Councils need new tools to pay price of growth
User charges, targeted rates could pay for infrastructure
Systemic failures in the provision of infrastructure are throttling Auckland’s growth and helping drive house prices to eyewatering heights. So the Productivity Commission concludes, and few would disagree.
It devotes a fair chunk of its 516-page report on urban planning — released this week — to the issue.
Its proposed remedies reflect a belief that, where possible, those who benefit from infrastructure investment should pay for it.
It is an overall theme of the report that councils should rely more on pricing and less on prescriptive rules.
In particular, when it comes to three waters (water, wastewater and stormwater) and roading infrastructure, councils need a greater ability — and willingness — to impose user and congestion charges to encourage efficient use, help recover costs and manage pressure on existing assets, it says.
When cost cannot be allocated with such precision, and especially when new subdivisions are involved, it favours development contributions levied on developers.
It cites research by the Centre for International Economics that, on average, the marginal cost to Auckland Council of providing new infrastructure for housing in highdensity or infill areas is close to $30,000 for each dwelling and for lowdensity or greenfield areas, close to $45,000.
How much of that gets sheeted home to the newly accommodated, via development contributions, user charges or targeted rates, and how much is socialised through general rates is a perennial and vexed issue councillors have to grapple with. The commission argues that their options should not be limited by legislation to the extent they currently are.
Then there are the windfall gains to landowners within the areas which benefit from costly infrastructure investment, which the commission believes should be taxed.
“As well as existing tools (user charges, general and targeted rates), councils should have the power to capture a portion of the value created by development — via targeted rates on the increase in the land values of property owners.” It sketches one way some of that value could be captured through a targeted rate.
A council would identify an area which would benefit from an infrastructure investment. Only those properties within the designated area that increase in value by more — and sufficiently more — than general property inflation in the wider region would be subject to the rate. The council would choose a threshold of increase in value beyond which the rate would apply, for example 20 per cent above the measure of general property inflation.
The targeted rate might be 10 per cent of the uplift in land value, payable over a five-year period.
General rates, the commission
argues, should be levied on land value, not the capital value, of a property.
That would redistribute the burden on general rates more in the direction of unimproved land, reducing the incentive to land bank.
It would also reflect the fact that as a tax base, land has the virtue of being inelastic, that is, taxing it does not reduce how much of it there is.
A survey of councils undertaken for the commission last year found 43 per cent of them agreed with the proposition that “Our council often does not invest in, or delays investment in, needed infrastructure that has a strong business case because it cannot fund it.”
And 49 per cent agreed that “The main barrier to funding our infrastructure needs is we have reached the limit of rating increases.”
For long-lived assets not specific to a new development, the commission sees borrowing as the way to go, on grounds of inter-generational equity and the ability to bring forward needed investment.
But councils are strikingly debtaverse, with an average gearing ratio (debt to assets) of just 7 per cent.
Even if an infrastructure investment to support growth delivers a net financial gain to a council over a reasonable period, if it is unable or unwilling to borrow to finance it, that may well stop it going ahead.
For Auckland it is more a case of unable than unwilling.
Auckland Council is closing in on the risk of a credit rating downgrade from Standard & Poor’s, which uses a debt-to-revenue test.
The council estimates than for transport alone there is a $12 billion gap between the 30-year funding requirements identified in the Auckland Plan and currently available funding sources.
There are also constraints imposed by the Local Government Funding Agency, set up in 2011 to provide the scale and specialised knowledge that would enable local authorities to access debt finance more cost-effectively.
The Government has announced a $1b contestable fund to enable councils in fast-growing cities to fasttrack substantial infrastructure investment that enables new housing. More of that may be necessary if councils are hobbled by borrowing constraints.
The commission is not persuaded, however, by calls for councils to be given some share of national income tax or GST, or allowed to levy some new local income tax or sales tax.
Such tools would be complex and difficult to implement, it says, and make it even more difficult for councils battling declining populations to maintain services.
But it does see some merit in narrower tax options such as local fuel taxes, a visitors’ levy or a portion of the GST on new construction in a local authority’s territory.
Ideally, the planning system should allow councils to recover the full cost of infrastructure through user charges, development contributions levied on developers, or targeted rates.
Legislative barriers to the use of pricing tools and to greater use of development contributions need to go, it concludes, and legislation is needed to enable councils to levy targeted rates based on the increase in land values resulting from public infrastructure investment.
Will Parliament oblige?