is to be assessed solely by comparing adjacent properties — not by comparing working-class suburbs with elite suburbs, or heavily mortgaged homes with homes that are owned outright, or ordinary home owners with speculators owning numerous vacant lots.
4. New job opportunities are not welcome in Monash.
5. People who find jobs in Monash shouldn't be able to afford to live there. Neither should your kids or your aging parents.
6. Property owners should be penalized for using the right, and rewarded for wasting the right, to build higher-density housing.
7. Ratepayers need the threat of Big Brother snooping around inside their houses to keep them compliant.

Let me explain the above principles in greater detail, so that you can better appreciate their wisdom.

1. The home owners who have received the biggest windfall gains in the values of their homes are the ones most in need of a tax cut.

As Cr Klisaris recently put it, “The current system produces financial distress amongst the losers” — the “losers” being those whose Rates bills have risen the most, because the values of their properties have risen the most. Their “financial distress” is a Rates bill that claws back a minuscule fraction of the latest unearned increase in their net worth — it's terrible! Never mind that the market value of a site already accounts for tax implications, so that the rise in the Rates bill due to the rise in the site value still leaves the owner better off than if the site value had not risen. Such windfalls, however large, do not count; only reductions in windfalls count.

A “losing” home owner would be better off under CIV because, in the augmented rating base, the increasing site value would be diluted by the nearly constant value of the building(s).

Of course there are other ways to reduce these “losses”. For example, under the waiver power conferred by s.171 of the Local Government Act, the Council could make a local law whereby if the real increase in the Rates bill for an owner-occupied residential site exceeds a certain percentage, the excess will simply be waived. This is a more complete solution than CIV, which has no built-in limit on increases in individual bills. But we mustn't let superior alternative solutions get in the way of a good predetermined agenda.

2. A home owner whose Rates bill increases by a few percent of the increase in the rental value is more deserving of relief than a renter whose rent bill increases by 100% of the increase in the rental value.

At a rental yield of 5% per annum, Monash's rate of 0.2668% of the site value represents less than 6% of the site rental value. Hence, when a site value increases, the ratepayer typically incurs a Rates increase of less than 6% of the increase in the site rental value — less again if the total required revenue increases by a lower percentage than total site values. But a renter, by definition, can be slugged 100% of the increase in the site rental value when the lease is next renewed.

As already noted, CIV would moderate the Rates increases for those whose homes increase most in value. And by penalizing construction, it would exacerbate the shortage of rental accommodation, leaving renters worse off. That's as it should be.

3. The match between the Rates bill and “capacity to pay” is to be assessed solely by comparing adjacent properties — not by comparing working-class suburbs with elite suburbs, or heavily mortgaged homes with homes that are owned outright, or ordinary home owners with speculators owning numerous vacant lots.

Under CIV rating, if an opulent house and a tumbledown shack stand on adjacent lots, the owner of the opulent house will pay more. That's what counts.

Of course richer ratepayers tend to live in more expensive locations, which have more expensive sites but not necessarily more expensive buildings and are therefore better captured by SV than by CIV. But that doesn't count.

In consequence of these locational choices, richer ratepayers tend to have higher ratios of site values to building values than poorer ratepayers, and hence to pay a greater share of the burden under SV than under CIV. That doesn't count either.

More expensive buildings tend to be newer, and newer buildings tend to be more heavily encumbered with mortgages that offset the owners' capacity to pay. That doesn't count either.

The biggest winners under CIV are those who have the highest ratios of site values to building values. That means “land bankers” who own multiple vacant lots and therefore have high capacity to pay. So that doesn't count either.

4. New job opportunities are not welcome in Monash.

Employers need commercial/industrial accommodation. Under CIV rating, property owners who add to the supply of such accommodation will inevitably add to their CIVs and therefore be hit with higher Rates bills. That should deter them from helping to create jobs. The deterrent will be even stronger if, as proposed, CIV is accompanied by differential rating that hits commercial/industrial property harder than residential property. Who needs jobs when Australia is following the rest of the world into recession?

Of course, the lack of growth in job opportunities will eventually make Monash a less desirable place to live, and this of itself will tend to curtail the growth in residential property values, to the detriment of residential ratepayers. But that doesn't count — just as it doesn't count that the people whose Rates bills increase most after each Municipal Valuation are the ones who get the biggest windfall gains in property values.

One possible fly in the ointment is that under differential rating, in order to avoid the impression of doing favours to land bankers, a vacant lot might be taxed more heavily than a lot with a house on it. But this won't necessarily happen, especially in a built-up municipality like Monash. And if it happens, property owners who replace single houses with more capacious housing will still be penalized for competing with the land banks.

Of course most of these land banks are beyond the urban fringe and therefore outside Monash, which probably means that those who stand to gain most from the pro-CIV putsch neither live in Monash nor pay Rates in Monash. While this raises disturbing questions about the propriety of whoever is driving the process, it is a comforting precedent for the undersigned, who is also an outsider but does not share the land bankers' pecuniary interest.

5. People who find jobs in Monash shouldn't be able to afford to live there. Neither should your kids or your aging parents.

It's bad enough if jobs are created in Monash, but even worse if the people who fill those jobs can afford to live nearby. Under CIV rating, property owners who add to the supply of homes to rent or buy, making it too easy to find accommodation in Monash, will add to their CIVs and be hit with higher Rates bills. That should deter them from providing housing. Better still, the lack of local housing for prospective workers will deter prospective employers from offering jobs. It's a win-win.

And if new workers can't afford accommodation in Monash, neither can your kids who are about to fly the nest, or your elderly parents who need to be near you so that you can look after them. Apparently that's another win-win.

6. Property owners should be penalized for using the right, and rewarded for wasting the right, to build higher-density housing.

The mere permission to build higher-density housing on a site increases its value. It makes little difference whether that permission comes from an as-of-right zoning system, or from surviving an objection process. Under SV rating, getting that permission increases the Rates bill but using it does not. Under CIV, because the taxation of buildings allows a lower rate on the site, getting the permission causes a smaller increase in the bill, but using it causes a further increase. This further discourages those public nuisances who want to add to the supply of housing for the benefit of undesirables like employers, employees, children and parents.

7. Ratepayers need the threat of Big Brother snooping around inside their houses to keep them compliant.

Under CIV rating, the value of your house — not just the land — affects your Rates bill. Valuers don't come inside your house to make the initial valuation. But they do come inside if you appeal. And under CIV, ratepayers are more likely to want to appeal, because there's more to argue about. The need for an internal inspection will make them think twice about such insolence.

I hope that clarifies the issue for you. For further details, you might consult... [broken link; see this paper instead].

[Last modified Oct.13, 2009. See also Putland Cement.]