• Rates Reform

    Recent and prospective rate increases have prompted a renewed debate in New Zealand about the financing of local government. The following article by Bryan Gould was published in the New Zealand Herald on 30 August 2006.

    In the London of 1990, the poll tax protesters were on the streets and created a political and public order crisis that eventually forced Mrs Thatcher from office. I was at the time the Shadow Secretary for the Environment, responsible not only for Labour’s assault on the poll tax, but also for devising the Labour alternative.

    Mrs Thatcher was just the most high-profile casualty of what has always been one of the most sensitive of political issues – the role of local government and by whom and how it should be paid for. Rates have always been one of the most resented taxes but attempts to replace them have usually – as in the case of the poll tax – been disastrous.

    Very few would dispute the case for local government. Bringing decision-making closer to the communities affected by policy decisions has always been seen as worthwhile. Most people want to have the power to influence decisions in their locality rather than have them taken by some remote bureaucracy in central government.

    New Zealand has a rather more centralised system of government than is commonly found in most Western democracies. We have a unitary (as opposed to a federal) state and the powers of local authorities are less extensive here than in countries like the United Kingdom. One of Mrs Thatcher’s weapons in her battle against a recalcitrant local government that stubbornly resisted her so-called reforms was to transfer power from the local to the central tier of government, but there would not be much support for a further limitation of already limited local government powers in New Zealand.

    If the role and value of local government are not widely disputed, and if the price paid for failing adequately to carry out its functions is painfully evident in our major cities, the remaining question is – how is it to be paid for? There will always, of course, be room for critics to say that money is wasted and that local government should be reined back. But we also know, or should do, that one person’s wastefulness is another person’s essential service. No one likes paying for public services, but a stance that produces continuing demands for better local services while refusing to pay for them is hardly realistic.

    So, are we stuck with the rates? Mrs Thatcher’s disastrous experiment with a poll tax is unlikely to be repeated. Local income taxes are generally resisted as an unwelcome addition to an already heavy income tax burden. Local sales taxes create unnecessarily cumbersome and unhelpful differentials between regions which would be seen as ludicrous in a small country like New Zealand.

    There are of course many potentially thorny issues about how rates are calculated and levied – what should be the basis of valuation, who should carry it out and how often, what rebate schemes should be put in place – but a property-based local tax as an alternative or complement to income and sales taxes has long been recognised as a valuable widening of the tax base and has proved over centuries to be pretty resistant to challenge. Rates are fraught with difficulties but have so far been seen as preferable to any alternative.

    One of the aspects of rates most commonly resented is the impact they have on those – often the elderly and retired – who are property-rich but income-poor. The plight of the elderly widow forced by an excessive rates bill to leave her family home was one of the most powerful images used in Britain to make the case for replacing the rates with the poll tax.

    When I faced up to these issues in 1990 and proposed Labour’s alternative to the poll tax, I came up with a solution that solved some of these fundamental problems. I wanted to stick to the tried and true property tax as the basis of financing local government, but I proposed that its impact should be moderated by taking account of people’s income. Modern computerisation, even 15 or 16 years ago, made this eminently possible. The income tax code based on the income tax return that people made in any case could easily be applied to the rates bill so as to reduce that bill where income was low in relation to the rateable value of the relevant property.

    Unfortunately, my colleagues misunderstood my proposal and were spooked by what they saw as an income tax element to be added to the rates. They feared the reaction to what they thought might be seen as the introduction of a second tax or a local income tax. As a result, we missed the chance to reform the rates. Some say that the episode cost me the Labour leadership when I came to contest it a year or two later. It is interesting that a renewed British dissatisfaction with the Council tax (as the rates are now called) has led to a revival of interest in my proposals.

    It may be that in New Zealand in 2006 a serious and considered reappraisal of local government financing will come up with still more far-reaching reforms. But no one should bet against the survival of the rates in one form or another.