The Post: Higher rates for the rich, and other ideas for local govt’s funding crisis

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If our local councils are to repair water pipes, mitigate and adapt to climate change, and generally improve their communities’ quality of life, should that extra cost fall on Remuera or Otara? Khandallah or Kilbirnie? Merivale or Riccarton?

This urgent question confronts a handful of “high-growth” councils, notably those in urban centres facing both increased demands on their infrastructure and a looming financial crisis.

Auckland has just been through a painful round of cuts, Wellington proposes to slash infrastructure spending while hiking rates, and Hutt City warns of budget blowouts. Pressures are acute elsewhere, too.

Conservatives argue they all need to rein in their spending. But although any organisation can trim costs, and learn to avoid white-elephant projects, the problems are not really on the expenses side.

The much-abused cycleways, for instance, actually deliver benefits – lower emissions, healthier people – far in excess of their costs – potentially by a factor of 10, researchers argue.

Blow-outs on big infrastructure projects like Wellington’s Town Hall remain a concern. Better project management is urgently needed – but that, in fairness, is a New Zealand-wide problem.

The real issue is that local councils don’t have the revenue they need to upgrade pipes – forecast to cost $1 billion a year in Wellington alone – and generally support their communities. Under fiscal pressure, Wellington has just ditched a $25 million plan to switch swimming pools to low-emission heating, robbing the future to make ends meet in the present.

The standard local-council solution to these problems is to demand more from the Beehive: a share of GST proceeds, rates paid on central-government buildings, funding for new pipes.

But while these requests are understandable, they really just shuffle revenue from one part of the state to the other, without expanding its ability to provide the public goods on which our shared prosperity rests.

In my view, councils have a democratic mandate to seek innovative revenue-raising powers. In Wellington’s recent citizens’ assembly, for instance, a representative group of 40 ordinary residents urged the council to petition the Beehive for new funding tools.

After all, local councils, according to Statistics New Zealand, generate a tiny amount of revenue – just 2% of GDP, the same figure as in 1920. And rates make up a higher proportion of their income than in any comparable country, Local Government New Zealand says.

This could be augmented with tools like a “value uplift” levy, effectively an extra tax on residents when new infrastructure – better roads, parks, other amenities – boosts the worth of their property. Councils could, as Wellington is currently considering, also tax unused land at higher rates, discouraging land-banking.

I would propose two further ideas that challenge the current financial orthodoxy.

The first would be to levy rates at a higher percentage on wealthier properties. This would imitate income taxes, where there is widespread support for a “progressive” approach: as someone earns more, the amount they pay on each extra dollar rises from 10.5% to as high as 39%.

A core concept here is ability to pay. Flat-rate income taxes don’t work: a 25% levy, say, would leave someone on $60,000 with a miserly $45,000 for expenses, whereas someone on $600,000 would still have $450,000 left. The former should (and do) pay less, while only the latter can afford to pay taxes at 39% – or indeed more – to fund public goods.

Yet we do not extend this widely accepted principle to local council rates, which are levied at a flat rate either in dollar terms (a $500 charge for every resident) or in percentage terms (everyone pays 1% of the value of their property).

So my first proposal would be to change the law to allow councils to levy progressive rates, so that those living in Remuera villas and Karori mansions contribute more to the cost of repairing water pipes and fighting climate change. Asset-rich but cash-poor residents could defer paying the rates until they are in a position to do so, as many councils already allow.

My second proposal is that, except in rare circumstances, we stop building new houses by concreting over nature. Not only is greenfield development environmentally damaging, it is for most councils an economic disaster.

While local authorities do get financial “contributions” from developers, this never fully recoups the immense cost of providing new roads, pipes and wiring to greenfield sites. According to economists Sense Partners, each new greenfield dwelling could cost a council thousands of dollars.

By contrast, densification – more homes in city centres – requires very little investment in infrastructure already built to service the massive daytime demands of workers, while vastly expanding the revenue base. The likely several-thousand-dollar net benefit to councils from each high-density dwelling is the exact inverse of the typical greenfield house’s net cost.

Turns out that the smart thing to do socially and environmentally is also the right financial move. Who’d have thought?