THE PRESS MONDAY, FEBRUARY 20, 1989. Damaging land tax

Press, 20 February 1989, Page 12

THE PRESS MONDAY, FEBRUARY 20, 1989. Damaging land tax

More than a year ago a campaign against the imposition of land tax showed signs of becoming more concerted and more vociferous. The campaign has been steadily growing and land tax is likely to become a much more conspicuous political issue before the year is out. This is because the impact of recent, higher property valuations will be felt in some areas and the threat of higher tax payments on the revaluation of other districts will be imminent.

The objections will be more strenuous in some areas because the prevailing valuations, made when property values were at a peak, will seem unduly onerous when the current values have diminished. From the taxgatherers’ point of view, this kind of objection will not count for much. In the past, those who paid land tax did not complain when the property market was on the rise. In any event, the market change is not really relevant to the principles underlying the tax. Regardless of whether the market value of property is above or below the official valuation used for tax or for local rating purposes, the relativity between taxpayers stays much the same. In this respect, the question of equity hardly arises. The Government has recognised that the land tax has raised some particular problems. Last year the exemptions from the tax were widened to include, for example, certain properties classified by the Historic Places Trust. The law was also altered concerning the exemption afforded residential sites, so that the exemption was no longer restricted to a principal residence; and the exemption was extended to boarding houses and private residential hotels and homes for the aged. More than a decade ago, the exemption from land tax was extended from farm land generally so as to embrace forestry land as well. The tax applies today to urban property with a land value above $175,000. A contributed article on this page outlines the origin of the tax, which was designed with the social and economic purpose of breaking up very large land holdings and was once the mainstay of Government revenue. Today it is an assets tax and a tax upon, generally, unrealised capital gains made through the inflation of land values in towns and cities.

The adjustments to exemptions that have been made recognise, though incompletely, the inequities that arise from land tax. They do not recognise the inflationary and even disabling effects of the tax on property rents. In some cities, Auckland for example, the Government tax is expected to exceed the local authority rates bill on properties. There, and on 1988 values in Christchurch, the tax is already equivalent to a substantial proportion of local rates. After a revaluation applies, the

land tax on many city properties will be double and treble the amount paid in rates. The effect on owners’ earnings or on the rents charged of occupiers is too obvious to ignore, especially at a time when the prosperity of businesses is critical to economic growth and employment. In spite of changes in valuations, local rates are adjusted over all to yield the required budget. Land tax, fixed by law at a steady 2 per cent of the Government valuation, simply raises more money in direct relationship to higher values; an increase in land values simply provides a windfall for the tax-gatherers. This, of course, suits the Treasury very well. The Government may feel quite pleased that a tax which produced $77 million from the whole country in 1987 produced as much, or more, from Wellington City alone last year. Not surprisingly, the Government sees land tax as a good source of revenue that can be offset against the need to raise taxes from other sources. Taxpayers who are not directly affected by land tax, or who are not conscious of its indirect effects, are likely to be indifferent to it, or even relieved. Our contributing writer argues that the concept on which the tax was founded has long since expired and that therefore the justification for the tax has gone. The tax prevails, of course, simply because it produces revenue, and the only protests against it in the past have come from such a small portion of the electorate that they could be ignored. Now the impact of the tax is becoming really significant, and is being translated on a punishing scale into the rents of buildings in the cities, and into the costs of those who occupy property with a land value of more than $175,000. This base means that the tax hits many more people and businesses.

The tax is one way to force the current value of land into the cost of production and distribution. In its conception, the tax was devised to stimulate the productive use of land to steer land into more hands capable of increasing its earnings. If New Zealand had a buoyant economy and an abundance of people or businesses hungry for urban land on which to conduct more productive enterprises, at least the theory might hold good today. The State could take its 2 per cent rent and the economy might be better for it. In fact, this assets tax is already having exactly the opposite effect, because such conditions do not prevail, and the land tax is about to hit productive enterprise and the economy even harder. Having progressively recognised the problems that arise from land tax, the Government should be pondering the need for its drastic modification or even its abolition.