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ARC Rating Claims Exposed

ARC Rating Claims Exposed

Roger Kerr

The Auckland Regional Council's claim that the business sector benefits more than proportionately from its services has been exposed as groundless by two recent reports. The claim was the key argument for the introduction of a business differential rate.

The ARC collected its rates through territorial local authorities up to 2002/03. Its general rate was levied at a uniform rate in the dollar on all rateable land. Unbeknown to most ratepayers, territorial local authorities in the Auckland region used their rating systems to redistribute the ARC rate among property owners in their districts.

They used three different bases: annual, capital or land value. Most territorial authorities applied a differential rate to business. The general rate per dollar of rateable property used for business purposes in North Shore City, for example, was a scandalous 9 times that payable by a residential property owner.

The ARC decided to collect its rates directly from property owners following the passing of the Local Government Act 2002. In 2003/04 it levied a uniform general rate on a capital value basis. All regional councils applied a uniform rate on this basis. The move to direct rating, coupled with a massive 34 percent increase in budgeted rates revenue, changed the initial incidence of ARC rates. Residents were faced with a large increase in rates. Some residential ratepayers mounted a rate boycott. Egged on by some territorial authorities, they attributed their plight to the absence of a business differential.

The ARC proposed a continuation of its 2003/04 policy in its draft annual plan for 2004/05 but included a differential as an option. A differential of 1.5 was subsequently adopted. Thus a business paid 50 percent more in general rates than a residential property owner with a property of the same value.

The ARC gave three main reasons for the introduction of a differential: 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 organisations, led by the Employers and Manufacturers Association (Northern), pressed the ARC to justify its claim that business benefited disproportionately from its services.

The ARC was apparently aware that it could not substantiate its key argument. On the day that the differential was adopted, it resolved to commission a report "to assess whether there are additional benefits received by businesses that justify a differential over and above the capital value rating system."

Business proposed a joint study to resolve the impasse. The ARC backed down on this idea and decided to proceed with its own study. Associate Professor Basil Sharp of the University of Auckland was commissioned to undertake the work. His report was completed in May 2005, before the differential was increased to its present level of 1.6. Sharp focused on what is commonly referred to as the benefit principle. His report is of considerable importance to local government because it outlines a conceptually sound and rigorous approach to the application of the benefit principle.

Councils often assert that one category of ratepayer benefits from a particular service but fail to examine adequately whether a benefit is indeed generated and to quantify the level of any such benefit.

According to Sharp, the benefits of ARC services are measured by their contribution to consumer surplus (residents) and producer surplus (businesses). Consumer surplus is the buyer's willingness to pay for a good or service net of the amount actually paid. Producer surplus is an analogous concept.

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. Most benefits (76 percent by number) were classified as general benefits. General benefits should normally be funded by a uniform general rate on all rateable property. 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 have a medium probability of providing a direct benefit to businesses while just 7 percent were deemed to provide a high benefit.

Because Sharp could not quantify the level of direct benefits, his report does not support the main ground for the differential cited by the ARC.

Two ARC officers, seemingly anticipating that the Sharp report had demolished the ARC's main rationale for a differential, sought to expand the analysis to reflect the cost of activities that the ARC undertakes. Their memorandum was forwarded to councillors with the Sharp report.

The business organisations asked economic consultant Greg Dwyer to review the Sharp report and the ARC memorandum. He endorsed the Sharp report but was highly critical of the ARC memorandum. The latter ignored the explicit advice of Sharp that benefits could not be equated with the cost of ARC services and could not be quantified without undertaking specific empirical studies. A large number of papers on its rating policy were supplied to Dwyer by the ARC. He reported that none contained an analysis that would justify a differential rate. His report concluded, "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."

The ARC is preparing its draft long-term council community plan. It must revisit its rating policy knowing that the report that it commissioned does not support its argument for a differential rate and that its staff memorandum is flawed. Unless the ARC can produce fresh and credible justification for the differential, which is extremely unlikely, it will need to be withdrawn. The ARC may, of course, ignore the Sharp and Dwyer reports. That would, however, strengthen the case for legislation requiring councils to operate on a more principled basis in setting rates than at present.


Roger Kerr is the executive director of the New Zealand Business Roundtable.


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