Rating Business, October 2005
Rating Business, October
Prepared for the Employers & Manufacturers Association (Northern), Auckland Regional Chamber of Commerce and Industry, Heart of the City, NZ Business Roundtable, Property Council of New Zealand
-The Auckland Regional Council (ARC) commissioned Associate Professor Basil Sharp of The University of Auckland to assess whether there are additional benefits received by businesses which justify a business differential rate over and above the existing rating system based on capital value.
- Two ARC officers prepared a memorandum to provide some context to the report for councillors and "to expand" the analysis to reflect the cost of activities that the ARC undertakes (the ARC memorandum).
- Professor Sharp's report and the ARC memorandum are reviewed.
- Before July 2003, the ARC used the land value rating system. The general rate comprised a uniform rate in the dollar that was applied to all rateable land. There was no business differential rate.
- The ARC collected its rates via the territorial local authorities (TLAs) within its region. The TLAs reallocated the ARC rate among ratepayers within their districts according to their rating policies. Those policies comprised three different rating systems, and usually included a business differential rate and a uniform annual general charge.
- From July 2003 the ARC collected its rates directly from ratepayers in the region. It adopted the capital value rating system which rates businesses more heavily than the land value rating system. A uniform general rate was applied to all rateable property.
- The move to direct rating changed substantially the initial incidence of the ARC's rates. This, together with an average increase in rates revenue by one-third, led to pressure on the ARC to adopt a business differential rate to alleviate the rate burden on residential ratepayers.
- In 2004/05 the ARC imposed a business differential rate of 1.5 (that is, property used for business purposes was subject to a rate that was 1.5 times as large as that levied in respect of a residential property with the same rateable value).
- The ARC stated that its decision to implement a differential rate was based on three factors: its assessment of the beneficiaries of the services it provides, the responses it had received through public consultation, and the size of the change in rating burden for the residential and business sectors generated by the rating policy adopted in 2003/04.
- Business interests have been pressing the ARC since June 2004 to demonstrate that a differential rate is justified on principled grounds, most notably that businesses benefit more than proportionately from ARC services. Professor Sharp's report was intended to address this issue.
- Professor Sharp views rates as a benefit tax. This approach is consistent with the ARC's proposition that the share of rates payable by owners of residential and business property reflects the level of benefits that they each derive.
- The benefits provided by goods and services are subjective. They reflect the preferences of individual ratepayers which differ.
- If the benefits derived by each ratepayer from the ARC's activities equal or exceed the level of rates that each ratepayer pays, a benefit tax would be efficient.
- Proper measurement of benefits is critical. Benefits reflect the contribution of ARC services to producer surplus (businesses) and consumer surplus (residents).
- Benefits do not equate with the cost of goods and services supplied by the ARC.
- Professor Sharp classified benefits generated by the ARC's activities as general benefits (those attributed to a broad section of the regional community), or direct benefits that accrue to business ratepayers. Direct benefits that accrue to residents were not examined.
- General benefits should normally be funded by a uniform general rate on all rateable property.
- Most benefits (76 percent by number) were judged to be general benefits.
- The report also contains a qualitative assessment of the likelihood that the ARC's activities would provide a direct benefit to businesses.
- Most activities (79 percent by number) were assessed to have a low likelihood of providing a direct benefit to businesses. Fourteen percent of activities were judged to provide a medium probability of providing a direct benefit to businesses while just 7 percent were deemed to provide a high benefit.
- Unless the level of direct benefits (taking account of the shifting of the initial incidence of rates) is quantified, consistent with the methodology adopted, it is impossible to know whether such benefits are small or large.
- Neither direct benefits nor general benefits were quantified. As a consequence, Professor Sharp's report does not provide the assessment that was to be undertaken and it does not immediately assist in resolving the central issue of whether a business differential rate is justified on the main ground cited by the ARC.
- The quantification of benefits is, in part, an empirical matter. The ARC does not plan at present to undertake an empirical study.
- A benefit tax approach is not feasible if benefits are defined to include avoided harms. Another major problem arises in estimating the willingness of businesses and residents to pay when benefits are subjective and there is no mechanism for revealing their true preferences.
- It is unlikely to be feasible to collect the information required to apply a benefit tax satisfactorily. Genuine benefit taxes are rare for this reason.
- Central government's tax policy eschews such an information-intensive approach, most notably in setting a uniform rate of GST.
- Professor Sharp is of the opinion that the argument that businesses are advantaged by being permitted to claim an income tax deduction for rates and an input credit for GST paid on rates is incorrect.
- The funding of a given level of spending is primarily a taxing issue. Generally accepted principles of practical tax policy point to a uniform rate on all rateable property as the norm for local government funding, with limited exceptions.
- If it is proposed that a particular class of ratepayer should fund specific publicly provided goods and services, the consent of affected ratepayers should be obtained in advance. This requirement replicates, to a limited extent, voluntary exchange in the case of private goods. As in other comparable situations where the will of the majority is imposed on a minority, support from at least 75 percent of affected ratepayers should be required.
- The ARC supplied a large number of papers on its rating policy. None contained an analysis that would justify a business differential rate on the capital value rating basis.
- The suggestion that businesses benefit directly from transport services used by employees and shoppers, is doubtful. Beyond the short-term, businesses earn a normal return only.
- Little weight can be placed on the surveys and submissions that conclude that another ratepayer group should pay disproportionately for services that are available to all ratepayers. Survey responses that reflect mistaken analysis cannot support an informed rating policy.
- The ARC is poorly placed to judge issues of fairness and equity, such as ability to pay and inter-generational equity, on an informed and objective basis.
- The ARC memorandum ignored the explicit advice in Professor Sharp's report that benefit cannot be equated with the cost of ARC services and could not be quantified within the scope of his study.
- The analysis reflected in the ARC's claimed expansion of the Sharp report is alarming. The ARC memorandum equates cost with benefit and, leaving aside that fatal error, contains other mistakes.
- The ARC cannot credibly sustain its claim that the business differential rate reflects the level of benefits received by businesses unless it can produce persuasive evidence on the level of benefits that accrue to different classes of ratepayers.
- The onus is on the ARC to demonstrate that its rating policy is derived from a principled analysis and reflects a genuine commitment to act in the best interests of all ratepayers and residents rather than an arbitrary policy essentially aimed at appeasing residential ratepayers. The ARC has not yet discharged that responsibility.