July 19, 2012 12:00pm by David Farrar

Herald on powers of Councils

Elected members of local bodies around the country spent two days this week at a conference in Queenstown where they agreed – unanimously – that they do not need their wings clipped by a bill the Government is putting through Parliament.

How unsurprising.

Neither is inclined to leave it entirely to local voters to decide what their councils can do.

Why not? Councils in this country have a source of revenue independent of the central Government. If they exceed the wishes of their ratepayers those who receive their bill have a vote every three years. Do they need the Government to require their elected council to do more (Labour) or less (National) than they might want?

Their source of revenue is Government granted, not independent. But putting that aside, the trouble with the Herald’s argument is that rates increases are not transparent.

The central Government has to live within its means. To increase tax rates needs a special law of Parliament, and everyone sees that the Government is increasing tax rates. Generally also, any increases in taxes are flagged well before the election so voters can vote on them.

In local Government, they work out all the things they want to spend money on, and then strike the level of rates to match. And while media may report the average increase, the actual amount each property owner pays varies depending on the movement in their house value compared to the average. Plus you have the problem that a minority of voters actually pay rates. In total, there is little incentive for Councils to be fiscally restrained – hence why the average increase has been 7% annually – well beyond the ability of the economy to sustain.

What I would do is change the funding of local government from rates to taxes. Each Council can levy an income tax, which means almost all residents will pay it and hence take an interest in its level. It also means that a Council wanting to spend more money than previously, would need to openly propose that (for example) the local income tax increase from say 2.6% to 2.8%. People would be able to compare the level of local income tax between councils.

Now isn’t increasing income tax a bad thing, as the more you tax income, the less incentive people have to work. Yes. So I would balance this by reducing central income taxes significantly, and bringing in a national land tax in a fiscally neutral tax switch.