Finding the right balance

BULLER RATESOVERHAUL

INFORMATION PACK NO3 of 3

RATING SYSTEM OPTIONS

Council is currently reviewing the way we calculate rates within the Buller District.Council will consider the rating options that align with our rating principles to calculate your rates fairly.

“Some of us may be paying too much rates, some

not enough. If this interests you... READ ON.”

In our first two information packs we explained why we need a Rates Overhaul, and the principles that should be built into any new rating system to guarantee that it is fair and robust.

Any new rating system will have to fit within the legal framework available to Council. This Information Pack No 3 sets out the various legal options available in layman’s language.

Any changes from the existing rating system would not bring in more or less rates revenue in total. Overall rates revenue stays the same. The options would just change the calculation of individual property shares.

However, as the incidence or burden of rates is shifted around under different options, some ratepayers would pay less while others would pay more.

At the conclusion of this Information Pack we float some thoughts and we ask you to give us some feedback, please see the back page for our contact details.

Your feedback will then be collated and incorporated into a public report that will go to the Buller District Council in November 2014. The Council will take a deep breath, and identify a possible new Rating system that could come into effect from 1 July 2015.

This possible new Rating system will then be written up into a formal consultation document as a “Draft Proposal”. This Rating System Draft Proposal will be publicly notified to our communities. Then Council will invite both written and oral submissions, with everyone given a fair chance to have their say.

The formal consultation process on the Rating System proposal will conclude early in 2015 and the Council then has to make a “final” decision in February 2015. But wait….there’s more…That decision will then be incorporated into the Draft 2015-2025 Long Term Plan which also goes through a formal consultation process that will conclude in June 2015.

It is a long but very thorough process that follows the local government rules.

The law only allows for three different forms of prime rates, yet over the years we have developed complex variations, some of which have no obvious logic.

Maybe it is time to look at going back to basics. Instead of endlessly splitting the rates shares into even more components, perhaps it is time to recognise that we all depend on one another to a greater or lesser degree. No ratepayer lives on a desert island cut off from the rest of the district. We all rely to some extent on “the public good”.

Maybe we would be better off with a system that:

a) makes every ratepayer pay something through a reasonable UAGC, and

b) makes everybody pay a value based progressive share of all other services that are put into one public good General Rates pool, and

c) only uses targeted rates for a handful of special purpose functions where the benefits can be isolated to a very small and select ratepayer group.

What do you think?

In any future system we could have more Targeted Rates if we felt that the functions or services targeted were of benefit to only a select group. There is a point at which it might be better to just have user charges instead of rates.

On the other hand there are options to radically simplify the multitude of ratepayer categories by “pooling” similar groups of ratepayers when they are all getting the same benefits.

Another option could be to move away from the present universal uniform or fixed amount per ratepayer approach, to an approach that used a value based progressive rate mechanism. Higher value properties would then pay more while lower value properties would pay less.

What do you think?

The Court of Appeal has said “it is implicit in the scheme of the legislation that the rating system in all its diversity remains primarily a taxation system and not a system inherently based upon a principle of user pays”

If rates are a tax, the wealthier pay more and there is no requirement for a clear and direct correspondence between rates and the levels of benefit received.

That is not how it currently works in Buller.

A house in Alma Road Westport has a Capital value of $740,000 and it pays $1,205.33 in rates.

Back across the river in Brougham Street that $350,000 house is paying $2,903.07. The Alma Road house is worth more than twice as much, yet it pays only 41% of what the Brougham Street house pays.

Round the corner in Russell Street is the $195,000 house. The Alma Road house is worth 3.8 times as much, yet it only pays 42% of what the Russell Street house pays.

It does not get any better if you go inland. A house in Reefton has a Capital Value of $145,000 and it pays rates of $2,013.45. Outside of Reefton a farm has a Capital value of $2,340,000 and it pays $4,429.25. The farm has a value more than 16 times greater than the house, but it only pays 2.2 times more than the house. The farm then has the ability to claim back the GST and to claim the rates as a tax deduction meaning that the net cost is significantly reduced.

What do you think?

One of the Rating Principles is “the ability to pay”. This does not just refer to wealth as measured by property value. Some ratepayer categories enjoy advantages not available to other ratepayer groups. This gives them an enhanced “ability to pay”.

If the ratepayer is in business and GST registered that ratepayer can claim back the GST on the rates and also claim the rates as a tax deductible expense. This advantage means that such a GST registered taxable business ratepayer can pay a differential of 1.6 and still have a net after tax cost that is the same as the non-business ratepayer.

