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Larry Baldock Address to Local Govt. NZ Conference

UFNZ Media Release
For immediate release

United Future MP Larry Baldock
Address to Local Government NZ Conference
5pm, Tuesday, 27 July, 2004

Let me first thank LGNZ for the opportunity to speak to you today to promote the United Future Member's Bill to remove GST from rates which will have its first reading in Parliament, possibly as early as next Wednesday.

Before discussing the Bill, sponsored by my colleague, Gordon Copeland, and the GST on rates issue in general, let me first outline United Future's policy on a number of issues that relate to local government funding.

Firstly, we support increasing the Financial Assistance Rate paid by Transfund for local roads to 80% to alleviate the cost burden of local road maintenance and construction on rates and, therefore, on councils.

In addition, in the short term we will be supporting the increase of a further five cents petrol excise tax and similar increase on RUC for light vehicles from April 1, next year.

The revenue gathered from these moves will be devoted entirely to the National Land Transport Fund and distributed regionally for local road construction.

We made sure in our negotiations with the Government that none of the five cents would be diverted to the Crown account, or what was formerly known as the consolidated fund.

Indeed, with the announcement of the funding package for Auckland's roads, I made sure in last minute negotiations with the Finance Minister, Dr Michael Cullen, that all of the funds being given to Auckland would come from a reduction in the 18.5 cents currently diverted to the Crown account from petrol excise.

This would equate to about a three-cent reduction, and we will continue to push for a further two-cent reduction that would enable the increase of the Financial Assistance Rate.

We also support and will be arguing for the review of the rates rebate level to assist those on fixed incomes.

United Future applauds the initiative of those councils that have also prepared plans for enabling some ratepayers to defer rate payments to their estates, which enables them to remain in their properties in circumstances where they are asset rich but cash poor.

We are also supportive of the concept of central government sharing a percentage of GST revenue with local authorities on a regional basis in a similar way to the new road revenue.

There may need to be some parameters around this funding, such as limiting it to infrastructural projects and not operating expenses, but that is a discussion and debate that can be had.

Just 1% of current GST on annual revenue from GST for the year ended in June - a take of $9.57 billion - would amount to about $95 million.

And there are indications from the Government that consideration is being given to assist small councils with large infrastructure projects such as sewage and water treatment - and such moves would have our support.

All of this is necessary because we entirely agree that local government has been given more and more responsibility over recent years without any additional funding, except that which it raises primarily from property owners.

The new Local Government Act gave new powers to take sub-division impact fees and along with building impact fees, enabling the costs of providing new amenities for our communities to be spread on to new home owners as well as existing ratepayers.

However, there are limits to how far this can be extended without having a negative affect on the cost of housing, particularly for young families and first time buyers.

Removing GST from rates is a very practical first step in addressing the increasing rate burden that has fallen on existing private property owners.

If the Bill to remove GST from rates passes its first reading next week, it will be sent to a select committee where public submissions can be heard, not only specifically on the removal of the 'tax on tax,' but also allowing a debate to be started on the wider issue of the funding of local government, which in my opinion is absolutely essential.

It is essential because on a number of occasions, recommendations have been made to central government on what needs to be done to alleviate the dependence of local government on the taxes levied on property owners to fund all the services they provide for a community.

Some progress has been made with more user-pays charges, and as I have said earlier, with new subdivision impact fees to spread the costs of new facilities for growing communities, but still more needs to be done.

However with the remainder of my time today I want to talk primarily about our plan to remove GST from rates.

The reaction in recent weeks from some sectors has been astounding.

First the Business Round Table and then the Local Government Forum said they thought it wasn't a good idea because it may create a situation where councils had an unfair advantage over private business if they didn't pay rates.

That misses the point: this Bill is about removing GST from ratepayers not councils.

Next they said that because businesses would not be able to claim rebates on GST on rates anymore they would have to increase their prices.

Again this missed the point: you don't need to claim a rebate on what you no longer pay in the first place.

Federated Farmers likewise was not ecstatic, but then farmers currently claim the rebate as well, so their position would be neutral except for the reduction in their rates assessed on their private home and its curtilage.

Our focus has been on the fact that every private residential ratepayer would see an immediate reduction in their rates bill by not have to pay 12.5% additional tax on it.

The interesting scenario of course in Parliament now is that the Finance Minister was an opponent of GST being applied to rates when he was the senior whip in Labour and the now National leader, Dr Don Brash, was the chair of the committee that recommended that GST apply to rates.

And Dr Cullen recently advised in reply to a written parliamentary question that the cost to central government would be approximately $160 million. This has been revised down from the original estimate of around $250 million.

While there has been some talk in local government circles about the idea that they want the Government to continue to collect GST on rates and then give it back to local government, I think some caution is needed.

There is perhaps some merit in the proposal for central government to send a percentage of the GST it collects back to councils, distributed regionally in a similar manner to the current handling of the fuel excise tax, but that doesn't justify a tax on a tax.

And remember, if central government collects it as its tax, it can all too easily, during a time of fiscal pressure, take it back again.

What would be the effect of zero-rating of rates for GST purposes on local government accounts?

Local authorities would still collect for themselves exactly the same amount of rates, so there is no loss to them. They would still pay GST on their GST rated activities, and they would claim back GST on purchases that qualify for rebate.

This is confirmed by Deloittes in the opinion sought from them by Local Government NZ, when they said: "It follows that Mr Copeland's proposal for local authorities to nevertheless remain entitled to full GST input tax would not be inconsistent with current GST legislation."

Deloittes then went on to say: "Looked at in this way, the question whether GST should be imposed on local government rates is arguably a side issue, with the better questions being: * whether the Government is collecting more money than it needs to fund its current and future activities, and * whether removing GST on rates is the best mechanism for delivering a reduced tax take?

Perhaps not surprisingly, the above questions are more political than tax policy questions. We accordingly leave you to form your own view."

In United Future, we resoundingly answer YES! In an environment where Central Government is running healthy surpluses, removing GST is a tax cut that makes sense!

And finally, to quote from my colleague Gordon Copeland:

"On the very day my Bill to remove GST on rates was drawn from the ballot, as Deputy Chair of Parliament's Finance and Expenditure Committee, I was meeting with the Australian Parliament's Committee on Economics, Finance and Public Administration and we were talking about taxes and rates. I asked whether GST was applied to rates in Australia and quickly received the answer "No - because that would amount to a tax on a tax."

Sometimes our Australian neighbours just make things too simple don't they!

Let me finish by summarising the key reasons why United Future is advocating the removal of GST from local rates. They are two-pronged and difficult to refute:

1. The GST on rates represents a tax on tax and this is wrong in principle.

2. The current economic conditions are robust enough to account for the elimination of this ill-gotten revenue.


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