A better way to reduce the burden on residential ratepayers

A submission to the Monash City Council's “formal public consultation” on rates, by Gavin R. Putland.¹

Summary

Of all the pro-CIV arguments in the Rating Strategy Review Steering Committee's report,² the only one that was not pre-emptively demolished in my first submission³ is the alleged need to lighten the burden on residential ratepayers relative to commercial/industrial ratepayers. This requires differential rating, which in turn appears to require CIV rating. In response, this submission shows that a “limited differential rate”, as permitted with SV rating under s.161A of the Local Government Act, can be used to redistribute the burden from residential property to commercial/industrial property. It can simultaneously achieve another stated goal of CIV, namely to redistribute the burden from detached homes to units.

If a lower “limited differential rate” were applied to “residential use land”, almost all ratepayers in detached homes would pay less than under the present system.

Among the goals stated in the report of the Steering Committee or in the preceding informal consultation, there is nothing to be accomplished by CIV rating that cannot be accomplished as well or better by tweaking the existing SV system. Therefore, if the Council insists on adopting CIV rating, it must be doing so for reasons other than those officially stated.

Contents

1.  Problem: Commercial/industrial ratepayers are allegedly not paying enough

1.1  Solution: On “residential use land”, apply a “limited differential rate” lower than the standard rate

2.  Problem: Under SV, some unit owners pay very low rates

2.1  Simple solution: As above
2.2  Comprehensive solution: As above, plus a Municipal Charge (MC) and/or a garbage charge
2.3  Worst solution: CIV

3.  Sundry rejoinders

3.1  Capacity to pay
3.2  Not a revenue grab
3.3  Sudden increases in bills
3.4  Too late to change the proposal?

4.  Conclusion

1.  Problem: Commercial/industrial ratepayers are allegedly not paying enough

That is, residential ratepayers are allegedly paying too much. Under the corresponding heading in my first submission, I wrote:

Are the costs of providing council services to commercial or industrial ratepayers out of proportion to their site values and hence to their present contributions to council revenue? If so, the obvious remedy is to charge for services. If not, in what sense are these ratepayers not pulling their weight?

I then offered two arguments against the proposition that they are “not pulling their weight”. As the Council appears to have rejected or downplayed those argument, I now submit as follows:

1.1  Solution: On “residential use land”, apply a “limited differential rate” lower than the standard rate

A “limited differential rate” on “residential use land” under SV rating (or NAV rating) is permitted by s.161A of the Local Government Act. And according to s.2 of the Valuation of Land Act,

residential use land means any rateable land —

(a) which is a unit or self-contained dwelling-house used solely for residential purposes; and

(b) which is situated in the municipal district of a council in which rates are levied in whole or in part on the site value of rateable land; and

(c) the site value of which, or in the case of a unit, the site value of the larger property of which the unit forms a part, has been declared by a valuer responsible for making valuations within the municipal district concerned to have been materially increased by reason that it is suitable for development or further development which is allowed by or pursuant to any relevant planning scheme...

This definition is applicable to almost any detached home on almost any residential lot in Monash, because the standard zoning of such lots permits a much higher density of development. Even if development at the highest “permitted” density is unlikely to survive objections from neighbours, a more modest increase in density is more likely to be approved; and this possibility causes the site value to be higher than it would be if the zoning permitted only a single dwelling.

If such “residential use land” receives a lower “limited differential” rate, the higher “standard” rate will apply to residential units, vacant lots, and commercial/industrial property, so that commercial/industrial property will bear a higher share of the burden.⁴

Note that vacant lots would share the increased burden. During the informal public consultation, the opportunity to impose a higher differential rate on vacant lots was offered as an argument for CIV — although, curiously, this feature was not included in either of the “options” then under discussion, or in the final “resolution”.

N.B.: Clause (c) above does not require a quantitative estimate of what the site value would be under a counter-factual zoning. It only requires a declaration that the value of the site is “materially increased” by whatever redevelopment opportunities actually exist. Such a weak statement can be made with great confidence.

