THE PRESS WEDNESDAY, MARCH 23, 1988. The land tax momentum

Press, 23 March 1988, Page 18

THE PRESS WEDNESDAY, MARCH 23, 1988. The land tax momentum

The Minister bi Revenue!. Mr de Cieene, is .unmoved by [the concerns of commercial ■property owners about thelrapid escalation in ! property tax payments that they Tace. The | high inflation of recent jjears and 1 the rapid j building development that has changed the i face of New Zealand cities? 1 have also meant a I rapid rise in [the value of commercial land.- | Much of this land is subject to land tax at. a j flat rate of 2 ([per cent. Trie rapid rise in the -; value of the properties has meant a.) correspondingly rapid rise in the amount of 1 land tax to be paid. Mr tie Cieene ;has said ) that troubled property owners, chipfly in the [. main cities, could expect little relief from the j tax.

Some measure of the rate of escalation of the tax can ibe gauged from a couple, .of i examples. Wellington City! has recently had a ; revaluation of property after three years. The j change in valbes of commercial properties as ( assessed in tfie new valuation compiled last year had the effect of increasing the land'tax from the central city tenfold; Last year the revenue from land tax from the whole country was 1.577 million; this year the tax ; should bring'in SBO million from Wellington; City alone. In Auckland; the last valuation' was done in i IQB3. Central commercial land was then valued at $50)0 million. Given a[ movement in property Values in Auckland i similar to that in Wellington, and allowing, for the longer interval in) Auckland since the I last valuation, the new' valuation due this, year is expected confidently to exceed $6, billion. . I

The land; tax is by nature selective. Until! now it has been a minoy source of revenue,! though simple and cheap to collect. Only 5, per cent of the country's total land value is! taxed. Agricultural Ipnd is explicitly, exempted and residential land is effectively! exempted because the tax does not start to; apply on any property until the land value) reaches $175,000. On land valued between; $175,000 and $350,000, th!e tax is;applied on a; sliding scale; above $350[000 the flat rate of 2 per cent applies. Originally, land tax provided; a major' source of! Government revenue; About the turn of the century it accounted for' almost thijeerquarters j of all of the Government’s taxation income. (By the time) the Labour Government; took office in 1984,1 however, the $4O million raised .'through land tax was less than one-triird( of I per cent bf the total tax take. The) proportion will rise; markedly this year. ) [ [ I ) J Property owners,' who will have to find the hundreds of millions of dollars extra to meet the tax, were upset already. They must have been incensed by Mr de Cleene’s naive and ill-judged remark that, i if property owners could not afford the tax after seeing their land value increase several times over} they should! sell up and move. .For some of them, this might indeed be the only way iri which they) will be; able to meet the tax’ provided that I their successors ; can manage better and find the property affordable. At 2 per cent the tax might'appear minimal, but the rapid inflation of land values will mean a sudden jump in tax for many and a rapid rise, too, in rentals to recover the added burden where this is possible. Owners and tenants o!fi smaller, low-rise and older buildings in central business districts could be squeezed odt. | I ' |' Mr de I Cieene implies in his comment that the owner-occupier of a small office block whose property has been revalued sharply upwards, is jin some way financially

better!off solely because of the revaluation ; and (therefore better equipped to pay a high i tax lob) the land. This simply is not so. the ' upwjards (revaluation of land brings .no financial- [advantage to the owner,; except ! perhaps, by. way of collateral to raise more money by way of'mortgage, until the land'is sold.. I ■ | i ■ (When a business is already under strain . j — and ; many ini New Zealand are — the I added;imposition of an inflated tax that bears ' no relationship to the firm’s ability to : pay out 'of trading income; could be fatal. Mr de ‘ Cieene has illustrated with this one example I tile’ type ! of liquidity crisis that can result ii from trying to impose a capital (gains tax on the nominal but J unrealised gains made by; assets! ;j . ''(.'[' [ . : ( One of the historic justifications for the land tax ho longer applies. It once served a social; purpose in (acting as an inducement to break; up large land holdings and to foster the productive use ;of land. As income tax became a more important source of revenue, the use of the tax for land redistribution assumed greater significance as a reason for its retention; but land tax is no longer necessary; or effective as a means of breaking up large land holdings. It no longer applies to agricultural land and its chief effect now is to force (the I redevelopment of central cities into multi-storey- blocks that) within the limit of the demand for space, provide the best returns on highly taxed sites. j The Historic Places Trust has recognised . this danger to “the essence of New Zealand’s inner-city areas”!and has also urged a change in the tax. Other people, concerned with the (shape arid character of cities should be no less interested in the likely effects of) the tax. iThe (responses suggested by - Mr de fleene .should (worry ( town planners, transport operators and the providers of other services. Forcing, [city changes by taxation does not (make- sense. ' . )■ ) ’ I Mr de (Cleene’s reflection that if the tax pushed big business out of the cities and into the (provinces, this could be only to the (benefit of the provinces, does not stand close ; scrutiny) It just raises questions about what is (left behind and) about higher land values in smaller towns. If regional development is the 1 Government’s aim, the decline of the inner cities is too high a price to pay for it. In any; event, big business will not be the immediate ( (victim of the strain of meeting the higher tax; (small business will be. i The higher, tax and the higher rentals [that’ will flow from it will inflict a substantial , increase in business overheads. The expected .cash windfall to the Government of as much !as $1 billion by 1990 has to come from ■ somewhere; and when the economy, is far i from robust, the smaller business usually j goes down first! ' , ■_ ' .[ A reasonable case can be made for the retention of some form of land tax on commercial properties; but at times of rapid inflation, the level of the tax has to be | reviewed. At 2 per cent, in times of low | inflation, the owner of land subject to the tax i will have paid the Government the equivalent ; of value in the first year in a little less than 50 • years; at times of high inflation the purchaser of a freehold title might pay the Government thp equivalent of the purchase price twice or more in the same period. The Government capnot adopt a “set it and forget it” policy towards land tax without bearing in mind the consequences that arise from times like the present. . I . I