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Friday, May 10, 2013:

The Minimum General Rate as a weapon of class warfare

Address by Gavin R. Putland to the Fraser Coast Rates Summit organized by the Henry George Association of Queensland and the Fraser Coast Ratepayers & Residents Association, Brolga Theatre, Maryborough, 8 May 2013 (Chair: Stephen Keevil). Text as prepared for delivery.

Thank you, Mr Chairman. Thank you, ladies and gentlemen. And thank you, Joffre [Balce], standing in for Tony Fitzgerald. No, not that Tony Fitzgerald. Yes, I am old enough to remember the Fitzgerald Inquiry. And I should remember because I was a Queenslander at the time: I was a North Queenslander for the first 12 years of my life, then a South-East Queenslander for the next 33 years. Please forgive me for having been a Victorian for the last 5 years.

So let me indulge in a bit of boasting. In Queensland, General Rates have been levied on land valuesexcluding the values of visible artificial improvements, such as houses and other buildings — since 1890. In New South Wales they've only been doing that since 1908. But at least they play League and Union. In Victoria, where they play some other game that I still haven't figured out, land-value rating wasn't used until 1920, and was never applied across the board, and hasn't been used at all since 2010.

The obvious advantage of rating on the land value — or the site value, as it's now called — is that you don't discourage building. And that's important not only for the builders, but for almost everyone.

  • If you have to work for a living, your employer must be able to pay for business premises out of the proceeds of the business, and you must be able to pay for housing within commuting distance of the business premises, out of wages that your employer can pay out of the proceeds of the business.
  • Equally well, if you're an employer, you must be able to pay for business premises out of the proceeds of the business, and your workers must be able to pay for housing within commuting distance of the the premises, out of wages that you can pay out of the proceeds of the business.

If you're an employee, the cost of housing in places where jobs are available (as opposed to places where they're not) is a cost of earning your wage and therefore operates as a tax on your wage, like income tax. If you're an employer, the cost of business accommodation where labour is available is a cost of employing that labour and therefore operates as a tax on hiring, like payroll tax or the superannuation guarantee. Overall, the cost of accommodation adds to the tax wedge between the cost of labour as paid by employers, and the benefit of labour as received by employees. The relationship between employers and employees is the basic productive relationship in the economy, while taxes and accommodation costs act as toll gates across that relationship, so that employers and employees together suffer a loss; and the labour market, which mainstream politicians are so obsessed with, merely apportions the loss between the two.

So, if rating policy is a weapon of class warfare, the war isn't between bosses and workers. They're on the same side. Whether you're an employer or an employee, or the partner of an employer or an employee, or the child of an employer or an employee, you want accommodation to be affordable. Therefore you want it to be plentiful. Therefore:

  • You don't want the Council to impose an additional Minimum General Rate on anyone who converts a single dwelling into a duplex.
  • And you don't want it to impose an extra water-access charge just because there's a second dwelling on the same lot.
  • And you don't want it to impose a garbage charge just because someone builds a house on a vacant lot, which the garbage truck has to drive past whether anybody lives there or not.

In summary, you don't want the Council to circumvent site-value rating by doing anything that would discourage construction. And that's only considering the static effect of the supply of housing, not the business opportunities and job opportunities generated by the building activity and its flow-on effects.

In case anyone doubts that current policies are discouraging construction, I offer two analogies. If you build a second dwelling on your land, the Council apparently thanks you by increasing your minimum rate bill by $846/year. Suppose the building costs $84,600, which is a plausible amount for a small flat built in situ.

  • The first analogy is with interest: the increase in the minimum rate bill is equivalent to an extra percentage point of interest on the cost of construction. By way of comparison, the Reserve Bank typically adjusts interest rates by a quarter of a percentage point. So, if the Reserve Bank thinks a quarter of a percentage point makes a difference to economic decisions, imagine what difference a whole percentage point makes. In particular, imagine how different your past real-estate decisions would have been if interest rates had been a whole percentage point higher.
  • The second analogy is with income tax: if you expect the additional construction to yield a 10% annual return in terms of additional rent, then the increase in the minimum rate bill is equivalent to a 10-percentage-point increase in income tax on your rental income. If Wayne Swan were to come here and announce a 10-percentage-point hike in tax on rental income, would the landlords among you be saying, “Oh, that's OK, Wayne; that won't affect our incentive to provide accommodation”? Would they? Because the minimum rate bill on the second dwelling amounts to the same thing!

And on top of the Minimum General Rate, you get the Standard Waste Service Charge ($316/year in 2012-13), and the Standard Water Access Charge ($425/year), and the sewerage charge ($665/year per rateable parcel), all of which add to the disincentive to supply housing and create jobs.

