Why National might be more vulnerable than Labour on tax – Thomas Coughlan

National's tax policy could have a more significant impact on the election than Labour's. Photo / Mark Mitchell

THREE KEY FACTS

• The Government is phasing-in full interest deductions for landlords, allowing them to reduce their tax bills. It will cost $2.9 billion in lost revenue.
• Labour is currently debating its tax policy for the next election. Its leader, Chris Hipkins said he believes spending will need to rise to cater for a growing population.
• National said it would get rid of the 39% top tax threshold, but got rid of the policy after the economy worsened.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.

OPINION

You’re probably aware the Government gave tax cuts to landlords.

How could you not be? Every contentious spending decision made by the Government is met with Labour’s favourite rejoinder that the coalition is prioritising tax relief for landlords above... well, almost everything.

The tax cuts themselves aren’t that significant, in fact, they were only half phased in by the time the Government decided to scrap them. In a different world, the policy itself (allowing landlords to deduct interest costs) might be contentious. Economists and tax experts (including Treasury) generally support it noting that (with some caveats) it will put downward pressure on rents.

What’s significant about the landlord tax cuts is it is the first instance in some time where Labour appears to have won an argument on tax. Public polling on the issue is scarce to non-existent, but members of the Government have privately admitted that this particular tranche of the tax package (a small but not insignificant $2.9 billion over four years) has been a tough sell in the way that straight income tax cuts are not.

Labour’s win on the cuts is worthwhile considering while some in the party indulge in a bit of Opposition defeatism on the issue of tax, steeling themselves for what they foresee will be an absolute shellacking at the 2026 election should the party decide to run on an ambitious and progressive tax policy.

Members of the Labour right hold this view for good reason. Poor Labour has been convincingly dealt to at nearly every election from the demise of Helen Clark to now, in no small part because the party simply could not stop talking about raising taxes. Even when the party finally won, in 2017, it did so in a way that was so unconvincing that many (including the incumbent Prime Minister) thought it had lost – Labour and the Greens’ combined party vote was lower than National’s – an impressive feat for a third-term Government, and a weak mandate from a party that just six weeks earlier thought it was so popular, members portmanteaued the word “mania” to their leader’s name.

But Labour has finally won on interest deductability, proving it can put up a good battle on tax – in part by playing variations on the great Tory tax standards like giving the tax cut an unfriendly name, which follows in the noble tradition of ute taxes, KiwiSaver taxes, bach taxes, death taxes.

The wind is almost certainly at the coalition’s back heading into the next election. Things look ugly now, but will rather conveniently begin to recover around the time Kiwis are expected to head to the polls in 2026. Not much of that is the coalition’s fault any more than the wind that blew Labour out of office in 2023 could be said to be it’s fault, but it certainly won’t hurt them.

What is interesting about the next election, however, is that it might be the first election in many where Labour might be on firmer ground than the coalition on tax.

Labour appears to be considering shifting some of the tax burden from income earners to the owners of capital. The party then needs to choose whether to use the revenue it raises from that new tax to cut taxes for income earners (which was the 2023 Wealth Tax policy), to lift public spending, or a mixture of both.

All options present risk for the coalition, particularly National.

Lifting spending is probably the easiest to diffuse. The coalition continues to tell the public that it can have good public services without Labour levels of taxation, but is currently doing a terrible job of proving that this is actually true. Voters might, in 2026, be inclined to listen to a “better public services” argument from Labour, and the party seems to be gearing up for this, with leader Chris Hipkins telling everyone who will listen that spending levels will need to increase as the population ages.

But the coalition could easily retort that the Sixth Labour Government did little to assuage concerns about lefty profligacy, and in opposition, the leadership has arguably not done enough to reckon with that legacy of waste and assure the public it won’t happen again (an example, in 2016, Labour promised to put up $680m to fund half of Auckland’s $1.36b Light Rail Project, by the time it left office it had actually spent a third of its budget – $230 million, but had not delivered a single inch of track and the cost of the scheme itself had blown out to more than $14b).

Using the money raised to fund further tax cuts is probably the most politically challenging for National. If Labour put up a tax package like 2023′s proposal, it could use about $4b a year in additional revenue to reduce income taxes by $20 a week. The coalition would need to at least consider matching that, but would struggle to fund it without crippling spending cuts.

Act might look to reduce the tax burden by cutting spending. The party is fairly unsentimental about the size of government and might do a decent job of cobbling together cuts large enough to fund a large tax cut.

Prime Minister Christopher Luxon hasn't given thought to it. Photo / Mark Mitchell

National, however, would struggle. Having cut spending by $1.5b a year this year, with further cuts to come, it’s hard to see how the party would be able to find further cuts large to slash income taxes close to what Labour could offer through hiking taxes elsewhere.

That would leave National with two lines of attack: picking holes in the tax policy, hoping for a repeat of Sir John Key’s “show me the money” moment, which dismantled a very similar “tax switch” idea in 2011, and arguing that Labour has a secret plan to hike taxes after winning the election. Again, Labour doesn’t help itself here, within six months of winning an election on a pledge of “no new taxes for the entire term” bar a new top tax bracket, it announced two taxes it hadn’t campaigned on (an extension to the bright-line test and the interest deductability change), it proceeded to nearly double the amount of spending in each Budget from what it had promised in 2020, and even tried to implement an uncampaigned on tax on KiwiSaver providers, which would have reduced KiwiSaver balances by more than $100b over most people’s working lives.

Labour will probably try the “no new taxes” line again in 2023, but voters can hardly be blamed for not believing them.

For all these challenges, the real threat to National on tax in 2026 isn’t Labour’s tax policy, but its own.

It’s no secret. National is ideologically wedded to a radioactively unpopular tax change: scrapping the top tax bracket introduced by Labour following the 2020 election. This was part of its tax policy until it U-turned in November 2022, officially because of gloomy forecasts from the Reserve Bank (the fact the policy seems extremely unpopular probably contributed).

The last public reporting showed the bracket, which taxes income earned over $180,000 at a rate of 39% taxed the top 3% of taxpayers (between 1-2% of the overall population) and is meant to earn about $595m this year (both figures are now likely to be higher).

National believes in getting rid of this bracket and returning to a flatter tax system and the party’s donors very much believe in it. National has some form in scrapping top tax brackets, with Key inheriting a 39% tax rate from Clark and managing to get rid of it.

But things are far different now. Mainly because of a clever booby trap left by Labour.

The Fifth and Sixth Labour Government’s tax rates look alike, but cannot be more different.

For much of Clark’s time in office, the top tax rate kicked in at income over $60,000 – in 2008, 15% of income earners had some tax paid at the top rate.

The Sixth Labour Government cleverly set the threshold much higher so that only 2-3% of income earners actually pay it. The trick was borrowed from the UK Labour Government of Tony Blair and Gordon Brown. They too implemented a tax on very high incomes. After 14 years of Tory rule, the tax rate remains intact.

National faces an identical problem here. There will never be a good time to repeal that tax threshold, there will always be a competing spending demand. The party would need deep reservoirs of popularity to get rid of it – something it lacks.

If it wins a second term and delivers the first surplus in more than half a decade, it is politically untenable for New Zealand’s highest earners to be first in line to reap the reward. It will either need to deliver further tax relief for everybody, or nobody at all.

Act might try to skate around this by itself promising to get rid of the top rate, but this would almost inevitably lead to six weeks of Christopher Luxon being pressured to “rule out” giving in to that demand, which, seems highly likely.

When asked on Monday about axing the tax, Luxon said he hadn’t given it thought yet and fair enough. He’ll have plenty of time to contemplate it in 2026.