What chance of resurrecting a land tax in New Zealand?

The Green Party policy is to have two new tax brackets at the high-income end, raising about $1.3b revenue pa. But that’s a drop in the ocean if a government is looking to fill a massive budget deficit and fund additional social policies. Hence the Greens propose a comprehensive wealth tax to raise $8b pa.

Some commentators/media suggest a new asset-based tax is a realistic alternative. A wealth tax, in the form the Green Party propose, particularly one that includes the family home, businesses and farms, is unlikely to find favour in the Labour Party particularly given the Tax Working Group rejected a wealth tax and the political ramifications of bringing in a comprehensive tax on capital assets.  

The Prime Minister previously scuttled any chance of a capital gains tax while she remains in charge. It’s hard to see how that decision could be rolled back, even though fiscal circumstances have well and truly changed.

A recent Stuff article (5 July by Susan Edmunds) mooted a land tax, which one commentator endorsed and suggested that a 1% tax could raise $12b pa (almost as much as income tax collections from corporates). For those old enough to remember, New Zealand used to have a land tax (albeit with many exclusions). In fact, land tax was the very first direct tax imposed on New Zealanders in 1878. In 1990 it was abolished- interestingly, by a Labour Government.

A land tax is usually levied on the unimproved value of land (gross of any debt), whereas a property tax would include the improvements (buildings) on the land. The total value of all New Zealand unimproved land stock in 2017 was $930b^[1]. In theory, a 1% land tax on unimproved land could raise around $9b if it applied to all land with no netting of debt, no de minimis threshold and no exemptions. Excluding owner-occupied housing and allowing for businesses to claim a tax deduction for the land tax, a rough estimate suggests up to $5b pa could be raised.

A land tax will be politically difficult for Labour to introduce given their rejection of capital gains tax and the fact that the Tax Working Group considered land tax as a poor alternative to a broad capital gains tax. Taxing the primary residence would be political suicide. In fact, a Labour led government would need to carve out a substantial portion of the New Zealand land stock if it wanted to target the top 6% of New Zealanders (as per the Greens wealth tax).

Previous studies suggest that land values would fall around 17% if a 1% land tax is imposed. That might appeal to a government looking to make a seismic change in housing affordability. Furthermore, to suggest that land is not already taxed is to ignore that local authorities apply land values to calculate rates.

Another alternative to capital gains tax is simply to deem the equity value in those assets to earn a risk-free return. If an asset is worth $1m, a risk-free rate of 1% would give rise to taxable income of $10,000. That amount would be treated as the taxable amount instead of the net rental income earned and irrespective any actual capital gain made. This risk-free return method (RFRM) was considered by the Tax Working Group but was not favoured over a general capital gains tax. There are issues applying this RFRM across many asset categories.

No major political party would apply a RFRM tax model to a person’s primary residence. Furthermore, given the low returns on risk-free assets at present, the tax collected from rental properties may well be less than that collected at present. However, it would potentially bring vacant land and baches into the tax net. For these reasons we do not see RFRM as a serious consideration.

Ultimate tax hikes are inevitable under a Labour led government. However, attempts to significantly fill a hole in tax revenue through new asset-based taxes is not politically realistic and could hamper the recovery. Capital gains tax was previously recommended to the Government over other alternatives, but Labour has ruled it out for the foreseeable future. In our view the next government will do well to focus primarily on a plan to facilitate growth in the economy to increase tax revenues.

[1] https://www.stats.govt.nz/information-releases/annual-balance-sheets-2017-provisional. Excludes central and local government holdings.