by Keith Johnson
On reading through a sample of the supporting documentation sent to me by the Wellington City Council in response to my Official Information Act request, I am struck again by the degree to which financial data and financial management issues are folded away from prying eyes – from potential view by both the Councillors and Mayor, and the public at large.
The finances of the WCC appear to be run on the old army dictums like ‘It makes no difference which side the general is on’ and ‘Don’t ever be the first, don’t ever be the last, and don’t ever volunteer.’ You might very well say that the documents are convoluted, abstruse and calculatedly uninformative – but I could not possibly comment.
I did however, come up with an interesting statement on the Business-Household Rate Burden shift:
‘In 2000, the Council voted to alter the rates differential (the rates split) that decides the share of general rates only paid by residents and by businesses. Over a 10-year period, the balance will shift from a point where the commercial sector contributed 7.0 times more general rate (for a property of the same value) to a stage where they will end up contributing 2.8 times more to the general rate then the residential ratepayer by 2009/10.
‘The adjustments from 2005 were: 2006-07 to a ratio of 4.4; 2007-08 to 3.8; 2008-09 to 3.3; and for 2009-10 to a ratio of 2.8’.
And the amounts of money we are talking about here are substantial – as is the continued pressure from the NZ business community for further adjustments.
In the case of the Auckland Super City, last year’s differential was 2.63, with Mayor Len Brown committing to reducing this by 0.1 per cent per year to 1.73 per cent by 2020-21. But Auckland Business leader Michael Barnett is demanding that businesses to pay the same rates as households – a move that would result in a $200 million per year or 20 per cent rates rise for the residential sector.
THE RATING DIFFERENTIAL POLICY – THE BUSINESS COMMUNITY’S ARGUMENTS
The arguments in favour of continued rebalancing have been neatly summarized by BusinessNZ [Submission by BusinessNZ to the Department of Internal Affairs on the Department of Internal Affairs ‘Development Contributions Review Discussion Paper ‘ (March 2013)]:
‘Sometimes differential rating is applied to the business sector on the unsubstantiated ground that the business sector benefits proportionately more from council services. A number of reports have found such thinking to be groundless, yet councils continue to apply significant differentials simply because they can, rather than on any principled economic basis.
‘Where councils have agreed to reduce such differentials, any reduction has generally proceeded at a snail’s pace, councils being mindful not to upset the majority of residential ratepayers who enjoy the advantages of a lower rates burden courtesy of the business sector.
‘In the past, a number of people have argued (and many still do) that businesses are advantaged relative to residential ratepayers because they can deduct rates for income tax purposes and claim a credit for GST paid on them.
‘These claims have been discredited by reputable economists for the following reasons. First, a firm can only claim a tax deduction for rates because its income is subject to tax. Nobody could seriously argue it is an advantage to be subject to income tax.
‘Second, a GST registered person or firm can claim a credit for GST paid on inputs because supplies (outputs) are subject to GST. The net GST collected is paid to Inland Revenue, so a business receives no advantage.
‘BusinessNZ is concerned with any reference to the GST status of a business as an alleged justification for imposition of any local government charges. As implied above, we do not consider the tax status (including presumed tax status) of a business to have any relevance to the level of charge that a council can impose.
‘An unprofitable business logically remains as liable for its use of Council provided services as a profitable one, given the cost of providing that service remains.
‘BusinessNZ remains concerned about the use of targeted rates (taxes) mainly because there is a danger these can simply be another way of raising needed revenue without taking the full implications of their use into account.’
Well, I’m not sure who the ‘reputable economists’ are but commonsense suggests a few ripostes.
In the first place, households also pay income tax. And as most income tax payers are caught by the Pay-As-You-Earn system, there is very little wriggle room – in contrast to the case of business, where has been universally noted, big businesses in general and international corporations in particular have a multitude of financial bolt-holes, rat-runs and camouflage instruments at hand to minimize their liabilities.
Secondly, the bulk of New Zealand’s value-added Goods and Services Tax is paid by householders as the final purchases of most products and services. This is in contrast to most producers who can offset much of their liability against input purchases. Why should household ratepayers not also have the opportunity to deduct their rate obligations?
Thirdly, poor households [the equivalent of ‘unprofitable businessess’ in this strand of argument] continue to pay rates, either directly as owner-occupiers [in additions to their bank mortgage repayment obligations], or as tenants who get rates passed through to them via their weekly rental payments.
Finally, there is the issue of comparing like with like – apples and oranges.
Take, for example, an inner city petrol station that has the same land value as a nearby apartment block. Is it really true that the demands on Council services are essentially the same? What about the extra demands on wastewater and effluent disposal? What about the extra requirements on road layouts and traffic management? etc.
Ah, you may say – but in the case of Central Wellington, a good deal of the economic activity in the business sector is office-based and therefore much more similar in general to households in its demand for Council services. I’ll come to that.
