LAND TAX AND MORTGAGES

Press, Volume LXXII, Issue 21865, 19 August 1936, Page 15

LAND TAX AND MORTGAGES

Inequities Revealed in Examination VARIATIONS AMONG DIFFERENT DISTRICTS ;^"| ,ii | ) , || , || , | ,,i,r,,i,, L „im 1 | i, u 1,., "• 18F1CWUO.I WBOTJSS TOR TUB PSES3.) IBy T. N. GIBBS] V. ' .‘.V.; : W. : : This is the last of a series of five articles in which Mr^Gibbs ; has surveyed the Incidence of the proposed land tax as it will affect various classes of rural and urban property in the. Dominion. In this article he discusses the operation of the tax with regard to mortgages.

It is not possible within the scope of these articles—and this is the last—to examine all the defects, injustices and inequalities which can be end are imposed , by a fixed and highlygraduated tax. such as the land tax now proposed for this Dominion. The subject should not, however, be left without reference to the mortgage position. If all fanners and land owners held their land free of debt and independent of the rest of the people, there would be a great deal to be said for a special land taxing system. The land is, of course, not so held in New Zealand. We have developed the wide and full use of credit, and nowhere more so than ; n respect of land. It has been very easy for any citizen with a capacity lor work and a small amount of savings or other capital to acquire land. Loans have in the past been freely made on the basis of the first mortgage of land, and it has not been unduly difficult to secure supplementary finance. As a result of this, the land is not today something divorced from the people, but through this system of mortgage and credit many more people than occupiers are concerned, and have a direct and financial interest in the land and its productivity. Perhaps there is something in the philosophy of this which accounts for the existing mortgage exemption of £7auu It means that no land tax is payable on a multitude of land units m the Dominion which come under this level or standard. The main point to be. considered then is whether this exemption level of £7500 is fair and sound with relation to (a) the various farmers and land owners who are working or developing bigger or more valuable units subject to mortgages above the exemption allowance, and <b> the effect of the proposed tax levy upon the mortgages on land units not exempt. - • The Exemption Level We will examine firrt the exemption level adopted as it affects the mortgagor. It is well known that there are many eases where farmers and others work big properties, but they carry very large mortgages. The net financial worth and income of many such farmers are substantially less p>an many others occupying smaller properties, and paying little or no tax. Many of these larger units cannot be subdivided or worked economically as smaller units. What little these men have is to-day imperilled by the proposed graduated tax levy. In the circumstances also, the factor of the varying proportion of unimproved value to capital value, referred to in the previous article, is of considerable moment. In a considerable number of counties inJ4ew Zealand the average unimproved value is less than 30 per cent, of the capital value of the farms. On the other hand, there are a score of counties where the unimproved value is rated at 75 up to 80 per cent. Take three typical counties; (a) with average unimproved value equal to 30 per cent of capital value; lb> with unimproved value equal to 80 Per cent,; and (c) with unimproved value equal to, 78 per cent ff-his reference to counties gives average values in typical districts. There would be many properties in these and other counties, both above and below the proportion, of unimproved values stated. Assume a property la selected in each of the above categories, and each with a capital value of £20,000. This capital value would have close relation to the annual income from the property. Assume also that each property carries a mortgage for £14,000, The result is as follows; In A the unimproved value is £7500, full mortgage exemption is allowed: no land tax is payable- In B the unimproved value is £IO,OOO, mortgage exemption of £8000; tax payable on £BOOO only at id, amounting to £2O. In C the unimproved value Is £15.000, no mortgage exemption ia allowed; tax la payable on the 'whole value at 2id, amounting to £l4O. Inequitable Differentiation It has already been stated that each farmer has the same capital and the same income, but because of the natural characteristics of his locality, or perhaps the fact that the one county was settled earlier —the land requiring less capital improvements—it is found that one pays nothing, another £2O, and the third £l4O, This is scientific taxation! Such differences mount more severely as bigger units are taken. Take properties of equal capital value of £40,000 in similar districts as previously. Assume each also carries a mortgage for £27.000, the result is;— In a, the unimproved value is £12,000, a mortgage exemption qf £3OOO is allowed and tax is payable on £9OOO at lid, amounting to £56. In B the unimproved value is £20,000, there is no mortgage exemption, and tax is payable at 2|d, amounting to £239. In C the unimproved value is £30,000, no ei. ;mption: b . is at 4£d, and- amounts to £515. The farm units are in each case equal In value and production. On what possible grounds can there be justification for such a basis of taxation? City Properties Similar analogies can be drawn in the case of city- properties. Take two blocks of equal capital value. One block may have a large modern building, well let and bringing in good revenue. The value of the property is mostly in the building and the unimproved value is equal to only onethird el the capital value- On the other property of equal vaiue there may be a small out-of-date building, of little value, The unimproved value would be.high and the income from the property small. A typical ca r for comparison purposes would be as follows: SSaLSS"**, || Mortgage exemption 8,000 nil Net Tneomo alts? interest paid . ~ 800 BPO Land tax (a) an fßooo f »t -■ M ~ ' 20 (b> ««' 228,000 at aid 364 It will be noted that in this comparison the owners have identical equity-or financial interest It might be started in the ease of city property of occupier does not pay, the mort-

