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									 LOCAL GOVERNMENT RATING

       A CONSULTATION PAPER




This document has been prepared and revised by Skilmar Systems Pty. Ltd.

Its initial preparation was for the City of Playford, using funds provided by the
Local Government Research and Development Fund.

It has subsequently been revised for District Council of Mt Barker (January
2001) and Wattle Range Council (April 2001).
Local Government Rating – A Consultation Paper


CONTENTS

1.0    Overview ...................................................................................................................... 1
   1.1  Introduction.............................................................................................................. 1
   1.2  Outline of the Paper ................................................................................................ 1

2.0    How Does a Local Government Raise its Revenue? .............................................. 3
   2.1  Introduction.............................................................................................................. 3
   2.2  Revenue Raising Options ....................................................................................... 4

3.0    Taxation – Its Nature and Principles ........................................................................ 6
   3.1   The Nature of Taxation ........................................................................................... 6
   3.2   Taxation as a Policy Mechanism ........................................................................... 6
   3.3   Principles of Taxation ............................................................................................. 6

4.0    Local Government Rates – The Legal Framework ................................................. 8
   4.1   Local Government Act 1999 ................................................................................... 8
   4.2   Valuation Of Land Act............................................................................................ 9

5.0     How Can A Council Tax Its Community? ............................................................. 11
   5.1      Local Government Rates and the System of Property Valuation ................... 11
   5.2      Local Government Rates and the Rate in the Dollar ........................................ 14
      5.2.1     Introduction.................................................................................................... 14
      5.2.2     A Simple Rating System .............................................................................. 14
      5.2.3     The Application of a Minimum Rate .......................................................... 15
      5.2.4     The Application of a Fixed Charge ............................................................. 16
      5.2.5     Differential Rates ........................................................................................... 19
      5.2.6     Tiered Rating Systems and “Maximum” Rates ........................................ 23
      5.2.7     Remissions and Rebates ............................................................................... 25
      5.2.8     User Charges .................................................................................................. 25
   5.3      Other Taxing Methods - Potential....................................................................... 26

Appendix 1      Taxation – Its Roles and Nature .............................................................. 27
 1.1     The Roles of Government ..................................................................................... 27
    1.1.1    The Allocative Role of Government ........................................................... 27
    1.1.2    The Distributive Role of Government ........................................................ 27
    1.1.3    The Regulatory Role of Government .......................................................... 27
    1.1.4    The Stabilisation Role of Government........................................................ 28
 1.2     Principles of Taxation ........................................................................................... 28
    1.2.1    Introduction.................................................................................................... 28
    1.2.2    Equity .............................................................................................................. 28
    1.2.3    The Benefit Principle ..................................................................................... 29
    1.2.5    The Efficiency Principle ................................................................................ 30
    1.2.6    The Simplicity Principle ............................................................................... 31

Appendix 2               Glossary of Terms...................................................................................... 32


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1.0   Overview


1.1   Introduction

      This paper has been prepared as an aid to local governments and
      communities. Its purpose is to increase the level of understanding about the
      legislative framework for local government rates and the principles of taxation
      which underpin the rating policies of councils. Its intention is to assist
      councils and communities to practically and fairly implement sound systems
      of rating which:
           Raise revenue sufficient for the purposes of a local government
              providing an appropriate level of goods and services for its community;
              and
           Equitably distribute the rate burden across a community, taking
              account of the principles of taxation.


1.2   Outline of the Paper

      Section 1 provides an overview of the paper.

      Section 2 reviews how a council raises the revenue it requires to provide the
      goods and services needed by its community.

      Section 3 briefly discusses the nature of taxation, including the roles that
      taxation meets, and the underlying principles of any tax system. A fuller
      discussion is provided in Appendix 1.

      Section 4 outlines the broad legislative framework within which local
      governments may raise rates in South Australia.

      Section 5 discusses the various options available to local governments to rate
      its community. Figures and tables are presented to help readers understand
      the impact of the various options. The four major options discussed are:
       A simple capital value system – a single rate in the dollar uniformly
          applied to all properties.
       A minimum rate system – the capital value system, with a minimum rate
          applied below a certain property value. This has the effect of reducing the
          tax paid by high value properties, a slight increase for many properties
          and, sometimes, a significant increase for lower valued properties.
       A fixed charge system – the capital value system, with a fixed charge
          applied uniformly to each property. Lower valued properties pay a higher
          amount and higher value properties pay a lower amount, with the bulk of
          properties also paying more.