Concerning jobs, I notice that the unemployment rate in the Wide Bay-Burnett region was 7.6% in March, having been 10.8% in December (I need to mention both because the local figures aren't seasonally adjusted and tend to be volatile). Concerning the supply of housing, the real estate institutes tell us that a rental vacancy rate of about 3% is considered neutral; anything lower makes life harder for tenants. In March, according to SQM Research, the national vacancy rate was 1.9%; but for Hervey Bay (postcode 4655) it was 1.5%, and for Maryborough (postcode 4650) it was a catastrophic 0.4%, and for both postcodes the rate had been trending downward for 2 years or more. So if you're an employer and you think you're facing a skill shortage, perhaps the real problem is that the people you're looking for can't afford to live where the jobs are, and can't afford to commute from where they can afford to live.

So, who are the beneficiaries of restricting the supply of accommodation? They're not workers. They're not bosses. The obvious answer would seem to be property owners. But the obvious answer is too simple.

One complication is that you need a place to live. If restricting the supply of accommodation lets you get a higher price for your present home, it also makes you pay a higher price for the next one. So your interest as a prospective seller conflicts with your interest as a prospective buyer. In other words, if you're an owner-occupant, your interest as an owner conflicts with your interest as an occupant: as an owner, you want accommodation to be expensive; but as an occupant, you want it to be cheap.

That's your dilemma if you own your home. That's also your dilemma if you own not only your home but also your business premises, at least until you sell out of the business. On balance, as an owner-occupant of property, you don't necessary gain if accommodation gets more expensive. And I remind you: as an employer or an employee, you lose if property gets more expensive.

And what about your kids? If expensive housing lets you pass on a more valuable asset to your heirs, it also increases their need for it; and it tends to increase their need for it before you're ready to pass it on! Besides, your kids need jobs, and job creation requires affordable accommodation for both employers and employees.

So, to be a net beneficiary of expensive property, it's not enough to be a mere property owner. You must own more property than you need to occupy. In other words, you must be an investor — and not just any investor, but a big enough investor to ensure that your interest as an investor outweighs your interest as an employer or an employee. Having a job and a home and a negatively-geared investment property doesn't raise you above the working class as long as it all depends on that job.

The catch is, as soon as you become a home owner — that is, as soon as you become a slave to the bank instead of the landlord — you become susceptible to propaganda that encourages you to think of yourself solely as a home owner. And that includes propaganda on the rating system.

Site-value rating, as I've already explained, is good for job creation. That means it's equitable in the sense that it's good for people who have nothing but their labour: it helps them help themselves. It's also equitable in two other ways:

  • First, the value of your land reflects your capacity to pay, as expressed by your locational preference: the locational value of a property is contained in the site value — not the values of any buildings, because they depend on construction costs rather than “location, location”.
  • And second, the value of your land reflects the benefit conferred on your location by any desirable developments, including those funded by the Council. Even if the facilities provided by the Council are not the main reason why land values are high, those facilities will tend to be found in locations where land values are high for other reasons — like the city centre, or the esplanade.

In short, site value rating reflects both the capacity-to-pay principle and the “beneficiary pays” principle.

But, human nature being what it is, some of those who own the most valuable land in town won't want to make a proportionally valuable contribution to cover the cost of local government. They'll want to offload the bill onto people who are less well off. And to the extent that the value of their land reflects the benefit of council projects, they'll want someone else to pay for those projects. So they'll look for loopholes in the rating rules.

  • One loophole is the ability to impose so-called “service charges” in addition to General Rates. Hence the Standard Waste Service Charge and the Standard Water Access Charge and the sewerage charge.
  • The other loophole, of course, is the “Minimum General Rate” — more accurately described as minimum bill, because it's a fixed amount rather than a “rate in the dollar” on the site value.

If a council raises more revenue through these loopholes, it can reduce the rate on the land value and therefore raise less revenue from the owners of the most valuable land, while ratepayers with less valuable land make up the shortfall. The effect of the minimum rate is the most obvious and most blatant: the express purpose of the minimum rate is to make ratepayers with the least valuable land pay more than they would pay under a straight site-value system.

So how do councils get away with this? I can discern two basic methods. One is to combine “class warfare” with the tyranny of the majority, and the other is to conjure up distractions. Let me consider each of those in more detail.

If you want to promote policies that help the rich at the expense of the poor, it's always possible to tweak the policies so that the winners are in a majority. For example, you might aim to help the richest 60% at the expense of the poorest 40%, in the hope of getting the votes of the richest 60%. In theory it's also possible to help the poorest 60% at the expense of the richest 40%. But that's not so attractive politically, because the richest 40% will still have more money for campaign donations, and it doesn't matter how many people your policies are good for if you can't get the message out. So helping the richer majority at the expense of the poorer minority is the more viable political strategy.

