Cities with Land Value Rates have one big issue
Real Land Value Rates has never been tried
Many local governments in New Zealand currently implement some form of Land Value Rates. Nelson, Palmerston North, New Plymouth all charge a portion of their rates on land value.
So, we sometimes get asked, why do these areas not see the benefits we’re claiming, and why are some of them actively seeking to move to a capital value system? The answer is that these systems, despite nominally being based on land value, are designed in such a way as to run counter to our goals of encouraging housing supply and promoting equity.
The big issue is fixed charges: charges levied either on individual properties or individual units within a property. These charges are highly regressive and also pose a significant detriment to housing supply, yet cities such as New Plymouth and Nelson receive 40-45% of their rates revenue from them. Overall, we’d have a hard time choosing between Wellington’s rates system (95% Capital Value, 5% Fixed Charges) and New Plymouth’s rates system (55% Land Value, 45% Fixed Charges) even though the former has no land value component whatsoever — that’s how bad these charges are.
Even worse, Palmerston North also places a significant differential on multi-unit housing, to the point where the rates burden on dense housing in Palmerston North might be worse than any other city in the country.
The end result is a system that fails on housing supply and fails on equity, so it’s no surprise to us that there are voices calling for changing it. And indeed, in a place like Palmerston North, we’d welcome a ‘pure’ Capital Value Rates system — no fixed charges, no extra rates on multi-unit dwellings - in place of the current mess. However the best way to levy rates is still on land value, because rates based on capital value will always be worse for housing supply and creating vibrant, growing cities.
Under our proposal for Land Value Rates, rates would be lower for low-income residents and more houses would get built, across every city and district in the country. The regressive fixed charges we see in Nelson, New Plymouth and other cities need to go.
There's a really key message that you articulated well in the Better Things Are Possible podcast: with rates we shouldn't be trying to proxy a system of user charging, but rather trying to devise an efficient and equitable tax.
Differential rating is always justified as a proxy user charge: "multi unit housing uses more water/roads/etc per $ of land value so we should charge them more since they benefit more from council services".
It takes a broader view of benefit to escape that mindset. Benefits aren't received by the occupant of land, but by the owner of land, and there's a precise monetary quantity that measures them: the land value. Land value measures the net benefit of occupancy at the optimal built form less the costs of developing that form.
So land value is ALREADY a clean expression of the benefit derived by the site owners from the various services provided by local (and regional and national) governments, as well as by the actions of all of the rest of us.
This point - Councils shouldn't be trying to use a blunt rates tool as proxy for complete user-pays pricing of council services - is one we really need to hammer home.
That's the equity case for land value taxation (including land value rating). The efficiency case - more housing supply - is one you've made well and most people now appreciate.
Your podcast expression of that point was on point; good work.