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         Differential rates (including two-tier rating systems) – again, the capital
          value system, but with selected groups of properties receiving lower rates.

      The different valuation systems are discussed as are user charges and rebates
      and remissions.

      The main message is that the principles of taxation should be given careful
      consideration in determining a rating policy with the underlying message that
      lower rates for one property mean higher rates for someone else.




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2.0   How Does a Local Government Raise its Revenue?


2.1   Introduction

      Local governments are responsible for the delivery of a broad range of
      services to the community. The range of services continues to grow,
      sometimes because the Commonwealth or State governments cease providing
      certain services and local governments step in to take up the slack. At the
      same time, the revenue raising capacity of local governments is largely
      unchanged, restricted to property values, although the extension of user
      charges to a broader range of services has provided a measure of assistance in
      revenue raising. Some State governments have further squeezed the ability of
      local governments to raise revenue by imposing „rate freezes‟ or rate
      reductions on an arbitrary basis.

      To support the provision of services and to improve the quality of life for all
      ratepayers, whether residential or business, local governments provide
      significant levels of infrastructure in the form of roads, bridges, drainage,
      buildings and park and recreation facilities. Much of the infrastructure has
      been built in the period between the First and Second world wars and in the
      fifties, sixties and seventies as Australia increased its population through
      immigration. The Commonwealth and State governments funded a large
      portion of this infrastructure, either through grants or by building the
      infrastructure and then handing it over to local government.              This
      infrastructure is now ageing and will need to be replaced, with significant
      expenditures looming within ten years.

      Some local government‟s service „growth areas‟ where population expansion
      is taking place. Although the land developer now meets some of the cost of
      infrastructure development there is anecdotal evidence to suggest that a
      significant portion of the cost remains with local government. This is certainly
      the case where the additional development places the existing infrastructure
      under strain and the infrastructure network needs to be expanded (e.g. wider
      roads, larger drains and new bridges).

      Each local government provides a unique range of services for its community.
      It is clear that different communities have different priorities. This provides
      each local government with the challenge to:

         Raise revenue sufficient for the purposes of a local government providing
          an appropriate level of goods and services for its community; and
         Equitably distribute the rate burden across a community, taking account of
          the principles of taxation.




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      It is important to recognise that each local government faces different
      circumstances and provides a different mix of services. This means that its
      need to raise revenue is different from its neighbours, as is its capacity to raise
      revenue and the way that the revenue-raising burden will be shared by its
      ratepayers. To some extent, this explains why similar properties in different
      local government areas pay different rates. The mix and range of property
      values in each local government area also contribute to the reason for similar
      valued properties paying different rates in the different areas. The only way
      to achieve uniformity in the rating system would be to have one local
      government covering the whole of South Australia and the use of the word
      „local‟ in that context would seem to be invalid.


2.2   Revenue Raising Options

      Local Governments raise their revenue from the following sources:

         General Rates – a system of taxation based on the value of a property, which
          tends to be the major source of revenue for most local governments;
         Service Rates or Service Charges – a rate or a charge associated with the
          provision of a specific service, e.g. water supply, common effluent
          drainage scheme, waste collection. A service rate is based on the property
          value and a service charge is usually a charge based on the service
          provided.
         User Charges – charges raised for the provision of services such as
          swimming and recreation centres, caravan parks and the like. Service
          charges are a specifically legislated type of user charge.
         Grants and Subsidies – funds provided by other levels of government, that
          are either general purpose grants or provided specifically for the provision
          of services. All local governments in Australia receive a share of
          Commonwealth taxation revenues and the proportion received is based on
          both population and an assessment of the need of each local government.
         Income from Commercial Activities – some local governments undertake
          activities that provide profits from their operation. Typically the activities
          include quarry operations, saleyards, caravan parks and engineering
          works for other governments or the general public.
         Investment Income – The investment of surplus funds generates income.

      Figure 1 (following page) provides an indication of the proportions of income
      raised by councils. Table 1 (following page) shows the spread of dependence
      by councils on the various revenue sources, as a percentage of total revenue,
      in percentage groups. The major highlights of the data are:
       For most councils rates are between 40% and 70% of total revenue;
       Five councils rely on grants for more than 40% of their revenue;
       In comparison with previous years, user charges are a growing proportion
          of total revenue.


