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Property Values used to Determine Rates

Radio Broadcast

John Darley, Advance SA MLC (5AA 10.06-10.16) Councils using property values to determine rates

(Byner: … we have a very feudal assumption that is governing your Council rates and that is that the value of your house or property is commensurate with your capacity to pay. Now the Local Government Association is a peak body, it is basically a union for Councils, it does basically little for ratepayers and indeed there are people within Councils who wonder about the value of them, that’s a matter for them. But this idea, this proposition that if your property rises in value, that somehow you are more wealthy and you are more in a position to pay what they want I think is an absolute joke. But first of all, let’s talk to … John Darley … I just want to take people back. Some time ago you were head of a Land Tax Reform Association and you put in a submission about this concept. Tell us what happened.)

… I would say it would be about 12, 13 years ago, the Land Tax Reform Association looked at this issue of property taxation. Now … the proposal put forward by the Land Tax Reform Association at that stage was to charge all rates and taxes on the basis of what it costs to provide that service … SA Water, for example, I reckon about 10 years ago, it might’ve been nine years ago, did change the water rating system whereby they moved away from property valuation as the basis for water rates to pay for use on the basis of what it costs to provide water. Now as one of your previous callers mentioned just a moment ago, SA Water have two charges for water, now that’s an interesting concept as well. But getting back to the … rating and taxing side of it, the Local Government Association set out many years ago, I think it was five or six principles of taxation. The first of these was that rates and taxes should have regard to ability to pay. Now, no one disagrees with that … then the second principle was the best indication of ability to pay is the valuation of a property. Well as you just mentioned, that is not always the case because we have pensioners living in houses who, through no fault of their own, have increased in value over time and in a lot of cases, it’s getting beyond their capacity to pay. Notwithstanding those two principles, all Councils then apply differential rates and I can tell you that in the case of vacant residential land, they can charge up to three times the residential rate as a differential rate on vacant residential land.

(Byner: Why are they allowed to do that?)

They can do that and it’s on this misguided notion that if you increase the rates and taxes on vacant residential land, it will encourage people to build houses. Well just tell that to young couples who want to buy a block of land and build a house because … whilst they save up to buy the block, and then they’ve built it with double or three times the rate whilst they save up to build a house, it’s just not on. And the same with commercial industrial properties. These properties are providing employment for people and most Councils, oh with the exception of Burnside, they all charge a higher differential rate on commercial industrial properties as well.

(Byner: Now. My point is this. A very simple piece of logic runs across the nonsense of this feudal assumption by the Local Government Association and that is this. There are people listening to this program right now who’ve lived in their house for a bit and the price they bought it at is well above what they could’ve afforded and if they were buying that same house now, the bank would probably not give them the principal to buy it. So this idea that your property value is your capacity to be able to pay is a complete nonsense. It’s wrong …)

There’s no question about that … you’re quite right that … people who bought a house in a … particular suburb when they first got married and now they become pensioners and for … no reason or not fault of their own, the value of that property escalates to the point, I don’t think … there’s any question about the fact if … they tried to buy their house today on a pensioner’s salary, the banks wouldn’t even entertain a loan.

(Byner: All right, stay on the line …)

Darryl Gobbett, Chief Economist, Baillieu Holst (5AA 10.12-10.19) Councils using property values to determine rates

(Byner: … because I’ve got Chief Economist from Baillieu Holst, Darryl Gobbett … tell us about this assumption.)

As John has said … the issue is the capacity to pay but also … as economist, we’d say “well it really should be those people who are using the services that should … bear most of the cost of the services moderated by the capacity to pay” … something like 68, 70 per cent of all the revenue of Councils come from Council rates so it’s a very important part and probably people are starting to think a bit of a … strange way now to do it, given the escalation in … property prices … this is one of the assumptions that that rise in property prices actually reflects the services people are getting from property. But … I think what we’re seeing now is because of the changes to metropolitan boundaries and other things, we’re seeing a significant escalation of the price of land, well ahead of … what services people are getting from property. But I’d also make the point, and this is important for economist, is that … people should pay for the services they actually get … 23 per cent … one of the larger parts of Council spending is actually roads and transport and it’s quite likely, particularly for some of the inner suburbs, that a lot of the people who use those roads actually aren’t residents and I think this is an area where the Councils, with the changing technologies, are gonna have to start thinking about different ways of taxing who actually uses those services rather than just saying “this revenue will principally be raised by way of [unclear] like wealth tax.

