New Zealand - land and property taxation

Robert D. Keall

ROBERT D. KEALL [*]

NEW ZEALAND IS a "small country at the world's end," [1] its closest significant neighbor being Australia, more than a thousand miles distant. Its population of over 3.5 million mainly occupies two narrow islands with a combined area somewhat larger than Great Britain, lying diagonally in the South Pacific roughly midway between the Tropic of Capricorn and the Antarctic Circle.

For scenic beauty and variety, the nation has few if any rivals. In the north, lush, semi-tropical vegetation and thermal geysers may be found; in the south, alps, glaciers, fjords, lakes, forests, and rolling heathland; while attractive cities grace both islands. Because they are narrow, the sea is never far away.

Its fertile soil and temperate climate make the land eminently suitable for agricultural and pastoral pursuits, but, although the chief source of export earnings, they employ only about ten percent of the workforce; this may be attributed both to advanced technology (including mechanization) and to the fact that pastoral production, by its very nature, has never been labor-intensive.

Most New Zealanders are descended from settlers from the British Isles who came after 1850, seeking greater opportunity. Between 10 and 12 percent are of Maori extraction. The Maoris are a Polynesian people who arrived a few centuries before the Europeans. Never conquered, in 1840 their chiefs signed the Treaty of Waitangi, acknowledging Queen Victoria as ruler. New Zealand became a self-governing colony of Britain in 1852, and was granted dominion status within the empire in 1907. It is now an independent Commonwealth nation, recognizing the British monarch, represented by a governor general, as chief of state. It has a unicameral parliamentary government, headed by a prime minister.

Historically, New Zealand was long known for its advanced social legislation. It pioneered female suffrage, and was among the first countries to adopt social security, old age pensions, and universal health care. A measure of land-value taxation was introduced even before the publication of Henry George's Progress and Poverty in 1879.

As has been noted, New Zealand's export production provides jobs for only about 10 percent of its workforce, yet full employment has long been an overriding political goal. In seeking to achieve this goal, successive governments up until the mid-1980s subsidized inefficient industries, restricted imports, and maintained a vast corps of public servants. They also progressively increased expenditure on welfare. These policies, together with compulsory union membership and mandatory arbitration of labor-management disputes, helped to insulate the economy from market discipline, and kept wages artificially high. All this was accompanied by a degree of state regulation "unparalleled in most other Western economies." [2] The mix of inefficient subsidized enterprises, non-market-oriented capital investment, union monopoly, cumbersome over-regulation, and a "safety net" so high as to discourage initiative for work and training, helped to produce an ill-prepared, poorly motivated labor force and a low rate of per cap ita economic output. [3]

For some three decades after World War II, this program, initiated by Labour but continued and expanded by the National (Conservative) Muldoon government, seemed to work: New Zealand enjoyed one of the highest living standards on earth. As long as tax revenue from exports fueled government spending, the illusion of prosperity could be sustained. But eventually, with the development of synthetic fibers to compete with wool, the rise of West Germany and Japan as economic superpowers, the erection of European Common Market barriers against New Zealand exports followed by Britain's decision to join the Common Market, the oil shocks of 1973 and 1979, etc., the terms of trade turned against New Zealand. For a while, the government was able to stave off the inevitable by overseas borrowing, but only for a while. "From having been one of the three or four richest countries in the world in the early 1950s, New Zealand moved to about 20th in international rankings by the end of the 1970s." [4] Moreover, by 1981, infla tion had reached 17 percent.

Land-value taxation, in the form of rating at the local government level, counteracted these tendencies to a minor extent, providing a degree of stimulation especially in the building industry. But although successful as far as it went, it did not collect enough of the economic rent or account for a large enough share of the total budget to constitute anything like a decisive factor in the economy. Furthermore, it is doubtful that even full rating of land values, coupled with the complete lifting of rating on improvements, could have in themselves prevailed against such massive forces for stagnation.

"By the time of Labour's victory in the 1984 election, the economy was seen to be on the brink of collapse, with the old-style interventionist policies of the Muldoon era clearly indicted as failures." [5] The new government faced a crisis situation, driven by a severe depletion of foreign exchange reserves. It was Roger Douglas, the incoming Labour minister of finance, who had mapped out a program of radical reform, and was able to push it through. Douglas, grandson of a member of the first Labour administration, had himself been minister for housing in the third Labour government, and spent many years in Parliament. At first, he had embraced the traditional interventionist position of his family and party, but gradually became convinced that instead of helping the less fortunate it actually made their position worse. [6] Through participation in a discussion group made up partly of academic friends, he became familiar with theoretical economics of the neo-classical and public choice schools, and arrived at the strongly free market views expressed in his 1980 book, There's got to be a better way. The sweeping turnaround he engineered set New Zealand on a course of economic expansion, international competitiveness, and negligible inflation which continued under succeeding National Party (solely or in coalition) governments that maintained much the same policy direction until it was repudiated by the electorate in November, 1999.

