1. Local Government Rates and Charges : applying theoretical considerations to fairly generate adequate revenue
Presentation by John Comrie ( JAC Comrie Pty Ltd) at SAIRA conference
19 February 2010

2. Rating snapshot - have councils got the mix right?
2007/08 Grants Commission database
Valuation base used;
SV (11) : AV (1) : (CV) 56
Minimum (38) : Fixed Charge (29)
Waste service charge n/a
2009/10 LGA rating survey (53 responses to date)
28 reported applying differentials, typically;
lower for rural & residential
higher for commercial, industrial & vacant land

3. Taxes
Taxing powers are an important distinction between governments and private sector
Governments should use this power in considered and transparent way
Purpose of a tax
Macroeconomic stability
Redistribute income
(both above more appropriate to other spheres of government than local government in Australia)
Fund government outlays

4. Council rates Council rates are a tax By far largest source of income
Quantum controllable by councils
In 2007/08 SA LG’s raised 66% of operating revenue from rates

5. Funding Public Outlays
Revenue raising decisions should have regard to whether outlays generate public or private goods
Private goods
Rival in consumption and excludable
(eg seat at theatre performance)
Public goods
Non-rival
Non-exclusive
(eg defence, environmental protection)

6. Funding Public and Private Goods
Pure public goods best funded by taxes
Pure private goods best funded by charging price
In practice many local government provided services have characteristics of both public and private goods (eg roads, parks)

7. Fees and Charges
Even where services are more like ‘public goods’ should consider applying fee or charge (or specific tax) whenever beneficiaries can be identified and practical to do so
Helps service recipients appreciate costs involved and provide feedback on value to service providers, eg
CWMS
Waste service charges
Aim to recover full costs in absence of compelling reasons to do otherwise

8. LG Rating – key theoretical considerations
A good tax should have regard to
Efficiency
Administration costs
Economic efficiency
Equity
Benefit Principle (do some classes of ratepayers enjoy significantly different standards of service)
Capacity to Pay
Above considerations often non-complimentary – need to make judgement re weighting

9. Administrative simplicity
Property taxes are administratively efficient
Some bases may be more/less efficient than others but generally not major issue

10. Economic efficiency
A tax is economically efficient if it doesn’t distort behaviour
SV is more economically efficient than CV
Given modest magnitude of LG rates is usually not a significant factor in choice between SV and CV

11. Benefit principle LG services often enhance the value of property (SV)
Makes sense to tax property to fund such services
SV better accommodates benefit principle than CV but again given modest magnitude of LG rates is usually not likely to be a significant issue

12. Capacity to pay
CV far from perfect (income better) but typically much better indicator of capacity to pay than SV
Given that most councils apply (and LG Act favours) CV and that CV is probably inferior to SV on other grounds it is reasonable to assume legislators, decision-makers and community see capacity to pay as key criteria in determining rating system structure
But should a property with double CV of another pay double amount of rates?

13. Fixed charge Use of fixed charge can enhance equity, eg
If some services benefit all properties equally or equally benefit people then could recover cost via fixed charge (benefit principle)
Extent of reliance on fixed charge can be tailored to vary extent to which property value influences amount payable (capacity to pay)

14. Impact of Fixed Charge

15. Minimum rate
Hard to see justification for use of minimum rate, particularly when;
also using capital values (ie presumably council considers capacity to pay particularly important yet application of minimum means it is charging lowest valued properties proportionately more)
compared with fixed charge

16. Impact of Minimum

17. Differential rates
Probably reasonable to assume that material benefits arising from local government services and relative differences in services (or access to services) are reflected in property values
Differential rates detract from economic efficiency
Justification for use of differential rates would seem to rely therefore more on capacity to pay grounds

18. Impact of Differential Rate

19. Rating responsibilities
Councils should regularly review and be able to defend their rating system particularly in terms of equity, ie benefits received and capacity to pay by different classes of ratepayers, eg by
Locality
Land use
Social disadvantage/special need

20. Appropriate rating system can vary over time
eg because of;
Rapid rates of development
Change in mix of properties
Change in mix of council services
Significant variation in rate of movement in property value between localities or classes of property
Change in economic circumstances of ratepayers

21. Rebates
Can address undesirable consequences for particular ratepayers without changing overall rating structure
Can be used to phase in impact of proposed change in rating system or impact of large relative change in valuation between properties by capping annual increase for adversely affected ratepayers

22. Deferrals
If rating system well designed then problem of ‘asset rich income poor’ best accommodated by deferral rather than rebate
Deferral effectively has no cost to council
With increasing proportion of population being retired, ‘asset rich (or at least asset richer than many younger families) and income poor’ is going to become significant issue

23. Best rating system? No single ‘right’ or ‘best’ approach
Policy makers needs to determine weighting of various objectives, eg economic and administrative efficiency, distribution of benefits to ratepayers and their capacity to pay
Different approaches are appropriate in different circumstances
Need to have regard to public finance theoretical considerations and legislative constraints

24. Legislative requirements
Councils required to
"assess the impact of the rates structure and policies on the community based on modelling that has been undertaken or obtained by the council” (SA LG Act S.123(2)(e))
Articulate rationale for their rating system (see Reg 5A, LG (Financial Management) Regulations)
As minimum councils should be aware whenever continued application of existing approach would result in significant shift in distribution of rate burden (eg because of relative movements in property values) and if so if this can be justified relative to alternatives

25. Public Finance Theory Summary
Are benefits from provision of various services more of a public or private good character? – if latter consider greater use of user pays
If services are of public good character and reasonably equally beneficial to all then (capacity to pay considerations aside) a flat charge appropriate
Capacity to pay
Income best indicator but not an option for councils (but can have regard to ABS data of absolute and relative income levels in different localities)
CV often reasonable indicator of (particularly life time) income
SV often unreliable indicator
Need to consider benefit principle and capacity to pay in determining who pays what

26. Questions?