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                      SA Councils - 1998/99 Revenue Sources



        Grants & Subsidies                       Other
               16%                                8%




                                                                                                 Rates
                                                                                                 57%
    User Charges
        17%
                             Statutory Charges
                                    2%




                                                           Figure 1.



                          Council Revenues as a percentage of Total Revenue (1998/99)

                                             No. of Councils - 1998/99 Revenue Sources
          Percentage of                            Grants &            Statutory          User
         Total Revenue          Rates              Subsidies             Fees            Charges         Other
            < =10%              2   (0)             12   (9)            68 (69)          18 (36)         55 (24)
         10.01-20.00%           1   (3)             25 (24)             0   (0)          25 (21)         8 (33)
         20.01-30.00%           2   (2)             11 (20)             0   (0)          18   (9)        3   (9)
         30.01-40.00%           9   (7)             15 (10)             0   (0)          5    (1)        0   (1)
         40.01-50.00%          21 (26)               3   (4)            0   (0)          2    (2)        0   (1)
         50.01-60.00%          14 (12)               2   (1)            0   (0)          0    (0)        2   (1)
         60.01-70.00%          10 (13)               0   (0)            0   (0)          0    (0)        0   (0)
         70.01-80.00%           8   (6)              0   (1)            0   (0)          0    (0)        0   (0)
        Note: Figures in brackets represent 1996/97 Revenue Sources - there was 1 additional council then.

                                                           Table 1.




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3.0   Taxation – Its Nature and Principles


3.1   The Nature of Taxation

      Taxation is the major source of revenue for governments. Tax is raised to pay
      for the services provided to citizens by the government. Many of the services
      provided by governments are provided because either businesses are not
      prepared to provide them, often because they cannot charge for them
      effectively, (e.g. defence, police, quarantine) or because the government has
      seen fit to impose certain community standards (e.g. education, health). There
      is no doubt that the line between what governments provide and what
      businesses provide is becoming blurred. The sale of „government businesses‟
      and the increasing resort to the private sector to provide infrastructure (toll
      roads etc.) is contributing to the blurring.

      This section of the paper briefly outlines the roles and principles of
      taxation. For a fuller discussion of the topic refer to Appendix 1.


3.2   Taxation as a Policy Mechanism

      Taxation is a policy mechanism. Taxes are levied to meet four specific policy
      objectives:
      1. the allocative role of government – where governments allocate resources to
         produce goods and services
      2. the distributive role of government – where governments re-distribute the
         revenue they raise, either directly (payments) or indirectly (goods and
         services) to those in need;
      3. the regulatory role of government – regulating the environment in which
         people live; and
      4. the stabilisation role of government – trying to maintain a growing and
         steady economy.


3.3   Principles of Taxation

      There are five principles that apply to the imposition of taxes on communities.
      The principles are:
      1. equity - taxpayers with the same income pay the same tax (horizontal
         equity), wealthier taxpayers pay more vertical equity)
      2. benefit – taxpayers should receive some benefits from paying tax, but not
         necessarily to the extent of the tax paid;
      3. ability-to-pay – in levying taxes the ability of the taxpayer to pay the tax
         must be taken into account;


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      4. efficiency - if a tax is designed to change consumers behaviour and the
         behaviour changes the tax is efficient (e.g. tobacco taxes), if the tax is
         designed to be neutral in its effect on taxpayers and it changes taxpayers
         behaviour a tax is inefficient; and
      5. simplicity – the tax must be understandable, hard to avoid, easy to collect.

      To some extent these principles are in conflict with each other. Governments
      must balance the application of the principles, the policy objectives of taxation,
      the need to raise revenue and the effects of the tax on the community.




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4.0   Local Government Rates – The Legal Framework


4.1   Local Government Act 1999

      A Council may impose general rates, separate rates, service rates and service
      charges on land in its area (Section 146). Generally, all land within a council
      area is ratable unless it is specifically exempted by Section 147 of the Act.
      Such exemptions include crown land, churches, cemeteries, land used for
      public educational purposes and council occupied land. A Council must
      adopt a rating policy each year which sets out the broad policy framework
      within which the Council rates its area (Section 171).