By this time, Douglas had left Labour to form a party of his own. Disillusionment with his program had set in, engendered by the feeling that the price for its successes was too high. For all is not well in Kiwiland. Wholesale privatization led to the selling off (frequently to foreign investors at bargain basement prices) of much publicly funded infrastructure that, from the standpoint of long-term social benefit, might better have been turned over to private operation rather than ownership. Although inflation was reversed, the national debt greatly increased, as did unemployment. As might be expected, some segments of the population found it difficult to cope with cutbacks (engendered by the unaccustomed regime of austerity) to entitlements and other public services. Finally, at Douglas' initiative, the reforming Labour government of the 1980s had turned against land-value taxation, and managed partly to dismantle it.

This will be discussed in greater detail later. The editor has hazarded the suggestion (admittedly conjectural) that Douglas, who had once been a member of the New Zealand Land-Value Rating Association, came, perhaps unconsciously, to associate land-value taxation with the discredited Labour Party socialism of his earlier years. If so, this was a tragic and unwarranted mistake. Although land-value taxation had traditionally had the support of Labour, its history in New Zealand long antedates that party, and it is conceptually distinct from (and, in its full Georgist form, antithetical to) socialism and the welfare state.

For over 150 years, land values in New Zealand have been collected for public purposes in three main ways: (1) by the sale and lease of Crown land, (2) from a national land tax, and (3) from land-value rates for local government. This record shows that the tax technique, however commendable in many ways, has significant practical limitations as well as being susceptible locally to administrative problems that, if not successfully addressed, are eagerly used against it; and that the principle and technique of institutionalized leases may be extended to include infrastructural monopolies, and thence more widely to land itself.

Crown Leases

From 1896 until recently, a government Valuation Department independently recorded the market values of the land, the improvements, and the composite or capital value. In 1999, the role of its successor agency was reduced to monitoring valuations done by private valuers under contract to local authorities, and to competing with private valuers for such contracts.

I

UNDER THE TREATY of Waitangi, only the government could buy land from the Maoris. Some of this land the government then resold in order to finance immigration, some it disposed of as grants to individuals in return for services, and some it retained on a perpetual leasehold basis. As local government evolved, some allocations were made on a leasehold basis to statutory bodies such as hospital and education boards to finance their statutory functions. Some coastal cities and harbor boards reclaimed land from the sea and leased it.

The operation of these leases was eventually regulated in the Public Bodies Leases Act of 1908; amended in January 1970. The act specifies the ways in which leases may be applied for, tendered for, or auctioned. It covers rent reviews, compensation for improvements on surrender or forfeiture, covenants and conditions, etc. The Act dismisses the fears of those who contend that state leases lead to bureaucratic nightmares. The leases are popular with the lessees who then put more into improvements instead of land price. Because the rentals tend to be low and too infrequently reviewed, the leases are often traded as freehold. Such a shortcoming does not condemn leasehold tenure, but indicates the need for regular adjustment in favor of the community at large. The lease mechanism provides the ideal means of applying environmental constraints as covenants in the agreement covering the interests of both parties.

The traditional government agency administering its leases was the Department of Lands and Survey, later known as the Department of Survey and land Information (DOSLI). As from 1 July, 1999, it has again changed its name, and is now Land Information New Zealand (LINZ). Its specified purposes are to provide certain essential information, and to effectuate "the transfer of all Crown lands to the private sector, to Maori, Local Authorities or the Conservation Estate." [7]

In addition to LINZ, the government established Land Corporation Ltd. to manage and sell, in an orderly way, certain government-owned leases, property, and livestock. Its subsidiary, Land-corp Investments Ltd., "has continued its successful programs to encourage lease freeholdings, early loan repayments, and the sale of freehold land, . . . and to realize the remaining land and loan assets...."8

Settlement of Maori land claims under the Waitangi Tribunal to redress historic wrongs seems directed at entrenching the principle of freehold as the only means of tenure.

Significantly, some tribes having secured their claims now propose to lease them.

II

The National Land Tax

IN 1853, GOVERNOR Sir George Grey, instructed by the Crown "to form Regulations for the sale and disposal of Crown Lands," gazetted regulations in which "he intended to impose a Land Tax, to prevent the acquisition of large areas of unoccupied land." [9] This plan was frustrated.

