Care essential in tax policy

TAXING FARMERS: A Labour/Greens government have indicated they will introduce a capital gains tax should they win the next election.PICTURE: NZ HERALD

With the general election approaching tax polices have been proposed by a number of political parties.

The three key policies from an agricultural perspective being the introduction of a capital gains tax (CGT), resource rental charge such as a tax on water, and the inclusion of biological emissions into the Emission Trading Scheme (ETS).

Federated Farmers is of the view that care needs to be taken when considering taxing competitive agricultural sectors since countries which have done so without strong justification, have performed poorly -- Argentina being an example.

Because of the potential negative effect of the taxes on the agricultural sector, Federated Farmers has contracted the New Zealand Institute of Economic Research (NZIER) to analyse the overall implications of the three taxes on farm profitability, farming succession and the wider economy.

The core approach of the studies will involve assessing the likely impacts of the taxes on the farming sector, and other primary industries, how they may lead to unintended consequences or perverse incentives and behaviour, and why this may be more of a problem for farming than for other affected sectors. Included in the approach will be a comment on how the taxes will affect other parts of the economy.

A CGT has been announced by the Labour Party to raise tax funds on asset values through the use of a 15 per cent tax on gains when an asset is sold. As the tax is outlined it will not apply to gains realised on family homes and retirement savings, including sale of small business assets if the purpose is to fund retirement income. Initial work by the NZIER on the CGT as proposed have highlighted that it would fail to meet many standard public policy principles around effectiveness, efficiency, administrative cost and equity. It is not seen as a game changer and would in fact raise very little revenue, reduce current farm values and not benefit the economy.

The focus of the resource rentals analysis will be looking at the potential costs and benefits of introducing a resource rental charge, such as a tax on agricultural water usage. It has been highlighted from the initial scoping work that there is minimal policy relevant data to inform decision makers how much water is being used by the rural sector, so it is uncertain how any policy would be set and if it would actually be enforceable.

When it comes to the ETS, Federated Farmers has a strong political focus of keeping biological emissions out of the legislative framework. No other country in the world taxes farm animal emissions and there is no benefits seen from including them in the ETS. New Zealand farmers are global leaders in farm efficiencies and already face an un-level playing field, for example other countries subsidy payments of agricultural products, so it would be unwise to raise further tax barriers to efficient production by changing the current climate policy.

The analytical work by NZIER will, where possible, be drawing on current public policy and data to provide Federated Farmers with robust information for its consideration of the three taxes within the farming policy setting framework. No one likes taxes, especially those that are unjustified and provide negative benefits to agriculture and the wider economy.