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Proposed Land Tax will have detrimental long term affects

Proposed Land Tax will have detrimental long term affects

Mark Rais
Updated 6/5/16

The national median price of houses sold last year was $450,000, according to statistics from REINZ (Real Estate Institute of New Zealand). A proposed Land Tax at the recommended 1% would substantively add to the existing rates already being paid. Rate payers would be paying a potential additional tax approximately 40% of their current total rates bill, and this tax would increase as valuations increase.

The proposals for a general Land Tax will directly impact the same groups of people who have been concerned over rising council rates for years, including pensioners and fixed income households.

Although such a proposed tax can have positive effects in the short term, Land Taxes have a strong tendency to perform the opposite economic effect over the long term.

Initiating a New Zealand wide Land Tax may, over the long term, punish home ownership for the general population, directly impact not just pensioners but all home owners on fixed incomes, and further exacerbate availability of affordable housing both for tenancies and for new home owners.

This conclusion is based on the application of similar Land Taxes in a number of other OEDC nations. Such taxes are referred comparably as Property Taxes, and are applied by specific counties in nations such as the United States.

These Land Taxes, or Property Taxes, can have substantial detrimental long term impacts on the macroeconomic environment, often resulting in the opposite market effects to the original intention.

Using the Southern California property market as an example, one can identify several major factors resulting from land taxation used among a number of Counties over the long term:

1. Land holders such as Farmers, Pensioners, and fixed income earners sold their property to avoid the increasing taxation. Land Taxes increase with the value of property and over the life of a mortgage can grow to substantial levels. Many small farms, vineyards, and ranches in California were sold off to developers as a result of the rising level of taxation.

2. New home buyers had substantially reduced options as lower cost home surpluses continued to diminish. The tax did not effectively decrease housing demand, and instead intensified demand on lower cost houses.

3. Landlords chose to offset the increased taxes onto their tenancies, raising rents.

4. Instability increased for the operating budgets of many of the County governments, since their budgets were tightly coupled with the fluctuating property taxes.

It is therefore conceivable that a general Land Tax in New Zealand will have comparable negative results in the long term:

1. As the value of the land increases over the term of mortgages, pensioners, and home owners on fixed incomes will find that the Land Tax increases substantially and many such fixed income earners will end up downsizing their homes. This results in an increase in demand for lower cost houses and more competition for new home owners.

2. Farmers and groups that own large sections of land are taxed increasingly more as the value of large sections of land grow over time. Often these groups tend to be the ones most negatively impacted by a Land Tax, which has been shown historically to be a consistently rising tax.

3. Long term tax increases based on land value have been known to encourage a growth in short term property speculators and developers, as they are not constrained by increasing Land Tax over long term cycles. It encourages speculators to purchase into the market, because actual growth in residential values is not moderated by tax, but by demand. This was seen in California, where the assumption was that speculators would leave the market. Instead, over the long term, the number of speculators increased proportional to demand, regardless of the tax.

4. Similar to other governments that implemented Land Taxes, the New Zealand government may become reliant on this new revenue and when residential values see declines there will be declines in tax revenue. It is one reason why reliance on a Tax that trends with market conditions is never a stabilising tool.

5. Land Tax continues for investment property owners indefinitely, whether they have paid off their mortgage. The result is that most property owners over the life of their investment will pay an increasing amount of tax as property values rise. This has a tendency to increase rents and reduce supply, as landlords offset the costs to their tenancies, and fewer landlords enter the market.

Initiating a New Zealand wide Land Tax may, over the long term, punish home ownership for the general population, directly impact not just pensioners but all home owners on fixed incomes, and further exacerbate availability of affordable housing both for tenancies and for new home owners.

Any type of taxation that increases with inflation or demand, and imputes punishment for long term ownership, will not resolve the macroeconomic housing environment in New Zealand.

Instead, it is more effective to use precise tools such as specific changes in lending regulations, and targeted capital gains taxes, to accomplish the goal of cooling the housing market while not undermining key economic stabilisers. Other non-legislative solutions should also be examined, including the fundamental requirement for increasing supply.

Other Scoop articles by Mark Rais:

Interest Rate Cuts Fails When Applied in Isolation

Op Article: Oil Rules the World

Clash of Super Powers in an Age of Global Conflict

Op Article: War for the Hearts & Minds of Our Children

Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and has written numerous articles on the influence of technology and society.

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