2.  Problem: Under SV, some unit owners pay very low rates

2.1  Simple solution: As above

If owners of detached homes pay less due to “limited differential” rating, then obviously unit owners will pay more.

Under paragraph (3) of s.161A of the Local Government Act, limited differential rates are subject to the usual 4:1 maximum ratio of the highest rate to the lowest rate. Thus the ratio of a unit owner's bill to a detached-home owner's bill could be increased by a factor of up to 4. However, if the lower differential rate, under ordinary residential zoning, were declared only for single dwellings (on the ground that duplexes and larger complexes, being already more developed, are less likely to be redeveloped), it would seem reasonable to set the differential rate at (say) 0.6 times the standard rate, so that a detached home would pay 0.6 times the combined bill of a duplex on an adjacent lot with the same SV, or 1.2 times the bill of each half of the duplex. (Under the present system, the detached home would pay twice the bill of each half of the duplex.)

But under this arrangement, if the adjacent property were a sixpack instead of a duplex, its combined bill would be about the same as that of the duplex.⁵ The Council, on its recent rhetoric, would regard this as inequitable and would want the sixpack to pay more.

2.2  Comprehensive solution: As above, plus a Municipal Charge (MC) and/or a garbage charge

As explained in my first submission,³ if the Council were to collect 20% of total revenue from a Municipal Charge and 15% from a garbage charge, the redistribution of the burden from detached homes to units would be similar to that obtained by changing to CIV (but with fewer evil side-effects). Moreover, the MC and/or the garbage charge would mean that a larger number of units on one lot would pay a higher total bill (so that a sixpack would indeed pay more than a duplex).

If a “limited differential” rate were used to redistribute the burden from the residential sector to the commercial/industrial sector, less revenue would be needed from the MC and/or the garbage charge to obtain the desired distribution between detached homes and units. Moreover, as the MC would apply to vacant lots while the garbage charge presumably would not, the proportionality between the two could be used to adjust the relative burden on vacant lots.

In summary, by suitably fixing the “limited differential” rate, the MC and the garbage charge, one could obtain almost any desired distribution of the burden between vacant residential lots, detached homes, units, and commercial/industrial properties.

2.3  Worst solution: CIV

CIV rating, unlike any of the above options, penalizes ratepayers who replace, extend or renovate existing dwellings, and rewards ratepayers who allow their properties to deteriorate. A lower “limited differential” rate for single dwellings penalizes conversion to a duplex but, unlike CIV, rewards the construction of a single dwelling on a vacant lot, and does not penalize increasing the number of dwellings beyond two. A Municipal Charge penalizes any increase in the number of rateable units but, unlike CIV, does not penalize improvement or maintenance of a single rateable unit and, in particular, does not penalize building a house on a vacant lot. While a garbage charge by itself penalizes construction on a vacant lot, this undesirable effect can be counteracted by a lower “limited differential” rate for single dwellings; and while a garbage charge penalizes any increase in the number of dwellings, it does not penalize improvement or maintenance of any one of them, as CIV does.

By comparison with SV plus a “limited differential” rate plus a Municipal Charge and/or a garbage charge, one might allege that CIV offers simplicity. Indeed it does: simple, indiscriminate, punitive taxation of every kind of improvement that make a neighbourhood desirable. Moreover, if we must make a virtue of simplicity, I would remind the Council that Monash already has the simplest rating system in the State, and that the Council's preferred option would complicate it.

Very conveniently for the CIV brigade, neither an MC nor a garbage charge, let alone a “limited differential” rate, was considered in the so-called public consultation. The only reforms on the table were (i) “flat” CIV, which penalizes improvement without fear or favour, and (ii) CIV with a 150% weighting on commercial/industrial property, which especially penalizes improvements that are needed to create jobs. Thus the Council offered two alternatives to the present system, one crazy and the other crazier, so that ratepayers dissatisfied with the status quo would be steered towards one or the other. Then it took a preferred position midway between the crazy and the crazier, and called it a compromise.