In 1868-69 on a visit to Britain, Grey discussed with John Stuart Mill the theory of taxing the unearned increment of land. [10] (In 1871, Henry George published his booklet, Our Land and Land Policy, anticipating the theme of Progress and Poverty, which followed in 1879). Finally, in 1878, as premier now, Grey with his treasurer, John Ballance, actually introduced a land tax. [11] Subsequently converted to a property tax, it was finally confirmed as a land tax in 1891 by Grey's successors [12] both for the revenue and to break up large estates. Correspondence [13] between Henry George and Sir George Grey and Representative P.J. O'Regan from 1880 to 1893 indicates Henry George's influence in this and later measures. By 1922, the land tax yielded about 10 percent of the Budget. As overseas trade developed and inflation became the accepted means of financing wars or social policy, so land values grew and were protected from any land tax by governments elected to do just that at all costs. Thus by 1989, or 98 y ears after its confirmation, the land tax yielded only 0.4 percent of the budget and was commonly regarded as an antiquated irritant.

Rural land was already exempt (see below).

During 1989, there developed a justifiable concern about the tax because: [14]

a. Commercial land values in Wellington and Auckland mainly, rose sharply but soon after fell just as sharply.

b. The land values had been assessed, in the normal course, at or near the peak, but the tax was collected a year later in the circumstances precipitating the fall in values.

c. In these peculiar circumstances, this caused real hardship. Where the site was underdeveloped (partly because of the insignificant level of the land tax hitherto) there were too few occupiers to absorb the tax, directly or indirectly.

d. Just prior to the collapse of the land values, the Labour government of the day with Roger Douglas as minister of finance, moved to lower the rate of the tax and also the threshold at which it was payable. This would have increased the tax-take to 0.5 percent of the Budget and as a prelude to widening the tax base was generally accepted. The collapse in land values changed all that.

The tax became a political football. So to pre-empt a Conservative National Opposition promise to abolish the tax, the Labour government did just that. The previous National Party government under Muldoon had already abolished the land tax on rural land (so benefiting 1,300 of the richest people in New Zealand and those most able to pay) but had increased it on commercial land. In context it now seems that as a matter of political expediency, the Labour government, having adopted policies of the "New Right," used the opportunity to progress its agenda of shifting all charges off land values onto goods, services, and users.

In 1990-91, the New Labour Party (NLP), as a splinter group from the now rightward-leaning Labour Party, in its Alternative Budget proposed to re-instate and increase the land tax eightfold, levied at up to 4.5 percent of land value, but exempting home owners and small farmers on land values of less than $100,000. It would yield about 5.0 percent of the Budget and was the one ingredient that would make all other objectives attainable.

To generate some political clout, the NLP formed the Alliance with numerous small parties. The results of the general election of November, 1999, reflected widespread disenchantment with fifteen years of New Right policies, and represented a swing to the Center-Left. The new government is a Labour-Alliance coalition. The Alliance, headed by Jim Anderton, now deputy prime minister, is pledged to push land as a source of public revenue.

III

Local Authority Rates

THESE ARE THE property taxes levied to pay for certain local amenities. In New Zealand, police, education, social welfare, and such, are the responsibility of the central government.

A. Terms

Uniform Annual Charge is a flat charge applied to each rating assessment for a specific purpose, i.e., administration, water, sewerage, refuse, etc. There may be several such charges, but in total, they may not exceed 30 percent of the total rates. They tend to increase the rates on the lower valued properties and reduce the rates on the higher, even above or below the 30 percent limit in total.

Land-Value Rating means that local government rates are levied on the government valuation of the market value of the land alone, exempting the improvements.

Capital Value Rating means that the rates are levied on the government valuation of the composite market value of the land and the improvements. Improving the property thus leads to higher rates. The improver pays while the land speculator wins.

Annual Rental Value Rating means the rates are levied on the value a property is rented for or would rent for, or five percent of the fee simple as assessed by the city council.

B. History

In 1849, in Wellington and Marlborough, [15] ordinances allowed rates to be levied on an estimate of the value of the land alone, excluding houses or buildings. This was confirmed in 1854 and 1855 respectively. To what extent these early colonial initiatives were inspired by John Stuart Mill and his contemporaries may never be known precisely. Henry George would have been sixteen at that time.

