Who's Talking Nonsense, Mr Copeland?

Who's Talking Nonsense, Mr Copeland?

"United Future's proposal to apply a zero rate of GST to rates is bad public policy and anti-business, despite United Future's claims to the contrary", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Gordon Copeland stated that the Business Roundtable's criticism of United Futures 'GST Off Rates' campaign was "ill-informed" and "illogical", and he described its view that the proposal is anti-business as "nonsense".

"Mr Copeland's statement of 24 June on the 'GST Off Rates' campaign referred to "removing GST from rates", "dropping rates by 12½%", and stated "GST is not applied to rates across the Tasman". He did not state that United Future proposes to apply a zero rate of GST to rates", Mr Kerr said.

"Mr Copeland only has himself to blame when his statement was taken to mean that rates were to be exempted from GST.

"United Future's proposal is flawed whether rates would be zero rated or exempt for GST purposes.

"Local authorities would be entitled to a credit for the GST that they pay on their inputs if rates were zero rated. Such a credit would not be allowed if rates were exempt.

"Zero rating of rates would confer a competitive advantage on local authorities. GST would not apply in respect of services that are funded from rates whereas businesses would be required to charge GST on competing services. The current GST treatment of rates is best viewed not as a 'tax on a tax' but as a 'tax on a price' of goods and services.

"The collection and disposal of household waste is an example. Although some local authorities fund such services from user charges, they are often funded, in whole or in part, through rates. Private firms that provide competing services are required to charge prices including GST. This is the reason why United Future's proposal is anti-business.

The treatment of rates was examined before the introduction of GST. The government's Advisory Panel on Goods and Services Tax comprised Dr Don Brash (chairman), Alan Martin, the managing director of L V Martin & Sons, and Richard Green, a leading tax lawyer.

The Panel addressed the argument that GST should not apply to rates because it was claimed to be a 'tax on a tax'. The Panel reported:

After lengthy discussion, we accepted the view that GST should be applied to rates. Rates are clearly a payment for services provided by local authorities, albeit a very imperfect means of payment, and especially in view of the fact that some of these services are provided in competition with the private sector, neutrality demands that GST be applied to payments for them (rates). Accordingly, we concur with the treatment of rates proposed in ... the White Paper, namely that they should be subject to GST in the usual way.

"Mr Copeland claimed in his statement of 24 June that "All businesses and farmers would relish not having to pay 12.5% on their rates", Mr Kerr said.

"However, GST is a tax on final consumption, which has some advantages over taxing incomes, and it is consumers who would benefit if rates were zero rated or exempted.

"By contrast, businesses, including farmers, would not. They would be required to write a commensurately larger GST cheque to IRD. The GST that would otherwise be paid by businesses on their rates would be collected from businesses rather than local authorities.

"Mr Copeland appears to have recognised his error. He does not repeat the claim in this morning's Dominion Post article. Instead, he says business people will benefit as homeowners and because their customers would have additional money to spend.

"Relieving rates of GST is not the way to deal with the legitimate complaints of ratepayers about a growing and excessive rates burden. This should be addressed directly by limiting the activities of local authorities to ensuring the funding and, where appropriate, the provision of public goods and the administration of regulations.

"Providing local government with "some headroom as they strive to make ends meet" by removing GST on rates is an open invitation for councils to increase the rates burden further to the detriment of business, residents and the wider community.

"The Business Roundtable would welcome a reduction in the tax burden but it opposes ad hoc and poorly conceived tax proposals, such as United Future's 'GST Off Rates' campaign.

"For the revenue cost of the proposal, there are far better ways of reducing the tax burden on business and the economy. Both the McLeod Tax Review and the Treasury have said that, from a growth perspective, the greatest benefit would come from moving to a much flatter income tax scale.

"No competent tax policy adviser would give priority to applying a zero rate of GST to rates.

"United Future's commitment to business-friendly policies is appreciated, and in the tax area its core idea of moving towards a more uniform tax scale is viewed favourably by business. It should seek more professional advice on technical tax issues to avoid making the kind of errors in the 'GST Off Rates' proposal.

"Fortunately, with the government and a Don Brash-led National Party likely to oppose Mr Copeland's members bill, it may go no further", Mr Kerr concluded.

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