Just as the non-business ratepayer cannot claim anything from the income tax system, he or she has no ability to pass the cost on to others. However all businesses set out to recover all their costs (including rates) otherwise they go out of business. They do this by recovering their costs in their prices. This is accepted as a form of “ability to pay”, and the Courts have upheld Councils’ rights to apply differentials to business ratepayers Council rates on this basis.

If we are to have a logical and principled rating system we might need to consider how differentials to cover these aspects should be applied.

What do you think?

THOUGHT 3

August & September 2014Three different Rates Information Packs being delivered throughout the district. See our website for these.

October 2014Council will hold public meetings, talk to stakeholders and welcome your feedback.

Wednesday 1 October 7:00pm Karamea Bowling Club

Thursday 2 October 7:00pm Ngakawau Hall

Monday 6 October 7:00pm NBS Theatre, Westport

Tuesday 7 October 6:30pm St Johns Ambulance Rooms, Reefton

Wednesday 8 October 7:00pm Pancake Rock Café, Punakaiki

November and December 2014Council will develop a proposed model for our Community to consider.Council will run a formal public consultation process asking for your feedback and submissions on the new rating model.

January 2015Council will hold public hearings to listen to people and organisations who want to talk about their written ideas and consider all your submissions on the proposed model.

February 2015Council will decide on any changes to our rating system and will include them within our Long Term Plan budgeting.

July 2015Any changes will take effect at the start of this financial year.

• Keep an open mind

• Read our information packs

• Talk about the overhaul with your friends and neighbours

• Look at further information on our website: www.bullerdc.govt.nz

• Give us feedback either by Email: ratesoverhaul@bdc.govt.nz Post to: Buller District Council, PO Box 21, Westport 7866

• Please attend public meetings in your community

KEY PROJECT DATES FOR BULLER RATES OVERHAUL PROJECT

WHAT DO WE WANT YOU TO DO?

THOUGHT 6THOUGHT 4

THOUGHT 5

Buller District Council - Our Community, Our FacilitiesRating System Overhaul : Are your rates a fair share of the burden?

AIRPORT • TOILETS • CONSENTS • ROADS • LIBRARIES • WATER • CIVIL DEFENCE RECYCLING • PLAYGROUNDS • DOGS • THEATRES • FOOTPATHS • SWIMMING POOLS

While there are only the three prime possibilities, each of these rates options has its own sub set of additional options.

General Rates can be assessed on either • The Annual Value of the Land, or • The Capital Value of the Land, or • The Land Value of the Land.

It is not possible to have any hybrid or combinations of the above three values. For General Rates purposes, you have to pick one of the three “values”.

The Annual Value of land is either five percent of the Capital Value, or the value the rating unit would fetch if it were rented, whichever is the greater. While this Annual Value possibility exists in law, no Councils in New Zealand use it, as it is considered too volatile and unreliable, as well as being expensive to administer. It was being used in Tasmania but they have just completed an Inquiry that has recommended moving away from Annual Value and going to Capital Value.

The Capital Value of land is the value of the land and improvements. “Improvements” includes all buildings on the land. Capital Values are now the most popular option, amongst New Zealand’s Councils. The 2007 Shand Inquiry into Local Government Funding recommended that all Councils should shift to Capital Values.

The Land Value of land is the value of the land without improvements. Historically most Councils chose the Land Value option but it has gone out of favour as communities become increasingly more urban in nature and as the local economies move away from purely farm based activity.

Option 3 General Rates? Choices, choices, choices

Option 1 Who pays?

Councils can only assess three prime kinds of rates.

These are

• General Rates • Uniform Annual General Charges • Targeted Rates

Once the choice has been made between value options, Councils then have to decide whether the General Rate will be set at:

a uniform rate in the dollar of rateable value for all rateable property, or different rates in the dollar of rateable value for different categories of rateable property.

Historically our Council has taken the differential rate approach to the General Rates. We currently have 44 different categories of rateable land. The reasons for all those differentials are buried in time, but they appear to have been attempts to overcome some of the distortions resulting from taking the Land Value option as a rateable value base.

By definition, General Rates are for services that are generally available to all ratepayers, therefore, many say that General Rates should be set on a uniform rate in the dollar of rateable value. The Shand Inquiry accepted that argument and recommended that Capital Values be chosen as the rateable value base.

Option 4 General Rates? (continued) Choices, choices, choices, choices

The second kind of prime Rates choice available to Councils is the Uniform Annual General Charge.