Auckland city is the last remaining instance of annual rental value rating--a relic from the nineteenth century. The original provinces of New Zealand drew their revenues from the sale and lease of land. [16] When the provinces were replaced by local government in 1876, rates were based on the annual rental value, as in England. Within six years it became apparent that with most properties being sold rather than rented, the capital value was a more realistic base. Accordingly, councils were permitted to switch to or from capital or rental value by resolution.

About this time, the writings of John Stuart Mill, Henry George, and others drew attention to the unearned increase in land values generated by growing communities whether derived from pressure of population or from public works. As a result, Grey's successors not only introduced the land tax in 1891, but also in 1893 a measure allowing local rates to be collected from land values alone if a poll of rate payers required it. The measure was blocked by the Upper House for three years, but in 1896, it became possible for 15 percent of ratepayers to demand that a poll be held to decide whether the rates should be collected from the unimproved value only, i.e., the land value exempting the improvements. [17] Under this dispensation, hundreds of rating polls were held so that by 1982, just 86 years later, 90 percent of all municipalities had by poll adopted land-value rating, which accounted for 80 percent of local government revenue. [18] The main dissident ones were remote, thinly-populated rural areas; a few co unties with a large dairy factory carrying a big proportion of the rates; the old boroughs on the Auckland isthmus largely parasitic on Auckland City; Lower Hutt, then a dormitory suburb of Wellington with extensive state rental housing but without its own hard core of land values; and Queenstown--a speculator's paradise.

On the strength of this overwhelming democratic endorsement of land-value rating, the New Zealand Land-Value Rating Association in 1985 repeated its representations to the new 1984 Labour Government that land-value rating be made mandatory and that the land tax be allocated to regional councils for major works and disaster relief. This would have given regional councils a vested interest in the land tax and entrenched it. The Association recommended too that homeowners' land-value rates be made income tax-deductible. It recommended stronger local units of government, and cited land-value rating as the proven catalyst for voluntary amalgamations. [19] Devolution of function from central government to the stronger local units would have involved an intensification of the land value charges at the expense of income taxes--a bloodless revolution!

Notwithstanding the Association's reference to the Labour Party's affirmation of land-value rating in 1948, it seems that during 1987, Labour (now in government) let it be known that it favored capital value rating. Accordingly, in 1988 devious reversions to capital value began. Christchurch moved from partial land value back to capital value by council resolution, when a poll should have been held. Dunedin fragmented its general rate into separate and special rates so they could then be changed by council resolution without recourse to the ratepayers and despite the ratepayers' vociferous protest march. The mayor threatened to take his council to court. The council action was not in fact illegal, but clearly a misuse of its powers. In 1953, the Dunedin ratepayers had voted for land-value rating, with an increase in building permits as a consequence. In Wellington, a year-long Rates Review Committee came down firmly in favor of retaining land value with an adjustment to the differentials between city center and suburbs. Nevertheless, the mayor contrived to have capital value narrowly adopted but needed a government Order in Council to validate his procedures, which an eminent lawyer and the local press regarded as illegal (Dominion, April 19, 1988). In the Rating Powers Act of 1988-89, the government withdrew the traditional right to demand a poll, at the same time as it propounded the merits of "local decisions locally made"! The right to demand a poll on a council loan still applies, but not to change the rating system.

In 1990, local government was restructured on the basis of topographical unity and presumed community of interest. In many ways, some such reform was long overdue after the demographic changes of 100 years--erstwhile towns no longer existed. The restructuring reduced 231 local units to 73. It also reduced proportionally the number of municipalities which by poll had adopted land-value rating from 90 percent to 73 percent, with little change since.

It must be pointed out that wherever land-value rating applies, it has been adopted by a poll of ratepayers representing a great amount of work and profound social concern. Wherever capital or annual value rating applies, it has been imposed by government or local councils, contrary to the express wish of the ratepayers in almost every case.

In 1990, the finance minister introduced a measure that would abolish annual rental value rating and would make capital value rating irreversible wherever it was in place or might be adopted subsequently. The move failed and the government changed at the end of that year.

Since then, several moves by councils to revert to capital value have been successfully opposed by ratepayers, even without the right to demand a poll. One or two moves have succeeded but later have been reversed. One or two changes have stuck--uncomfortably.