that the graduated tax will force the improvement of the property so as to produce more revenue, and thus counteract the levy. This, of course, is the principle behind the system of local, rating on unimproved value, but the law of supply and demand seriously limits the revenue that can be obtained from town property. No good purpose can be gained by putting up buildings which cannot be occupied or readily let. The local rates and other factors bring about improvement in the normal course. The foregoing should clearly demonstrate that from the mortgagor’s point of view this tax is not fair and equal between one man and another. It will be extremely hurtful to many hardworking and* struggling producers and land owners , Effects on the Mortgagee The other heading under which this subject should be examined is that of its affect on the mortgage and the mortgagee. The land tax takes a substantial payment from the property before mortgage interest can. be met. If not paid, the tax , is charged on the property before the first mortgage, and this charge can be registered on the title deeds. Further, if the land owner ever recourse he or it may. for the recovery of the amount. This legal sanction is no doubt justifiable in principle, as a means for securing collection of the tax, and in practice is not burdensome when the amount involved is moderate. When it is a large and heavy assessment, as is now proposed, it jeopardises the security, and in some cases will wipe out a considerable portion of the mortgage money advanced. For the future, it will change the whole basis of mortgage finance on property carrying high unimproved values. For illustration, look again at the cases cited above. In the first comparison given with regard to a mortgage for £14,000 the mortgagee in county A would not be affected, in county B the levy would be nominal, and in county C the mortgagee would find an annual charge of £l4O in front of his or its first mortgage, This, capitalised at 4i per cent-, is equal to £3112. fils' or its first mortgage therefore becomes a second mortgage. In the second case of a mortgage for £27.000, the ‘mortgagee & county A would not be unduly concerned. In county B the tax of £239 is equal to a first mortgage of £5312. The larrner loses this, amount and the margin left to the mortgagee on capital value is only £7688. In county C the tax of £515 becomes a first mortgage of £11,445. The farmer, logos this, and the mortgagee- has only a margin of £1555 on his security. The law re- . quires a margin of £13,500 for a trujsf security! 1 ? For the city blocks given for . comparison the, tax on the first and more profitable block is nominal and’the mortgagee is unconcerned. For the other the levy is £364, equal to a first mortgage of £BO9O. The owner loses ♦his and the mortgagee’s margin and owner’s equity is oniy £1010! What Puck is It serves out this treatment? Can the Mortgagees Stand it? One hears sometimes the superficial remark: ‘‘Will, they are big mortgages and the mortgagees can stand it.” The fact remains, however, that in New Zealand the proportion of large mortgages held by Individuals is small. For every one mortgage held by individuals there are probably three or four that represent public money or the combined of many small people. It must be remembered that big individuals can invest their money in many avenues in which trust funds and public money cannot be invested. The result is that the large mortgages are mostly held by such departments as the Public Trust Office, the State Advances Corporation, the Government Life Insurance, by Sinking Fund Commissioners, by charitable trusts, and by trust estates for beneficiaries and others. These will be the mortgagees to be prejudiced by thfe land tax pro--Bosals, It would be a strange turn if re investments these bodies and persona have made—-in what appeared to them as first-class securities due to the high proportion of natural or unimproved value—now turn out to be seriously jeopardised by the heavy land tax payable thereon.

Surely such a tax is thoroughly bad in principle as in practice, and some other more even and equitable means of raising needed revenue should be found.