Motu economist Arthur Grimes Land Tax Option

A TAX SYSTEM FOR NEW ZEALAND'S FUTURE 1 December 2009 Afternoon Session 1 Base broadening – land taxes Arthur Grimes, Senior Fellow, Motu Economic and Public Policy Research

Base broadening – land taxes Arthur Grimes, Senior Fellow, Motu Economic and Public Policy Research Background paper : Coleman, Andrew & Arthur Grimes. 2009. Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes Motu Working Paper 09-14, www.motu.org.nz

Background
Land tax (LT): tax on unimproved value of land
Property tax (PT): tax on capital value (land & improvements)
NZ has land value & capital value local authority rates:
Administratively almost zero cost for central govt to collect
No evasion/avoidance
NZ has relatively low use of recurring LT/PT (internationally)
So land tax base not ‘fully utilised’ through local authority rates

Recurring land taxes NB: Australia & Ireland currently reviewing (upwards)

Background (contd)
A land tax (LT) taxes an immobile factor
Economically efficient (does not distort production)
Property taxes (PT) less efficient (because of tax on improvements)
Current concerns about NZ tax system favouring property
A land tax may cause a rethink for property investors
What other effects of fiscally neutral switch towards LT?
Size of fiscal revenues that could be recycled?
Distributional impacts?
Impacts on asset values, private & country debt?

Fiscal Implications: 2006 Tax Base
Taxable land value base ≈ $460 billion
Excluding conservation forestry, public & Maori land
Implies 0.5% LV tax raises ≈ $2 billion p.a. (given land value falls)
Residential (incl lifestyle): ≈ 2/3 of total tax base
Agriculture + forestry: < ¼ of base
But very different average LV’s per assessment
Agriculture average LV: $1.0 million
Forestry average LV: $0.9 million
Comm/Ind average LV: $0.5 million
Residential average LV: $0.2 million

Distributional Impacts: Progressivity
Higher income households have higher value homes
Higher income households have higher rents (if they rent)
Similar relationships hold using net worth in place of income
Families with children tend not to own high value homes
Maori & Pacific families tend not to own high value homes
Land tax is more progressive than property tax
Taxes non-resident land-owners
Overall distributive effects depend on nature of other tax changes

Additional Distributional Results
Retired households mostly negatively affected
Young homeowners with little equity also hit
Owners of large properties hard-hit
Especially farmers & forest-owners
A per hectare tax-free threshold can overcome problems for farms/forests & improve progressivity
A threshold is ‘cleaner’ than exempt classes of land; exemptions could lead to policy tinkering/uncertainty

Land Tax with Differing Thresholds: Examples

Direct Price Effects
Land values fall with introduction of tax
Magnitude of fall depends on:
land tax rate
whether tax is deductible by business
real interest rate
expected rate of land value appreciation
other proportionate costs (e.g. local authority rates)
A 0.5% land tax (with no rebate) may cause land values to decline by up to 15% (possibly much less)
i.e. house prices to fall by ≈ 4-8%
small cf recent years’ value changes

Other Effects
Land value fall affects existing owners’ wealth
No effect on future purchasers
Effect on renters is broadly neutral
Incentive on land developers to get land developed
Tends to reduce urban sprawl
Borrowing by New Zealanders for housing decreases because of lower house prices
Hence overseas debt reduces
Fiscal revenue can be used to reduce distortionary taxes
Hence positive effect on economic growth rate

Motu economist Arthur Grimes Land Tax Option

by Bernard Hickey on Dec 01, 2009

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Motu economist Arthur Grimes Land Tax Option — Presentation Transcript