A valid confusing consideration in the moves to revert to capital value as the only legal alternative arises from the amalgamation of urban with rural areas, which previously raised and spent their own rates. Amalgamation can mean that a highly valued rural property pays for urban facilities. The land value of the rural property is determined far more by overseas prices and exchange rates than by council expenditure. Even the advantage of a nearby town comes from investment by the private sector, not by the council. Urban amenities provided by the council are little used by the remote farmer. This does not deny the validity of a national land tax for its own sake, but does introduce a cost/benefit issue in respect of local rates. The solution is not to revert to capital value rating, but to apply a differential land-value rate that relates public income to expenditure in both town and country so that each enjoys the advantages of land-value rating but not at the expense of the other. Any capital gains for the rural property derived from the rates relief afforded by the differentials are not the concern of the council, however important they may be as objectives of social reform through central government. A precedent for this sort of dispensation occurs in the Urban Farmland Rating Act of 1932 and with Special Ratable Values.[20] So long as the functions of local government are relatively limited, funding for those purposes will be restricted and must be related. Failure to recognize this invites having the principle dismissed as irrelevant by those eager to propose any alternative. In the urban/rural amalgamation, the farmer tends to be under-represented on council because of occupational commitments. Frequent, inconvenient committee meetings to solve urban problems preclude election to office.

The practical consensus now seems to be a basic land-value rate with differentials to distinguish between residential, rural, and commercial zones and to offset the advantages of tax-deductibility enjoyed by some, supplemented by uniform annual charges. Some councils have settled for a mix of land value and capital value as a placatory gesture devoid of any apparent reason. (NB: The differentials should not be extended to allow a hodgepodge of inner-city zoning dispensations.)

Any increase in rates to meet the widening costs of regional government due to devolution from central government should be accompanied by income tax-deductibility for the homeowner also-revenue sharing, they call it.

C. Endorsements

Land-value rating has been endorsed by:

1. The Royal Commission on Local Government Finance, 1958.

2. The Wellington City Committee, 1989.

3. The Internal Affairs Department Coordinating Committee, 1989, which concluded "that there should be a nationwide uniform base for rating," and "that undifferentialled land-value rating is the only rating system fully consistent with efficient resource allocation. It encourages an optimal use of high-value sites because rates based on land value penalize inefficient usage of the site [since] a landowner is nonetheless required to contribute financially to the community on the basis of that property's potential."

4. The 90 percent of municipalities in New Zealand that by poll adopted it and likewise could have rejected it.

5. All the newer areas of Auckland-North, South, East, and West that have long enjoyed it and clearly intend to retain it.

6. The cities and districts of Palmerston North, Waitakere, New Plymouth, Horowhenua, Kaipara, Tararua, Waimakariri, and Franklin, where proposed reversions to capital value were rejected, most of them heavily, by as much as eight to one.

The above-cited entities are in general agreement that land-value rating has the following merits:

1. It usually means lower rates for the majority of ratepayers. The common ratio of improvements to land value is three to one. Properties developed above that (usually homesteads) get a rate reduction at the expense of those with a lower ratio--usually underdeveloped or vacant sites held for speculation, and poorer commercial properties.

2. It promotes employment because:

a. It reduces the price of land, which means a lower outlay and greater accessibility for home-builders, farmers, developers, and property improvers of any sort.

b. It deters the speculator and under-user of land, with a constant stimulus for improvement and better land use.

c. It ensures the optimum use of land free of further penalty--truly an incentive tax, both stick and carrot. Thus, it tends to bed in and become accepted. It generates steady urban renewal, as in Sydney, Australia, and hitherto in Wellington, rather than deferred boom and bust as in parts of Auckland. Renewal in Wellington has slowed noticeably since reverting to capital value rating.

d. Given these incentives, every person who gains employment in primary industry or property improvement of any sort generates four more job opportunities downstream in secondary and tertiary industries. If another 10 percent of our primary work force, i.e., 25,000, were employed in housing, farming, fishing, and transport, another 100,000 would find work (see the Auckland Star, May 1, 1988). In these ways, land-value rating reduces the disparity between the easy rich and the unemployed. Any other form of rating does exactly the opposite--fourfold, as shown above.

3. It is environmentally friendly. By optimizing land use, it maximizes the natural, undisturbed environment.

4. It recovers some of the community-created land value for community purposes. Indeed, land price only arises because the community fails to collect its just dues. Insofar as it does collect them, so land prices diminish. There is thus a unique, important, moral imperative in land-value rating which is entirely consistent with its other virtues.