Now, obviously minimum rates help the land-rich ratepayers at the expense of the land-poor. And I understand that your Council has also claimed that those who pay less under a minimum-rate regime are in the majority.

That claim may seem paradoxical because the Council also claims to have about 3/4 of the ratepayers on the minimum rate. But that doesn't mean 3/4 of the ratepayers pay more than under a pure site-value system, because if the minimum rate weren't there, the rate on the site value would be higher, and that would affect some of the “3/4” now on the minimum rate. So there's no contradiction between the claim that a majority are on the minimum rate, and the claim that a majority are paying less because of that.

Now, because I don't know the statistical distribution of site values or their groupings under owners, I'm not in a position to confirm that a majority pay less because of the minimum rate. Nevertheless, I'm willing to take the councillors' word for it, because I can see what game they're playing: they're seeking the votes of the richer majority.

So, does that mean I've lost the game? Does that mean that because the richer majority pay less under a minimum-rate system, and because they're always going to vote for their own interests, and because they have the numbers to prevail, the system can't be changed?

Not necessarily, because the richer majority of ratepayers are not only ratepayers. They pay rates in their capacity as property owners, but they're not only property owners. They also wear other hats. In particular, they are certainly property occupants, and they're probably either employers or employees; and in any of those capacities they stand to gain from a pure site-value system, because it doesn't penalize people for providing housing and business accommodation.

A change in the rating system doesn't only affect your rates bill. It affects the whole local economy, which in turn affects whether you can get a job or hire people or sell your products, which in turn probably affects your welfare more than the rates bill. And if enough people understand that, council candidates will no longer be able to win elections simply by promising lower rates to the majority and higher rates to the minority. So much for the tyranny of the majority.

The other method that I mentioned, by which councils get away with imposing minimum rates on the poorest ratepayers, is to conjure up distractions.

It is said, for example, that a Minimum General Rate helps to avoid large increases in bills due to revaluations. Funny how the Council doesn't seem to mind large increases in bills due to building houses. In any case, there's a much more direct way to avoid large increases in bills: under s.50 of the Local Government (Finance, Plans and Reporting) Regulation, 2010, a council can simply impose a cap on the percentage increase in the bill from year to year. By combining that cap with a pure site-value system, one can avoid large increases in bills without penalizing construction, and without imposing minimum rates on the owners of the least valuable land.

Perhaps the favourite distraction is the old widow who lives on valuable land but has a low income. Why is she only a distraction? Because if you really want to help ratepayers who are asset-rich but income-poor, you don't have to impose a minimum rate on the asset-poor, who of course may also be income-poor. Under Part 10 of the same Regulation, the Council can grant a concession to any ratepayer or class of ratepayers that it believes to be suffering from hardship, and the concession can take the form of a discount of any size, or a deferral for any length of time or until any specified event. So the Council can help the asset-rich widow as much as it likes, without imposing minimum rates on the asset-poor.

The need to pay for services used by apartment owners is another distraction, but not a very effective one, because on its face, it's an argument for service charges, not for minimum rates. Even as an argument for services charges, it's full of holes. The mere availability of water or sewerage at a particular site increases the value of the site. Hence a rate on the site value is a reasonable way to pay for water and sewerage connection. Admittedly, a rate on the site value isn't linked to the actual cost of connection in that location, but neither is a flat connection charge. And if there's a need to discourage over-use of the service, that's an argument for a volumetric usage charge, not a flat connection charge.

Furthermore, if you look at the table of minimum rates for various numbers of apartments, it doesn't make sense for the purpose of funding services, or, as far as I can tell, for any other purpose:

  • A second dwelling on the same site costs you an extra $846 in minimum rates.
  • The 3rd to 10th dwellings cost nothing extra.
  • The 11th costs an extra $5703.
  • The 12th to the 19th cost nothing extra.
  • The 20th costs an extra $17,086 if it's in a multi-level complex, but only $3484 if it's all spread out on a single level. And if you're not confused yet, you soon will be, because if you build from 26 to 54 apartments it apparently doesn't matter if you have multiple levels, but if you build more than that, it apparently does.

When the reasons given for a policy don't stand up, you know you're dealing with a hidden agenda. In the case of minimum rates, one part of the agenda can't be hidden: minimum rates make the least wealthy ratepayers pay more. What is hidden is the small number of ratepayers who benefit at other people's expense. Even if a majority of ratepayers pay less as a result of the Minimum General Rate, that doesn't mean a majority of ratepayers are better off, because ratepayers ain't only ratepayers. All ratepayers are property occupants (not just owners), and most of them are either employers or employees; and as occupants or employers or employees, they stand to gain from a plentiful supply of accommodation. And the rating system most conducive to the supply of accommodation is a simple rate on the site value, possibly supplemented by volumetric service charges, but with no lump-sum service charges, and no minimum rates.

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