      A rate is to be based on the value of the land, a fixed charge or comprise both
      components – a rate based on the value of the land and a fixed charge
      (Sections 151 and 152). The fixed charge may only be imposed against the
      whole of an allotment and only one fixed charge may be imposed against two
      or more pieces of contiguous land owned by the same owner and occupied by
      the same occupier or a single farm enterprise (Sections 148 and 152).

      A Council may fix a minimum amount payable by way of rates or it may alter
      the rate to be paid by properties within a specific range of values, but may not
      do so if it has imposed a fixed charge. The minimum rate may only be
      imposed against the whole of an allotment (which can include land under a
      separate lease or licence) and only one minimum rate is payable by two or
      more pieces of contiguous land owned by the same owner and occupied by
      the same occupier. The minimum rate must not be applied to supported
      accommodation or independent living units within the same group or
      complex of units. The minimum rate and altered rates must not apply to more
      than 35% of the properties in a Council area. (Section 158)

      The basis of valuation is to be capital value, site value or annual value (Section
      151). Land must be valued by either the Valuer-General or a valuer engaged
      or employed by the Council (Section 167). Objections may be lodged against a
      valuation made by a valuer engaged or employed by the Council (Section 169)
      or by the Valuer-General (Valuation of Land Act).

      A Council may declare either a general rate or differential general rates based
      on the use of the land, the locality of the land, or the locality and the use of the
      land (Sections 153 & 156). A Council may declare a separate rate (or
      differential separate rates) on ratable land where a specific project is being
      undertaken to benefit the land or the occupiers of the land, which may be only
      a portion of the land in a council area (Section 154). A council may impose
      service rates and charges against land for any prescribed service it provides or
      makes available to the land. A service charge is also payable in relation to



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Local Government Rating – A Consultation Paper

      non-ratable land. Prescribed services are water supply and the collection,
      treatment or disposal of waste (Section 155).

      Rates are a charge against the land (Section 177). The owner of the land
      (unless the Council is advised otherwise) is the principal ratepayer and rates
      may be recovered as a debt against the principal ratepayer. In certain cases
      the occupier of the land may be classed as the principal ratepayer.

      A Council may require rates to be paid in either a single, two or four
      instalments and a council may grant discounts or incentives to encourage
      early or prompt payment of rates. A Council may also make arrangements
      with ratepayers for other instalment provisions to apply (Section 181). If an
      instalment of rates is not paid by the due date then the Act
      provides for a council to impose a fine of 2% on the unpaid instalment and, if
      the instalment continues to be unpaid, to levy a prescribed interest rate on the
      unpaid instalment, on a monthly basis. The Council may remit such penalties
      in whole or in part (Section 181). Where rates become unpaid for a period of
      more than three years a Council may sell the land to recover the unpaid rates
      (Section 184).

      A council may remit or postpone the payment of rates, on the application of
      the ratepayer, if the payment of the rates would impose hardship on the
      ratepayer (Section 182).

      A council must rebate the payment of rates for land used for various purposes
      – health services, community services, religious purposes, public cemeteries,
      Royal Zoological Society, educational institutions – as provided in Sections
      159 to 165 of the Act. A council may rebate the payment of rates (up to 100%
      of the rate for a period of up to ten years) on land used for a range of
      purposes, including for the securing the proper development of the land; for
      the preservation of buildings or places of historic interest; for the provision of
      facilities or services for children or young persons and for the provision of
      accommodation for the aged or disabled (Section 166).


4.2   Valuation Of Land Act

      Under Section 22A there are various qualifications laid down in relation to the
      provision of „notional value‟ for various properties. For example, where land
      is used for primary production and its value is enhanced by its potential for
      subdivision a valuing authority may value the land at its „notional value‟, that
      is, as if the potential for subdivision did not exist. Where land forms part of
      the State heritage it may also be valued disregarding any potential for other
      use (Section 22B). Any owner that believes that they are entitled to „notional
      value‟ must apply in writing to the Office of the Valuer General.




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      A person may object to a valuation of the Valuer General by notice in writing,
      setting out the reasons for the objections, and the Valuer General must
      consider the objection. If the person then remains dissatisfied with the
      valuation, the person has a right to a review. Applications must be made
      within 21 days of receipt of the notice of the decision (in relation to the
      objection) from the Valuer General. A payment of the prescribed fee for the
      review to be undertaken together with the review application must be lodged
      in the Office of the Valuer General, who will then refer the matter to an
      independent Valuer. If the person remains dissatisfied with the valuation
      then they have a right of appeal to the Land and Valuation Court (Section 24,
      25A, 25B & 25C).