D. User Pays and/or Cost/Benefit

Court actions against councils have recently been brought on the ground that there was no equitable relationship between the rates paid and the benefits enjoyed. These actions, until recently (see below), had only ever been taken in areas rating on the capital value--quite rightly. There is no connection between the private investment of capital and council services. Reticulation of any sort is better used by high-rise improvement than extended for miles. Community services are more accurately reflected in site values than in capital values. Moreover, land value is itself a cost/benefit measurement. As a land-value rate reduces the price by the amount of the charge capitalized, the site user either pays initially to a vendor or progressively, to a small degree, to the council. The principle of User Pays is eagerly directed at as many council services as possible by those who seek to relieve property of rates, thereby increasing the land values. However, the principle of User Pays applies logically first and f oremost to the user of the site (and other natural resources) either as purchase price, or progressively in the form of rates that recover for the rest of the community the community-created land value so that it can be used to pay for public services available to all. Land value rating to fund local government is a significant step along that road.

In fairness, though, the rate-payers' land value rates must then be made set off against income tax as deductions or rebates. In this way, the costs as well as the benefits of community services are equitably spread without an impossible statistical analysis.

Unprecedented litigation, outside the provisions of the rating legislation, has established that (a) a minute cost/benefit analysis with apportionment accordingly is not the intention, and (b) a council has to use the dispensations available to achieve a reasonable cost/benefit relationship. [21]

E. Rating Summary

By 1982, land-value rates comprised about 80 percent of local government revenue and were a significant factor in deciding site usage. Since then, the reversions in Wellington, Christchurch, and Dunedin, the spread of mixed systems, and the greater use of differentials with direct user charges have reduced their proportion of local government revenue to an estimated 40 percent. Draft legislation extends the use of direct charges to further reduce the rates. Since the restructuring in 1989, the collection of statistics has also changed without the detail previously available. The lower level has also lowered the level of economic impact and made the issue less critical for the majority of taxpayers. Macro-economic forces influence changes far more than the rating system. Nevertheless, at the ratepayer level, the preference to have improvements excluded from rates seems firmly entrenched.

IV

Recent Developments

DEMOLITION OF THE welfare state has seen the sale of many community facilities without distinguishing the operations from the assets. One-time local power boards retailing electricity have been privatized. The new shares issued free to consumers have rapidly devolved into a few hands, with mergers, buy-outs, and overseas minority holdings inflating the price. "This has released over a billion dollars worth of shares into the community" (NZ Herald, September 13, 1995). Even state-owned generators, hydro and coal, have now been sold. There is still some publicly-owned radio and television. Some water and sewage facilities have been corporatized, under vigorous protest and dissatisfaction with the charges. A new statutory obligation to provide for depreciation long deferred, inspires councils to try to distance themselves from the problem, to avoid the rate increases and to apply the User Pays principle. In various other ways, central government directly and indirectly requires or encourages local governments to off-load their operations, to "externalize" their costs, and to reduce their rates (predominantly on land values), with no apparent hesitation about turning monopoly rights over to private interests. Roads are talked about only, yet. The right to pollute is recognized. The government has also sold fishing rights (under a quota system), which it must now buy back when it wants to reduce the quota for conservation reasons.

In contrast, the Auckland Regional Services Trust, resisting pressure to privatize, has demonstrated the high profitability of retaining public utilities when run on a corporatized or accountable basis.

In 1996, over half the Reserve Bank's recent breach of its underlying inflation target was due to house-price inflation (up to 36 percent in two years in Auckland) and inflation in the nonproducing property sector (up to 84 percent in other areas) despite balanced, even surplus, budgets. "The Bank's failure has cast into doubt the monetarist framework that has underpinned the government's economic policy" (Sunday Star-Times, June 30, 1996).

V

Summary and Conclusions

OVER NEARLY 150 years until the late 1980s, land-value taxation in all its forms had become increasingly accepted, even popular, in New Zealand. It was reckoned then that without it, land prices would have been half as high again. Since 1989, the public appropriation of land (resource) values has significantly diminished, due to:

a. abolition of the land tax.

b. the lower level of land-value rates, even where it is the main system; the reversion to capital value rating in Wellington, Christ-church, and Dunedin, plus some rural areas; the increase of a mix of land and capital value rates; and the maximum use of direct charges, whether as rates or fees.

c. the limited scope for increasing land value charges of any sort for local government without making other provisions, such as tax-deductibility.

d. the progressive alienation of Crown land.

f. the privatization of state assets, natural monopolies and public utilities.

Regarding the land tax, Reece [22] explains that "New Zealand's abolition of land taxation in 1991 is atypical because of the rare combination of influences involved... not likely to be repeated elsewhere." The system may even be revived here by those who had to forsake it as a political expedient--when those influences change, as the necessity for it becomes clearer again, and when it is supported by other moves in the same direction (see below).