INEFFECTUAL, DUMB AND UNFAIR
I’ll preface the main part of my critique by drawing on today’s leader in the Dominion Post:
‘Wellington has been put on notice. The region’s economy is stuck in first gear and there is now a real risk of it slipping behind other main centres. A report analysing Greater Wellington’s economic performance makes for sobering reading. Although there are some positive points – median earnings are well above the national rate, 40 per cent of workers are in highly skilled occupations and the region has good transport and other infrastructure – the negative aspects give cause for alarm.
‘The report, by economic researchers Infometrics, found that Wellington’s economy has performed poorly compared with the rest of New Zealand in the past decade. Since 2001, regional gross domestic product grew by an average of 2 per cent a year, compared with the national average of 2.5 per cent. For the year to March 2012, Wellington was ranked 15th out of New Zealand’s 16 regions for economic growth. Only Canterbury, reeling from the devastating earthquakes, fared worse.
‘Wellington was also ranked the lowest of the metropolitan centres for population growth in the past decade and, in recent years, it has attracted a declining proportion of skilled migrants.
‘The growth in employment since 2002 was likewise the lowest of the metropolitan regions, and the region is still too reliant on too few sectors, most notably the public service, for too many jobs. Only Nelson has a less diversified economy’.
But ‘hold the phone!’
Surely Wellington businesses have just been given a substantial supply-side boost from a reduction in local taxes / business rates? How is it that, having lifted the rate burden, households are getting less than no payback in the form of business investment, extra production and more jobs? A good question, I think.
And then there is the issue of who gains most.
As the Dominion Post leader noted, Wellington has one of the least diversified economies in New Zealand – it is extraordinarily dependent on central government spending.
According to the Infometrics Report, Central Government Administration was the largest employer in Wellington in 2010, employing 19,610 persons and accounting for 7.8% of total employment in the region. By contrast this industry accounted for 1.9% of total employment in the national economy.
And over the past 10 years the top two industrial groupings in adding jobs were government administration and defence (10,400 jobs) and health and community services (6,610 jobs).
At a rough estimate, all told, a third or more of Wellington’s jobs are directly dependent on central government spending through government institutions [bureaucracy, schools and health care] plus their supporting contractors and sub-contractors.
And underpinning all this is the provision of serviced office space by property developers. So not surprisingly business and property services constituted the largest industry in Wellington in 2010 accounting for 15.7% of total GDP.
So let’s get this straight:
Wellington household ratepayers are being asked to defray the obligations of property developers who are renting most of their offices to the Central Government.
How dumb and unfair is that?
This drives me completely nuts with its illogicality. As does the claim of the National Museum ‘Te Papa’ on subventions from Wellington residential ratepayers!
For goodness sake, the national government should be putting money into Wellington as the capital city – and not taking it out. As I have commented before, if the residents of Canberra or Washington were asked to fund the Australian National Museum or the Smithsonian, there would be howls of outrage and derision.
And I will make a final point about apples, oranges and what’s simply fruity.
Again, as noted in today’s Dominion Post [‘Remote working paying off for SMBs’ by Claire Rogers]:
‘A survey of 1047 small to medium-sized NZ businesses (SMBs) by Colmar Brunton for the accounting software company MYOB shows 18 per cent have staff working mainly away from the office, while 28 per cent said staff split their work between home and office. Of those businesses that had staff working away from the office most or all of the time, 40 per cent saw revenue rise in the past year – compared with 28 per cent of SMBs whose staff only worked from the office. Those with staff mostly working remotely were 43 per cent more likely to have increased revenue in the past year than those without remote workers. They were also 21 per cent less likely to suffer a revenue decline’.
Sole operator or family firms are a major component of this growing trend.
And of course, those people who work from home are increasingly subsidizing the property developers in the CBD through the rating system. These residential ratepayers include a number of my friends here in Island Bay who run out-sourced export operations from a home office.
Now these really are the sort of people that Wellington City Council should be supporting.
For the record, my Official Information Act request was as follows:
‘Kindly note that I am applying here, under the Official Information Act and Local Government Official Information and Meetings Act [to be within 20 working days, as mandated by law] for:
• Copies of all policy documents and policy reviews 2002-2013 relating to Business Rating, Household Rating and Development Contributions – and the formulation and implementation of the policy of re-balancing the rate burden away from the business sector towards the household sector
• A break-down over the period 2002-2013 by year of the contributions of the above three forms of revenue by % and $
• The average burden incurred [by household and individual business] with respect to the above three forms of revenue over the period 2002-2013, by year
• Such forecasts as have been made of the expected revenue streams from the above three sources for the future’.
After sifting my trawl, the assessment that I provided on April 19 still stands – and the single spreadsheet that I quoted gives the gist of the WCC’s serious response [I am happy to email this to anyone else who is interested].
Also included on the CD which the WCC sent were the 2005-2009 Development Contributions Policy Statements; the 2001-02 Funding Policy Statements; and the 2001-02, 2006-07, 2009-10 and 2012-13 Revenue and Financing Policy Statements.
Also by Keith Johnson: Out of kilter – the council’s rebalancing of the rates
This is an edited version of an article first published on Keith Johnson’s Wellington blog