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5.0   How Can A Council Tax Its Community?


5.1   Local Government Rates and the System of Property Valuation

      A local government in setting its budget gives a great deal of consideration to
      what it believes its community can „afford to pay‟ by way of rates. It makes a
      decision on the total rate revenue it will raise. Then it makes a decision on
      how the rate burden will be distributed .

      A local government property tax is based on:
       the value of a property; and
       a rate (in the dollar).

      Local governments may adopt one of three valuation methodologies to value
      the properties in its area. They are:
       Capital Value (CV) – the value of the land and all the improvements on the
         land.
       Site Value (SV) – the value of the land and any improvements which
         permanently affect the amenity of use of the land, such as drainage works,
         but excluding the value of buildings and other improvements.
       Annual Value (AAV) – a valuation of the rental potential of the property.

      How might this work in practice? Consider two adjoining properties in a
      particular council area. Property A is a quarter acre block, with a four
      bedroom house, in ground pool and well developed garden. Property B is a
      quarter acre block, with a three bedroom house and average garden. The
      following valuations might apply to the two properties:

                                         Property A           Property B
                  Capital Value           $180,000             $120,000
                  Site Value               $45,000              $45,000
                  Annual Value              $9,000               $7,500




                                          Table 2.

      What rates would be paid by the two property owners under the different
      valuations? Excluding the potential for minimum rates or a fixed charge, the
      tax burden would fall as follows:
       Under Capital Value, the owner of Property A would pay 50% more than
          the owner of Property B;


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         Under Site Value, the two property owners would pay the same; and
         Under Annual Value, the owner of Property A would pay 20% more then
          the owner of Property B.

      Which is the fairer valuation system? This is a question that has no simple
      answer. The answer lies in considering the principles of taxation and
      applying them to the situation. Before doing that, it is important to consider
      what property value stands for in the property tax system. Property value
      gives an indication of the wealth of an individual taxpayer. While examples
      can be given where this is not the case, the evidence clearly shows that people
      who are in the higher income brackets tend to own more expensive homes.
      The normal expectation is that this will be the case.

      This raises the issue of how to make policy – any policy, not just taxation
      policy. The reality is that policy should be developed looking first at the
      broad situation that applies – what is termed the „macro‟ view. It is the
      „macro‟ view that will apply in most cases and, clearly, the development of a
      policy that can apply in most cases is appropriate and sensible. Once the
      broad policy has been determined, the „micro‟ view can be examined. The
      „micro‟ view encompasses those cases where the application of the „macro‟
      view will have unintended consequences or impose some hardship. The
      „macro‟ policy needs to be modified to cater for those cases and special
      arrangements made to ensure that the application of the policy does not
      adversely impact on individuals. All of this taxation policy-making by a local
      government must be carried out within the constraints of the Local
      Government Act.

       In the local government rating context, the „macro‟ assumption is that people
      with more expensive homes are better off than people with less expensive
      homes and that they have the capacity to shoulder more of the rate burden.
      However, pensioner concession, rebate and remission provisions and the
      ability of councils to tailor payments and make other administrative
      arrangements are a recognition that some ratepayers need special
      consideration – the „micro‟ view.

      Returning to the question posed about the „fairness‟ of different valuation
      systems. To some extent, the concept of „fairness‟ depends on an individual‟s
      perspective. Some people believe that if each person makes the same
      contribution to the cost of providing local government services, then that is
      fair. (This view is clearly not the majority view given the reaction to the
      introduction of a poll tax in Britain.) For those persons, the site value method
      would clearly have a great deal of attraction. The prevailing view is that there
      should be an element of progression about a tax system and that the concept
      of vertical equity, which requires people with greater income to pay more,
      should be applied. From the perspective of the equity principle, the site value
      system is least fair. Assuming that the capital values are an accurate reflection



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      of the true property value, then the capital value system is the most fair, with
      annual value being somewhere in between.

