Taxing water not as crystal clear as it seems
OPINION: The latest calls from Greens and Labour for a water tax acknowledge it would need to be applied in a 'fair' way, but I wonder if they understand just how difficult to nigh on impossible that would be to achieve.
A key reason is the basic geography and climate of New Zealand, which means that some areas get more rainfall and others are more reliant on irrigation.
For example, Canterbury accounts for just under 60 per cent of regional water use, Otago just over 10 per cent and the other three summer dry east coast regions around 5 per cent each. Unsurprisingly, there's a strong correlation between the drier regions of New Zealand and increased water use.
What would this mean for an across the board water tax based on water take? It means east coast communities would pay the lion's share. They would end up funding the fix-up for other regions 'environmental issues. This is far from equitable.
Irrigation New Zealand has met with the Greens and Labour on several occasions to discuss their proposed water tax. It's good to see that the Greens recognise there is an imbalance, but their plans to manage this in reality are not developed. They state that 'national meetings and hui' would be the way to decide a 'fair and equitable' process.
I can't see meetings solving the problem, because it would undoubtedly mean establishing an extremely complex tax system to account for different uses of water at the sub-regional level that would be an expensive administrative nightmare.
For example, if the Greens' proposed 10 cents per litre tax for water bottlers was applied to all the consented takes for irrigation, of about 6.5 billion cubic metres, there would be a $650 billion-plus tax bill. This is nonsensical when the GDP of New Zealand is about $250b.
Also, depending on where you irrigate, water use can range between 1500 cubic metres to and 5500 cubic metres per hectare per year. The primary drivers for this are the soil type and local climate. Crop types also influence water use. If a water tax is to avoid perverse outcomes for irrigated agriculture, it would have to be set at the sub-catchment level to address this.
Setting aside the question of how such a tax might be applied, the other key question is whether a water tax is actually the best way of achieving the purpose for which it's being established.
The purpose of the water tax, as proposed by Labour and the Greens, is to raise funds for environmental improvement projects and to help fund the modernisation of water infrastructure. Driving more efficient use of water use has also been mooted.
The first step in answering the above question is to understand how and where water is used in New Zealand.
According to the data from the national Land Air Water Aotearoa website, irrigation makes up the largest percentage of water use nationally (at just over 60 per cent) followed by town and stock water (both about 15 per cent). Industrial water use is relatively small (about 5 per cent), although much of this is mixed up with town water supply. However, many takes are multi-purpose, for example, most irrigation scheme takes also provide water supply for stock and local towns.
Irrigation will always require more water relative to other uses. Plant physiology dictates this. Plants have to transpire to keep them alive and without a regular supply of water they wither and die, as you will know if you forget to water your pot plant at home - after a few weeks it becomes stressed and very soon after dies.
However, if hydroelectric power generation was included in the water use figures I have quoted, the share taken by irrigation would drop from 60 per cent to about 25 per cent. Hydro-electric power generation is a commercial use of water, generating considerable profits for power companies and preventing others from using the water. However, a tax on hydrogeneration would undoubtedly result in higher power prices which would have a considerable impact on the poorer sections of our society.
Another question to be considered is what impact does a water tax have on other taxes? In New Zealand, we already have income and business tax. Governments like irrigation development because it increases farm profitability. For example, a 200 hectare dryland sheep and beef farm in Canterbury typically pays $15,000 in tax. When irrigated, profitability increases this tax bill to about $75,000. As a water tax will reduce farm profitability, the business and income tax take will be decreased accordingly. Why reduce income and business tax income already coming in to the public coffers by introducing a different tax? We would need to understand the net effect of this.
For all of these reasons, it would in reality be impractical to apply a water tax in a way that was 'equitable and fair'. These are easy words to say, but hard to bring about.
Despite the considerable rhetoric bouncing around in the media, the current regulatory regime, underpinned by the Freshwater Management National Policy Statement has already created a step change in how irrigators use and manage water. Ask any Canterbury irrigator what has changed for them in recent times and they will tell you that improving environmental management has become a hugely important factor to how they farm – both now and into the future. Audited Farm Environment Plans are driving rapid change, including increased water use efficiency.
Irrigation New Zealand believes the best way to address our environmental issues is for regional councils to support local communities to help understand their issues and find solutions. Environmental success stories always have the locals actively engaged and investing their own resources in the solution.
- Andrew Curtis is the chief executive of Irrigation New Zealand.