Back to John Darley

(Byner: So really … now this is … the nub of why I’ve spoken to you both right now. John Darley, I’ll get an answer from you. We’ve spoken to some people like Robert Gottliebsen … Channel Nine’s finance expert, Ross Greenwood. They’re all saying “look, there’s been a big hit in Melbourne and Sydney in values, and to some extent Brisbane, it will happen in Adelaide”. I wonder what happens when Adelaide prices come down, because I can imagine that what will happen … ratepayers have already told me this … their adjustment of rate in the dollar will still change and they’ll still pay what they’re paying, even though … if you’re gonna be more wealthy when the value goes up, you’re surely less wealthy when the values go down. Or is that too logical, John?)

… that’s exactly the situation and that’s occurred a number of times that I can recall. I can recall in 1979 property values came down but, as you say, the rate in the dollar went up and so the Councils and the rating authorities still got the same amount of revenue, and that’s what would happen.

(Byner: So … what do you think is a fairer way to go? Because Councils need money to deliver their services. How should it change in your opinion?)

Well it should definitely have regard to the cost of providing the service. I’m pursuing a situation now with Government departments where they … say they’re going to charge on the basis of cost recovery. Now the big question is well let’s have a look at that cost-recovery model to see whether you are actually charging on the basis of cost recovery. If you look at the waste levy, that’s certainly not charged on the basis of cost recovery.

(Byner: No, it’s a … wealth tax.)

Yeah, absolutely.

(Byner: So which department are you looking at that’s trying to … gouge more money? Bearing in mind, of course … turning up to the office anyway, because us taxpayers are paying for their jobs, so what is it that’s extra that they want from us that they weren’t delivering before? Can you tell me?)

Nothing, but … the charges are higher and the two departments I’ve started with are Primary Industries and Department for the Environment. But SA Water would be another one to look at, particularly in terms of … if a … developer is developing a brand-new subdivision, they have to pay SA Water charges for the provision of water and from what I understand, those charges are off the planet.

(Byner: And then they charge again when you move in.)


Back to Darryl Gobbett

(Byner: Darryl Gobbett, your comment?)

I think there’s got to be a look at … in a very broad sense how Councils raise money and also … there’s an interesting … parallel … South Australia is sort of saying “well our GST share has to be based upon our needs rather than on a per-capita basis”. Well, it’s probably good idea to go back and revisit the idea that perhaps Councils should get a part-share of GST, again on that needs basis, really to take … this whole focus of a land tax … acquires like wealth tax, as a way to fund the Councils because a lot of … in my view, you look at where the money’s spent, a lot of it should be on the basis of … who’s actually using that service. There are other services like libraries and sport and recreation that probably should be more of a … general tax on people to run that … and particularly … the roads and transport … a major part of Council spending. Perhaps we’ve got to get away from this idea that people can travel on the roads for nothing, particularly as technology’s going to allow us to potentially [unclear, cut off]

(Byner: Well I’m not sure that we are. Because you pay … what’s the excise supposed to be for?)

Yeah, but that doesn’t go through the Councils, that’s what I’m saying … the Councils, I’d say, would be paying … say … Unley Road, I doubt if that’s actually supported by the State Government, so that’s probably being largely paid for, whereas the South Road is more of a state road responsibility but I’d be saying “we might need to start looking … particularly with the … ability of GPS on cars, for people to start being charged for actually using those roads, rather than as you say, a pensioner who may not be driving at all.

(Byner: All right, Darryl Gobbett and John Darley, I deliberately wanted to get their take on this because all these businesses about tax … now you’ll notice that with the GST, we’re still gonna get our $1.47 per dollar. But in WA they get no less than 75 [cents] but what’s happened … this is a dynamite bomb this one, the Prime Minister is now going to make up the difference. What happens if there’s a downturn and they can’t afford it? …)