      Does the benefit principle help us to assess the fairness of the valuation
      system? Do the ratepayers receive different levels of benefit? Does the totality
      of services provided by the council affect each of the properties differently? If
      we make the assumption that the two ratepayers receive roughly equal
      benefits from the local government then the site value system is the most
      suitable basis for assessing the tax burden, followed by the annual value and
      with the capital value system providing the biggest disparity. Note that this
      conflicts with the assessment under the equity principle. This confirms the
      statements made in Section 3.2.1 of this paper, viz., “[t]o some extent these
      principles are in conflict with each other. Governments must balance the
      application of the principles, the policy objectives of taxation, the need to raise
      revenue and the effects of the tax on the community.”

      What about ability-to-pay and the system of valuation? The owner of Property
      A probably feels that he has a greater ability to pay the tax that would be
      levied under site value than the other two systems, because he thinks he will
      be paying less tax under that system. However, we only know the relative
      positions of the owners of two properties and not how the tax burden will be
      spread across every ratepayer. For instance, commercial properties generally
      have a higher valuation under capital and annual value systems than
      residential property. So the adoption of site value as a valuation system will
      result in more of the rate burden being carried by residential properties. This
      could be sufficient to make the tax levied on Property A under site value
      higher than the tax levied under capital value.

      The efficiency principle is largely unaffected by the system of valuation used by
      local governments. However, large swings in the value of properties is more
      likely under the capital value system then under site value or annual value.

      In terms of simplicity, because capital values are based on the market value of
      properties they are generally well understood. Similarly, with site values
      being related to the land component, they are readily understood, although
      less so in areas that have little vacant land. Annual value, although an
      approximation of rental values, are less readily understood. Often ratepayers
      make the comment “I am not renting the property, so why is that the basis for
      rates?”

      The following table shows the valuation methods adopted by South
      Australian councils, in 1999/2000.

                        AAV            CV            SV         CV & SV         Total
       Metro              1            16             1            1             19
       Non-Metro          0            34            12            3             49
             Total        1            50            13            4             68


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                                                                Table 3.
5.2                             Local Government Rates and the Rate in the Dollar


5.2.1 Introduction

                                Fundamentally, the rate in the dollar that a local government will apply to its
                                properties is simply a calculation based on the following:

                                                                                              revenue to be raised by rates
                                                                                          total value of all rateable properties

                                However, the use of minimum rates, differential rates, fixed charges and
                                rebates and remissions complicate the calculations. This paper will now look
                                at the effect of the use of the different mechanisms available to councils on the
                                spread of the rate burden, keeping in mind the principles of taxation. The
                                capital value system will be used as the basis for comparison, but some
                                comment will occasionally be made regarding site value.


5.2.2 A Simple Rating System

                                First, what does the share of the rate burden look like when the rates are based
                                solely on the rate in the dollar and the property value? This can be pictured
                                on the graph shown in Figure 2.
                                                                               Rating Systems - Simple Capital Value


                          800                                                                                                          Property Distribution                                                                                       $1,400



                                                                                                                                       Rates Raised
                          700
                                                                                                                                                                                                                                                   $1,200




                          600

                                                                                                                                                                                                                                                   $1,000




                          500
                                                                                                                                                                                                                                                            Rates Raised
      No. of Properties




                                                                                                                                                                                                                                                   $800



                          400



                                                                                                                                                                                                                                                   $600


                          300




                                                                                                                                                                                                                                                   $400

                          200




                                                                                                                                                                                                                                                   $200
                          100




                            0                                                                                                                                                                                                                      $0


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                                0




                                                                                                        0


                                                                                                                 0


                                                                                                                          0


                                                                                                                                   0


                                                                                                                                            0


                                                                                                                                                     0


                                                                                                                                                              0


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                                                                                                                                                15


                                                                                                                                                         16


                                                                                                                                                                  17


                                                                                                                                                                           18


                                                                                                                                                                                    19


                                                                                                                                                                                             20


                                                                                                                                                                                                      21


                                                                                                                                                                                                               22


                                                                                                                                                                                                                        23


                                                                                                                                                                                                                                 24


                                                                                                                                                                                                                                          25




                                                                                                                 Property Valuation
Local Government Rating – A Consultation Paper



                                         Figure 2.

