Soaring rates: Searching for fairer ways to share the load

A 13.4 per cent increase on household rates bills seemed harsh enough for Auckland City residents struggling with the rising cost of petrol, power, water charges and fruit and vegetables.

Then came the outcry from homeowners whose rates bills jumped 50 per cent or more.

How can this be when total rates income required by the Auckland City Council rose only 6.8 per cent?

The council points to its three-yearly property revaluation as the main reason for the higher average bills and for huge variations across the city. Homes that rose in value by more than the average valuation increase of 42 per cent had an above average rates rise; those that went up by less than 42 per cent received smaller bills.

But there's another influence: the impact of lower movement in commercial property rents and the council's desire to reduce the share paid by the commercial sector. While household rates have risen 13.4 per cent, commercial rates rose only 3.4 per cent and fell in the CBD, by 4.4 per cent.

The Herald's series on rates has shown the system to be a blunt instrument - and it doesn't just hurt the asset-rich in Auckland City. Ratepayers from the Far North to Invercargill are grappling with rises well ahead of the inflation rate. And 10-year forecast plans produced by many councils for the first time this year signal things are only going to get worse.

Is there a fairer way? Councils have three rating options under the Local Government Act: land value, capital value (land plus buildings) or annual rental value [see table]. The system they choose can create anomalies - as the Auckland Regional Council found when a law change forced it to introduce a standardised rating system across the seven local council areas from which it draws revenue. When the ARC adopted a capital value system, North Shore residents, whose local council uses a land value system, complained of 100 per cent rate increases.

In rural areas with large farm holdings, councils prefer to charge on land value than capital value. Over time, however, the trend has been for councils to move to a capital value system - charging on the value of improvements on the basis that houses and offices require more services than bare land.

Whichever system they adopt is imperfect. Only Auckland City used annual rental value until this year, when Manukau City switched to the system. Manukau's previous land value system was based on sales of bare sections.

"In our opinion it's the right form for cities which are considerably developed," says city manager Leigh Auton.

While changes to the rating system can cause upheavals, councils can spread the load by levying a uniform general charge for services which, in theory, everyone uses equally. Manukau this year charged $300 - averting a steep rates rise in its higher-valued eastern suburbs. Auckland City charged $95, a political decision to ease the burden on low-income households.

Another mechanism is differential rating - making one sector pay proportionately more. Most commonly, this means hitting commercial premises harder. In response, Auckland City has been progressively reducing its business differential, so that residents on average paid an extra 1.9 per cent as a result.

Shocks can be lessened by revaluing annually, as Wellington does, instead of three-yearly.

Another option is greater use of income-generating assets and user charges - but councils say raising charges too far puts people off using services.

How they rate

Annual Value: The greater of 80 per cent of the annual market rent or 5 per cent of Capital Value.

Capital Value: Value of the land and buildings only - it does not include chattels.

Land Value: The unimproved value of the property, although the value of 'below ground' improvements such as drainage are included.

Targeted Rate: A rate for specific service such as refuse collection.

Uniform Annual Charge: A fixed amount charged for services which are equally used, such as refuse collections. Councils can levy up to 30 per cent of total rates as a uniform charge.