The tax-deductibility of homeowners' rates (essential to any intensification at the local level) was debated in Parliament about twenty years ago and was defeated for no other reason than that the two major parties joined to oppose it in order to denigrate the rising third party introducing it.

The sale of Crown leases is less in the public eye and has been carried out almost clandestinely, but is now being monitored and has slowed.

The sale of other strategic community assets in communications, transport, and power, etc., especially to foreign control, is of growing concern and was an issue in the last general election. Over 50 percent of the New Zealand share market is owned abroad.

A proposal not long ago to regulate the privatized power companies was an admission of the inherent impossibility of natural monopolies being controlled by a free market. Telecom's misuse of its monopoly position to obstruct competition is constantly in the news, and its profits remitted abroad are a major cause and indicator of New Zealand's growing overseas debt. Tranzrail's lease of the nation's railways for a dollar a year enables it to hold the Greater Auckland area at ransom in resolving a desperately urgent public transport bind.

These policies were pursued (often in contradiction to election manifestos) by a coalition government stitched together on the basis of unrelated political issues and through the mechanism of an ill-contrived form of preferential party representation. The Asia-Pacific Economic Cooperation Group (APEC) conference held in New Zealand in the Fall of 1999, expressly designed to extend "trade liberalization," brought that approach under close scrutiny and adverse comment from, among others, a former governor general and a former prime minister. The underlying cause of concern is the failure to distinguish between free trade in produced goods and services, and treating the nation's patrimony of natural resources as a mere commodity to be bartered away to foreign interests instead of serving as a continuing source of opportunity for its citizens and revenue for its public services.

This diminished level of economic rent appropriation for community purposes has had the results that should have been expected. While glowing reports go 'round the world extolling the recent growth of the economy (which is fine for those who own "the economy"), wages fail to keep pace with even relatively low overall inflation and are inadequate to meet the new demands of individual responsibility. The benefits of deregulation have not trickled down. The rich have got richer, and the poor, poorer. State assets have been sold cheaply, ostensibly to repay debt. But the national debt and current account deficits have risen alarmingly. All basic government services are run down--health, education, police, etc., to meet tax cuts directed at the top end. Poverty and violence have attracted unprecedented comment by the judiciary. All these factors and more were issues in the 1999 election that resulted in the present government. The question now is whether New Zealand's repudiation of the failed program of the New Right presages a return to the failed program of the Old Left. There's got to be a better way than either. That way is sketched in the final paragraphs of this chapter.

New Zealand's experience of having practiced land-value taxation in several ways over 150 years; the demonstrated bankruptcy of other approaches at both ends of the political spectrum; the paucity of viable fresh alternatives on offer at the recent election; the liberal attitude of the media and the hunger for change of freelance journalists; in short, the crossroads the country is now at, make it a crucible for the resolution of these historic issues.

The current confluence here of the related critical issues (alluded to under Recent Developments and more immediately above) presents an unexpected opportunity to promote new ways to collect economic rent, and to secure the community's interest in natural monopolies, akin to the rating legislation of a century ago. Addressing this opportunity requires an approach (including appropriate terminology) that: (1) commends itself to the electorate; (2) is mutually exclusive of other taxes; [23] and (3) institutionalizes the principle so it is less vulnerable to political interference and to every tax collector, at every level, every year. To this end, a market "resource rental" is now more appropriate than a land tax in relation to the significant infrastructural industries currently the cause of concern. The term is already used by government and political aspirants. It inferentially distinguishes the operation from the ownership of the asset--one need not own it to use it. Private enterprise must not include pri vate ownership of the natural elements of life. When the objective is recognized, a wide variety of well known techniques may be used as transitional or enduring means of achieving it. In some cases, a capital investment by the state may be necessary to manage the resource and to recover the rent.

Because land (and thus land value) is perceived as sacrosanct private property, land value charges are too often seen as an invasion of private property, whereas infrastructural assets built up over time out of taxes are seen as public property and therefore eligible for public participation. Once adopted here, extending the principle to land would be a logical step.

In addition to the radically more equitable distribution of wealth and all the other merits of land value charges documented earlier in this chapter and elsewhere, the collection of market Resource Rentals for Revenue in lieu of other taxes has these advantages: (1) it resolves the inflation concern in that the rental destroys the inflationary tradable price by commuting it to essential social income; (2) it eliminates natural resources and natural monopolies as a form of investment or ownership, by whomsoever; and (3) it allows competition in the operation (under license), which is not possible when the resource is privately and exclusively owned. Any rental paid must of course be set off against any income tax payable, or vice versa, i.e., the charges must be mutually exclusive, which avoids the obligation to first re-purchase the resource. Who can quibble over a re-incidence of the charges?

