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Friday, April 24, 2009:

Weighting the debating of rating

By Gavin R. Putland

Rod Land, my colleague across the ditch, has drawn my attention to a “discussion document” distributed by the Far North District Council (Kaikohe, NZ). The FNDC is proposing to change the base of council rates from the Land Value (LV), which is the value of the land or site alone, to the so-called Capital Value (CV), which is the value of the land plus artificial improvements (including buildings). The first page of the document stresses that “NO decisions have yet been made” (bold type in the original), but admits that “the council likes the look of CV rating.”

How strongly the council prefers CV may be inferred from the tables on pages 3 & 4, which purport to list the pros and cons of the two systems. Notice that (a) the first table has the alleged advantages of CV in the left column and the second has the alleged disadvantages of LV in the right column, so that the CV proponents get the first and last word, and (b) the points purporting to favour CV are more numerous. Let me address problem (a) by reversing the order of the two tables (before combining them into one). And let me address problem (b) by adding a comment under each point [italicized, in square brackets] explaining it further and occasionally suggesting that it belongs somewhere else.

Land Value (LV) advantages:
  • LV rating is easy to administer and is currently well understood

    [It's easy to administer because the rateable value per unit area is a smooth function of location, and because the rateable value doesn't change when on-site buildings are upgraded or downgraded.]

  • LV does not discriminate against capital intensive commercial sites

    [True. The site owner can build the maximum amount of accommodation permitted by the zoning scheme without being penalized by a higher rates bill.]

  • LV is more likely to encourage business growth and development

    [True — again because there's no penalty for building.]

  • There is more consistency within local areas

    [True, because the rateable value per unit area depends on location.]

LV disadvantages:
  • LV makes little recognition of the ability to pay

    [True. A family that has borrowed heavily to build a $150,000 house on a $150,000 lot has less capacity to pay than a speculator who has bought an adjacent $150,000 vacant lot. But under LV they pay the same rates bill. The only recognition of capacity to pay is that richer people tend to live in more desirable suburbs, which have higher land values but not necessarily higher building values.]

  • LV is more prone to large valuation and rates swings

    [True. Because values of buildings are limited by construction costs, fluctuations in “property” values are actually fluctuations in land values. So if rates are levied on land values only, they will better respond to changes in values, hence changes in ... er ... capacity to pay. So why isn't this in the “advantages” column?]

  • LV is not currently addressing rating anomalies in coastal areas

    [The supporting text implies that the “anomalies” are the large increases in rates bills on the west coast, where land values have risen much more than on the east coast — the implication being that this “disadvantage” would be alleviated if those who have missed out on increases in property values paid a higher share of the rates!]

  • LV does not recognise the use to which land is put

    [Indeed it doesn't. The market value of land accounts for the use to which the land is allowed to be put, rather than the use to which it is actually put. Therefore LV rating does not punish those who put the land to the best allowed use. So shouldn't this be in the “advantages” column?]

  • LV tends to support growth pressure

    [True if we define “growth pressure” as adding to the supply of accommodation, which LV rating does not deter in any way. But shouldn't we rather classify the demand for accommodation as growth pressure, and the supply of accommodation as relief of the pressure?]

  • The share of rates relative to the benefits received and services used can be disproportionate

    [True if “received” and “used” are defined narrowly enough. Land values are heavily influenced by the availability of services on the land, but not by whether the services are actually consumed. If that's a problem, the solution is to charge for actual consumption of the services — not to change the rating base to CV.]

Capital Value (CV) advantages:
  • Most councils see CV as a fairer way to rate

    [So true that when Dunedin implemented CV just over two decades ago, the council split the General Rate into a “Separate Rate” and “Special Rate” in order to bypass the ratepayers' right to demand a referendum to reverse the decision. So true that Wellington implemented CV by a process that had to be retrospectively legalized by the Central Government. So true that the ratepayers' right to a direct vote on the rating system was abolished by the Labour-led Central Government in 1989, clearing the way for CV to be imposed across the country. (See my submission to the Royal Commission on Auckland Governance.)]

  • CV better acknowledges land use

    [Indeed it does — by penalizing people who use land more efficiently by building and rebuilding.]

  • The government Rating Review recommended all council's [sic] change to CV

    [The report of that Review didn't mention the fact that 90% of municipalities in NZ had adopted LV by ratepayer-initiated referenda by 1982 (see that submission again).]

  • About 60% of councils now use CV

    [It was 10% before the ratepayers lost their right to vote on the rating system. The fact that the democratic decision of the ratepayers has been usurped in half the municipalities is now being offered as a justification for further usurpations.]

  • CV better reflects the ability to pay

    [Yep. Under CV, the family that has borrowed to build a $150,000 house on a $150,000 lot pays twice the rates of the speculator who has bought the $150,000 vacant lot. CV reflects ability to pay like Auckland Harbour reflects the city skyline: upside-down!]

CV disadvantages:
  • CV tends to be more complex and may require the greater use of differentials

    [True. The differentials might be used to offset some of the perverse incentives that wouldn't arise under LV. Unless, of course, the perverse incentives are the reason why CV is preferred, in which case differentials might be used to make them worse.]

  • CV can adversely affect commercial activities

    [The inclusion of “can” is a deliberate understatement. If you tax buildings, you deter their construction and therefore reduce the supply of commercial accommodation — forcing up commercial rents — and reduce the supply of residential accommodation for potential customers and employees. It's a double whammy for business. And this is being proposed in the midst of the worst global recession since the Great Depression.]

  • CV causes wider rates variations among properties in similar locations where the improvements are different

    [Yep. That's what happens when you deliberately penalize improvements.]

  • CV can be counter productive [sic] to development

    [No kiddin'! To include buildings in the rating base is to tax development — not merely the natural resource (land) appropriated by developers, but the actual product of their work. What better way to discourage something than to slap a tax on it?]

As the “discussion document” asks, in large italic type at the bottom of page 4,

Which would be your choice?

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