Wellington has a lot of problems. No one thing will fix all of them. But the current review of council ratings policy could fix an important problem and provide an example for other urban councils.
The benefit principle of public finance would say that each property’s council rates should reflect the value of services council provides to the property. If council upgrades local parks and facilities mainly used by those in the immediate neighbourhood, the local neighbourhood should bear the cost of it. If council improves amenities that are enjoyed by everyone across town, we all should pay for it.
But if council wanted to set rates to reflect the value of council services, how could it ever tell what that value is?
It’s much easier than you might think.
The value of council-provided services winds up loading into the value of land. And it’s easy to see why.
Imagine you were a developer considering putting up apartments, a set of townhouses, or a commercial office tower. Would you be willing to pay more for land that’s right beside a small park and near a set of laneways that council spent a lot of money improving, or for land that’s far away from those kinds of amenities?
Developers bidding against each other for land, knowing that they will face a market test in selling or renting out units, will push up the price of land in places where council services are excellent. And land in places where council services are next to non-existent will not sell for nearly as much.
But Wellington Council does not divvy up rates based on land value alone. It uses the total capital value of a property instead, which taxes not just the value created by council services but also the value added by the owner, and on top of it layers a range of differentials, rebates and remissions which makes for a mess.
Downtown land serviced by superb council services can sit as surface parking lots and pay a trivial rating levy, because there is little capital sitting on top of it. If council rates were based on land value, rather than land plus capital, there would be stronger incentive to build apartments or commercial developments – perhaps with parking on the lower levels.
And more people could make better use of the services that council has provided.
But that is not the only problem in Wellington’s ratings system.
If an apartment tower is right next door to a commercial office tower, and both make identical use of council services, the commercial tower will pay 3.7 times as much in rates.
There is no particularly good reason for it. And the very high ratings differential, compared to other cities, encourages businesses to set up shop elsewhere. Auckland’s differential is 2.6. And Christchurch has proposed increasing its differential to 2.2 – still well below Wellington’s.
Wellington’s business community has pointed out the problem for years, to little effect.
Council sometimes justifies the differential by claiming businesses get more value than households from council-subsidised public transport. But proximity to public transit mattered when we bought our home. And it will also matter to businesses deciding on locations, if customers and employees value an easy commute. It will work into land prices in the same way for both.
The two messes together may provide an opportunity.
What reporting and rumours one hears around town suggests that, broadly speaking, councillors of the left like the idea of flipping rates to land value alone. Not because of underlying principles around tax theory, but because of the likely results in encouraging development, through a higher capital-to-land ratio, and density.
But shifting the ratings base to land alone places a greater portion of the city’s bills on larger properties in well-serviced areas that have single homes on them, rather than townhouses or apartments. And that can draw some opposition from councillors from the right.
Council could combine a shift to land-value ratings with an abolition of business ratings differentials – or at least a very sharp reduction in that differential.
Councillors of the left should welcome that a greater portion of the ratings bill falls on Wellington’s landed gentry – while properly reflecting the real value provided by council services.
Councillors of the right should welcome the far more business-friendly approach inherent in abolishing or sharply curtailing business ratings differentials. It would make the city more competitive.
And the rest of us should welcome a shift that would encourage more development in places where people want to live and work.
Remember that while capital is mobile, land is not. Taxing the one that does not move makes more sense than taxing the one the city should be trying to attract.
It would not solve all of Wellington’s problems. But it would help.