Comment: It's time for capital value rating

Jack Shallard, a chartered accountant, consultant, and independent correspondent with experience in tax systems, shares his views on future rating systems for Rotorua.

The council has begun the tortuous process of reviewing its rating policy as part of the triennial review of its long-term strategic plan. Review of rating policies is one of the reasons councillors are elected. And the legislation requires that rating policies be reviewed at least every three years.

The last review was sabotaged by public pressures almost entirely based on emotion, self-interest, lack of understanding of the issues, and intimidation of our elected members. The result is we have a hybrid system made up of historic compromises dating as far back as the merger of city and county, about 30 years ago, and ad hoc differentials and other tweaks ever since to appease various pressure groups.

It will be helpful if we, the ratepayers, will look beyond self-interest, and support our council in coming to a fair, equitable, and principled system, without threatening to toss them out at the next election. That's both selfish and cowardly. As for the councillors, Rotorua needs you to unite and work as a concerted team to bring in an equitable and sustainable rating system, even if some of us might have to bite some hard bullets.

No council will ever get peace until it gets to a capital value rating base with no differentials. Only then will it be able to say everyone is treated the same way. Only then will the council be able to truly defend its policy. But this cannot be achieved overnight for Rotorua. It would shift too much from business properties to residential. That might be fair but it won't be palatable.

Rates are a blend of pure tax and service charges. You cannot escape the fact that rates are a tax. Costs that can be measured, identified to those who benefit, and charged direct them, are in the nature of service charges. These include water and sewage reticulation, and refuse collection. Most other rates, whether targeted or general, are a tax so it becomes a matter of what is fair and equitable in setting the rate of that tax.

The common cry is that "rates are not fair", as if they cannot be made fair. The truth is that our duly elected representatives have the serious, rather sacred (for want of a better term), duty and responsibility of deciding, and therefore defining, what is fair and equitable in a rating system. That is the theme of the legislation. And it is serious business because they are setting and embedding tax rates. This is both a privilege and a responsibility. Once set, taxes are sacrosanct. No one else has that power apart from central government which sets income tax and GST rates.

Now comes the rub. Everyone will say they want a fair and equitable system, but people will have quite different views about what is fair and equitable, usually driven by self-interest. There are two views of fairness and equity. One is that everyone should pay the same uniform amount for everything - the horizontal view. The other is that we should all pay according to our ability to pay - or inability to pay - the vertical view. How do you reconcile these? Both are valid. The plain social fact is you cannot charge people at the bottom end of the economic barometer what they cannot pay. Some people cannot pay the full impact of the uniform, horizontal basis. It is unreasonable to expect them to do so. So, if it is to work at all, the system must take account of their inability to pay if it is to be fair, equitable, and reasonable. This inability to pay will become a major theme as the council proceeds through its review. And so it should. The system eventually chosen will be a blend of uniform amounts and rates based on ability to pay/ inability to pay, depending on the service. At this point the council will have defined equity and fairness in terms of what it is required to do under the legislation.

Any rating review must be based on guiding principles rather than running away from "the pain of change". This in itself will be painful for the councillors. These principles are clear. They are: conformity to accepted taxation principles, equity, transparency, representative of the activities it purports to fund, stability, consistent with the community's objectives, and enforceable in that it is administratively simple. These make up the ruler against which the policy should be measured and the discipline to be followed. They are underpinned by the 'reasonableness test'; taking everything into account, is it reasonable?

This ruler clearly eliminates land value as an option for a principled rating system. These principles all favour capital value for every activity the council is involved in. The Local Government Rates Inquiry in 2007 (Shand Committee on rates reform) recognised this when it recommended that "a common rating system based on capital value be promoted across the country for general rates." The Government endorsed it when it embedded capital value rating into the legislation that created the new Auckland Council. And the move among councils is always to capital value, never to land value, with about 60 per cent of councils now on capital value, and going up.

The point is that people and their activities either cause costs or benefit from council services. Capital value identifies the presence of people and their activities. Land value doesn't. People use roads, libraries, swimming pools, make noise, and have dogs. Land doesn't. That doesn't make capital value perfect, but it is the best we have and a lot closer than land value.

The Rotorua District Council's corporate and customer services committee is to meet on December 7 in committee room one of the Civic Centre to discuss options available for setting rates. The meeting is open to the public and starts at 1pm.