3.  Sundry rejoinders

3.1  Capacity to pay

The report of the Steering Committee contains the revealing statement that “A key issue for SV is that it does not reflect the landowners [sic] ability to pay rates where ability to pay is defined by the value of improvements to the property” (my emphasis).

Indeed, in the end, the contention that improvements reflect capacity to pay had to be a matter of definition because it could not be sustained in any other way; it crashed and burned at the second public meeting, was not explicitly stated at subsequent meetings lest it be further attacked, and was logically dismantled in s.9 of my first submission.³ In case any Councillors are still under its spell, I offer the following example, of which an edited version appeared in the Monash Journal on Oct.26:

[S]uppose that the Smiths have an old house worth $150,000 on a site worth $350,000, making a combined value of $500,000, which they own “free and clear” as is often the case with old houses. Next door, the Joneses have just built a $350,000 house on their $350,000 site, making a combined value of $700,000, of which they owe $650,000 to the bank, so that they are only $50,000 “above water” (compared with $500,000 for the Smiths).

Under the present SV rating system, the Smiths and the Joneses pay the same rates. Obviously this is inequitable. The Council thinks the Joneses should pay less because they are barely above water, right? Wrong! The Council thinks the Joneses should pay more because their house is worth more! Under the Council's preferred CIV rating scheme, the Joneses will pay 40% more than the Smiths. Equity problem solved!

CIV rating might reasonably reflect capacity to pay if the rates payable on a mortgaged property were shared between the borrower and the lender in proportion to their equity in the property; but the system isn't that sensible, and the Council lacks the authority to make it so.

3.2  Not a revenue grab

After the series of public meetings in which Mr Haratsis steadfastly denied that a change to CIV would affect overall revenue, the report of the Steering Committee declares:

The consultation process identified that a change from Site Value (SV) to Capital Improved Value (CIV) would ensure:

. . .

• An increased opportunity to raise revenue to provide facilities and services to meet a growing and changing community, through supplementary valuations.

Perhaps this is an unsubtly coded message, which decodes as something like “Argument is futile; we don't even have to pretend to be consistent.”

3.3  Sudden increases in bills

In the report of the Steering Committee, the original objection to SV rating, namely that it can cause steep increases in bills due to revaluations, has strangely fallen by the wayside. But the remarks in my first submission remain pertinent. If steep increases in bills are a problem, the most complete solution is to cap the increases by means of the hardship-waiver provision (s.171) of the Local Government Act. The cap would apply to increases caused by changes in site values, and perhaps also to increases caused by the initial change in the rating system. But they would not apply to increases caused by changes in numbers of dwellings or of rateable units, because these changes would be within the control of ratepayers and the consequent changes in rates bills would be anticipated and budgeted for, so that they should not cause “hardship”.

3.4  Too late to change the proposal?

It may now be too late to design and adopt, in time for the 2010/11 budget, any rating system other than the present one or the one recommended by the Steering Committee. But it should not be too late to adopt the suggested s.171 cap while retaining SV rating, so that the 2010 Municipal Valuation will not cause too many political headaches. A new system could then be adopted in time for the 2011/12 budget. If the introduction of the new system were subject to the same s.171 cap, this too would cause few political problems — probably far fewer than the Council is presently expecting from CIV.

4.  Conclusion

Combining the arguments in this submission and its predecessor,³ we see that there is nothing to be accomplished by CIV rating that cannot be accomplished as well or better in other ways — unless, of course, it is counted as an accomplishment to penalize construction, suppress industries upstream and downstream of construction, squeeze industries that require commercial/industrial premises and housing for employees, reward property owners who cease to maintain their buildings, reward speculators holding vacant land, force population growth to the urban fringe (much to the delight of the land-banking developers), and consequently increase trough-traffic and smog for the residents of Monash.

The last paragraph of the earlier submission bears repeating: “It is no accident that the last remaining SV municipality in Victoria has an unusually healthy economy. The surest way to throw away that advantage is to adopt the rating practices of the other municipalities.”

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