Above all, set-off makes it immediately clear to the individual that the resource rental is not just another tax. Instead, it is the alternative to taxes on endeavor. Widespread understanding of this crucial point provides the political dynamic essential for the ultimate adoption of a thoroughgoing resource rental system of public revenue.

Mr. Keall was a finance company executive and investment broker. He held various offices for many years in the New Zealand Land-Value Rating Association, and in 1994 founded the Resource Rentals for Revenue Association (International). He contributed Chapter 26, "New Zealand" (pp. 417-438).

(*.) Robert D. Keall was a finance company executive and investment broker. He has been honorary treasurer since 1956 and honorary secretary since 1959 of the New Zealand Land Value Rating Association, and founded the Resource Rentals for Revenue Association (International) in 1994. He is author of several submissions to the New Zealand Parliament, as well as tracts on such topics as inflation, unemployment, rating systems, and funding for local government.

Notes

(1.) Rolland O'Regan, "New Zealand" in H.G. Brown et al., eds., LandValue Taxation Around the World (1st edition; New York: Robert Schalkenbach Foundation, 1955), p. 27.

(2.) Patrick Massey, New Zealand: Market Liberalization in a Developed Economy (New York: St. Martin's Press, 1995), p. 7.

(3.) Ibid., chapter i, pp. 10, 29, and passim.

(4.) Organization for Economic Cooperation and Development (OECD), OECD Economic Survey: New Zealand (Paris: OECD, 1989), p. 89.

(5.) Massey, op. cit., p. 70.

(6.) Roger O. Douglas, Unfinished Business (Auckland: Random House, 1993), p. 10.

(7.) Department of Survey and Land Information (DOSLI), Annual Report, June 30, 1998.

(8.) Land Corporation Limited (LANDCORP), Annual Report, June 8, 1999.

(9.) W. L. and L. Rees, The Life and Times of Sir George Grey, K.C.B. (Auckland: H. Brett, 1892) p. 134; J. B. Condliffe, New Zealand In The Making (London: George Allen & Unwin Ltd., 1930) p. 100.

(10.) J. Rutherford, The Life and Times of Sir George Grey, KGB., 1812-1898 (London: Cassell, 1961) p. 584.

(11.) Condliffe, op. cit., p. 107; Rees, op. cit., p.419; Rutherford, op. cit., p. 612.

(12.) Condliffe, op. cit., pp. 178-185.

(13.) G. M. Fowlds, ed., An Interesting Correspondence. Sir George Grey and Henry George. (Auckland, Auckland Public Library, 1950). It also records their meeting in Auckland, New Zealand, on March 1, 1890. A letter from Henry George to P. J. O'Regan, November 11, 1893 (NZ LandValue Rating Association). P. J. O'Regan was MP for Inangahua from 1893-1896 and for Buller 1897-1899. The rating on the Unimproved Value Act is believed to have been introduced under his auspices.

(14.) Barry F. Reece, "The Abolition of Land Tax in New Zealand: Searching for Causes and Policy Lessons," Australian Tax Forum, Vol. 10, No. 2 (Spring 1993), pp. 223-244. An invaluable evaluation of the facts and conjectures regarding the abolition.

(15.) J. S. H. Robertson, Local Rating in New Zealand, a Study of its Development (Wellington, NZ: Valuation Department Research Paper 663, May, 1966). Rolland O'Regan, Rating in New Zealand, 2nd ed., (Petone, NZ, Baranduin Publishers, Ltd., 1985), p. 23.

(16.) Condliffe, op. cit., pp., 98-104.

(17.) R. O'Regan, op. cit., pp. 27-28.

(18.) Ibid, pp. 31-32.

(19.) Ibid, pp. 53--59, etc.

(20.) Ibid, pp. 112-125.

(21.) Ibid, pp. 123-124.

(22.) Reece, op. cit.

(23.) Condliffe, op. cit., p. 180.

                            Rating System Chart
                       RATING SYSTEMS IN NEW ZEALAND
                               1 July, 1999
          L.V.     C.V.     A.V.    Total
Cities     9        5        1       15
               60%      33%      7%
Districts  41       17               58
               71%      29%
Total      50       22       1       73
               69%      30%      1%
L.V. - Land Value
C.V. - Capital Value
A.V. - Annual Rental Value

Note: Since the restructuring of 1990, local government in New Zealand has been divided into cities and districts respectively. Both are accorded the same funding options by the central government, from which their authority is derived. There are no intermediate jurisdictions between central and local government.

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