The key factor about a Uniform Annual General Charge is that it is a fixed dollar amount on every rating unit, irrespective of the value of the rating unit.

There is a choice about whether or not to have a have a UAGC in any form. It is not compulsory and while most Councils have it to some degree, many do not.

However, if a Council does decide to have a UAGC, once again there are sub sets of other options.

The law caps the amount that can be charged as a UAGC. In any one year, a council may not collect more than 30% of it’s total rates revenue by way of the sum of UAGCs plus any targeted rate that is calculated as a uniform fixed amount, (excluding any rate targeted solely at water supply or sewage disposal).

While every rateable unit universally pays the same fixed or uniform amount per rateable unit, the actual UAGC amount can be established anywhere between $1 and an amount that is not more than 30% of total rates revenue.

In the 2014/15 year the UAGC for Buller District Council was $475 (GST inclusive). Every ratepayer pays that amount before any other rates are calculated. At this level the UAGC is about 24% of rates revenue.

Option 5 Uniform Annual General Charge? Choices, choices, choices, choices, choices

The third kind of prime rate available to Councils is targeted rates. The options here are technically almost limitless.

A Council can set a Targeted Rate for any service or function it identifies as a target in the Council’s Annual Plan.

A Council can set a Targeted Rate for several functions, or alternatively several Targeted Rates for one function.

A Targeted Rate may be set in relation to all rateable land in the Council district, or limited to one or more different categories of land.

A Targeted Rate may be set on a uniform basis for all rateable land, or on a differential basis for different categories of rateable land.

A Targeted Rate for water can be charged as a fixed charge per unit of water consumed or supplied, or according to a scale of charges that the Council considers appropriate.

Option 6 Targeted Rates? Choices, choices, choices, choices, choices, choices

The law allows councils to apply penalties for late payment of rates. At present we do charge penalties for late payment.

Councils also have the power to waive payment of rates on certain types of land use. Like most Councils we have policies that either reduce or completely waive the payment of rates on land used by some types of charitable or sporting groups.

There is no intention to review any of the existing policies about penalties or remissions, as any part of this Rates Overhaul.

Option 7 Penalties, and Remissions? Choices, choices.

Option 2 What kinds of rates can be set?

Unfortunately there are no options here!

The law requires that Local Government rates can only be assessed on property.

That means that we cannot consider local income taxes, or ideas such as a citizen’s tax.

We are required to enter all property in the district on to a rating information data base and district valuation roll. All property is given “rateable values”. The roll also includes the names of the persons who are the ratepayer in respect of each “rating unit”.

That ratepayer then becomes liable for all rates that are due on that rating unit.

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Buller District Council - Our Community, Our FacilitiesRating System Overhaul : Are your rates a fair share of the burden?

At present we have Targeted Rates for Water, Sewage Disposal, Waste Management, and District Promotion and Tourism. Nearly all the Targeted Rates are uniform or fixed amounts. Only a very small amount is value based. Collectively there is a multitude of ratepayer categories.

We need to consider all alternatives. Historically Land Values were favoured because most economic activity came from the land. Now days a tiny piece of low value urban land may host a major economic activity and unless large differentials are employed, it would only pay small rates. Conversely rural farms with large and valuable land areas would finish up being required to pay the lion’s share of a district’s rates, unless Councils applied discount differentials.

The Capital Values approach encompasses all forms of economic development, and on the face of it should get rid of the need for many of the different ratepayer categories, and their differential rates. Just about everyone else who has looked at rating systems seems to come to the conclusion that Capital Values is the best place to start.

We probably need to take a good look at changing to Capital Values instead of Land Values.

What do you think?

We probably need to consider making a greater percentage of the rates revenue come from progressive value based rates which require higher value properties to pay more and lower value properties to pay less. This would mean taking a hard look at both:

a) the fixed amount per property Uniform Annual General Charge, and perhaps reducing it, and

b) changing some, or all, of the uniform fixed amount per property targeted rates to value based rates.

When a Brougham Street, Westport house with a Capital Value of $350,000 pays $2,903.07 in rates yet a house in Russell Street Westport with a Capital value of only $195,000 pays $2,879.90 in rates, something is not quite right.

The $350,000 value house is only paying $23.17 more than the $195,000 house. But that is what happens when your only progressive value based rate is based on land values and everything else is a fixed or uniform amount per property. The land value for the Russell Street house is $3,000 less than the land value for the Brougham Street house.

What do you think?

THOUGHT 1

SOME THOUGHTS

THOUGHT 2