More local taxes come with costs

22:29, Jul 21 2014
Taxing Times is a weekly column that looks at various aspects of tax and money management.

As promised, in this article I depart from informing readers about the shambolic state of affairs Inland Revenue and the Taxation Review Authority have collectively left our tax residence rules in, and instead focus on proposals to increase local government bureaucracy.

Local Government New Zealand (LGNZ) in a recent media release says it is reviewing funding options for local government due to the fact that, in their view, the reliance on property rates is unsustainable. The reason given is that some regions have static, declining or ageing populations that had less ability to cope with higher rates to fund their local body, while other regions were growing, putting them under pressure to fund new infrastructure.

LGNZ says that: "Examples of funding tools that may be reviewed for appropriateness in a New Zealand context include local income taxes, local consumption taxes, congestion charges, visitor charges and payroll taxes."

A LGNZ working group has been formed to consider this, and it will come as no surprise to readers that the group is to be chaired by an Auckland city councillor. Nothing against Aucklanders, gosh some of them even know where Southland is, but if you are a sceptic like me, you may be left with the thought that this issue is all about funding Auckland.

Putting the perceived Auckland influence to one side, is there a strong case to introduce a specific tax regime at a local government level?

In my view, I have no issue with spreading the funding of local government across a number of tax bases if it can be done with administrative ease and spreads the burden fairly and efficiently across people residing in that area.


However, in many ways this happens already. Councils not only levy rates on land, but they collect all manner of user pays charges such as charges for water, sewerage, stormwater, building consents, developer contributions, building inspections, liquor licences, LIMs, rubbish, dog registration, as well as fines for things such as litter, dogs, parking and noise, and then penalties for late payment on all of the above.

As well as this, many councils receive grants from Transfund, Transit NZ, and central government, and income from local authority trading activities and investments.

While city councils are under increasing pressure to fund various city amenities and have the added headaches of leaky and earthquake- prone buildings, they already have a well spread means of funding.

Introducing a new layer of local taxation risks a whole new plethora of administrative costs for councils, as well as the additional costs imposed on business and others in complying with any new tax. But, importantly, it also risks introducing unwanted distortions and inefficiencies.

A payroll tax, for example, has all the economic efficiencies of a Stone Age window tax. You only have to look to Australia to see the cries from business to scrap inefficient state business taxes, such as payroll taxes, on the grounds that they are costly to manage and harmful to growth and competition. It is no wonder central government choked at the thought of new local government taxes.

Rather than looking at yet more tax mechanisms loaded with bureaucracy, costs and inefficiencies, LGNZ should be looking at how existing revenues can be better maximised and how councils can operate more efficiently: witness the fact that only recently the Dunedin City Council did not know it was missing upwards of 100 vehicles.

The working group is expected to publish an issues paper before Christmas and a final report in March next year.

Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on (03) 211 3355.

The Southland Times