      The graph is a straight-line graph and the amount of rates paid is directly
      proportional to the value of the property. Low value properties pay a low
      amount of tax and high value properties pay a high amount of tax. This meets
      the equity principle precisely. There is little doubt that ratepayers paying
      higher taxes may enjoy the same level of benefits as ratepayers paying less tax,
      but all ratepayers will enjoy the benefits of the goods and services provided by
      the council. The benefit principle does not require that ratepayers receive
      benefits equivalent to the tax paid, simply that they receive some benefits.
      With the property value approximating income or wealth, ratepayers in high
      value properties should have more ability-to-pay than taxpayers in low value
      properties. Because the value of the rates payable is linked into the property
      value, the tax meets the efficiency principle. The tax is simple, understandable
      and unavoidable and therefore meets the simplicity principle.


5.2.3 The Application of a Minimum Rate

      The Local Government Act allows councils to impose a minimum rate, which
      may not apply to more than 35% of rateable properties. (Note: If used in
      conjunction with altered rates applying across a range of values, the total
      number of properties paying a minimum rate or subject to an altered rate may
      not exceed 35% of properties.) Only one minimum rate can be imposed on two
      or more adjoining properties with the same owner. A minimum rate cannot
      be used in conjunction with a fixed charge.

      If this provision is used its effect is to increase the rates payable by lower
      valued properties and reduce the rates paid by higher valued properties. This
      is well illustrated in the following figure. It can be clearly seen that, when
      compared with a simple rating system, the effective rate in the dollar for
      properties above the minimum rate is less and the effective rate in the dollar
      for properties below the point at which the minimum ceases to apply is more
      and increases as property value decreases.




Revised – April 2001                                                     Page 15
Local Government Rating – A Consultation Paper


                                                                                             Rating Systems - Minimum Rates


                        800                                                                                                                $1,200
                                                                                                                 Property Distribution
                                                                                                                 Rates Raised
                        700

                                                                                                                                           $1,000



                        600



                                                                                                                                           $800
    No. of Properties




                        500




                                                                                                                                                    Rates Raised
                        400                                                                                                                $600




                        300

                                                                                                                                           $400



                        200



                                                                                                                                           $200

                        100




                          0                                                                                                                $0
                                   0

                                  00


                                           00


                                                    00


                                                             00


                                                                      00


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                                                                                                            0


                                                                                                            0


                                                                                                            0


                                                                                                            0


                                                                                                            0


                                                                                                            0


                                                                                                            0


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                                ,0


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                                                                                                      15


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                                                                                                      25
                                                                                                      Property Valuation




                                                                                                              Figure 3.

                        This is a distortion of the equity principle. Although above the level at which
                        the minimum rate applies the incidence of the tax is proportional to the value
                        of the property this is not the case below the minimum rate point. Below that
                        point all ratepayers pay the same amount. However, the argument in favour
                        of the minimum rate is that in terms of the benefits received by all ratepayers
                        it is appropriate that every ratepayer make a minimum contribution to the
                        cost of the services provided. This does not offend the benefit principle. In
                        terms of ability-to-pay, it is possible that the owners of lower valued properties
                        could have some difficulty with the increased tax. It will be a greater
                        proportion of disposable income for low wage earners. The efficiency principle
                        is generally met, although the higher incidence of tax on low income
                        ratepayers will limit their ability to consume other resources.               The
                        introduction of the minimum rate makes the tax system slightly more
                        complex, but this is a marginal effect on the simplicity principle.


5.2.4 The Application of a Fixed Charge

                        A council may impose a fixed charge on every property in its area, provided
                        that it has not imposed a minimum rate. Where two or more adjoining
                        properties have the same owner only one fixed charge is payable by the



Revised – April 2001                                                                                                                     Page 16
Local Government Rating – A Consultation Paper

                        taxpayer. Effectively, a council can raise the whole of its revenue by applying
                        a fixed charge.

                        The effect of a fixed charge on ratepayers, compared with a simple capital
                        value system, is shown in the following figure.


                                 Rating Systems - Simple Capital Value(SCV) vs. Fixed Charge (FC)

                                                                                    Property Distribution
                       800                                                          Rates Raised - SCV        $1,400

                                                                                    Rates Raised - FC
                       700
                                                                                                              $1,200




                       600
                                                                                                              $1,000



                       500
   No. of Properties




                                                                                                                       Rates Raised
                                                                                                              $800


                       400


                                                                                                              $600

                       300



                                                                                                              $400
                       200




                                                                                                              $200
                       100




                        0                                                                                     $0
                                                                                  0

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                             10

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                                                                         23

                                                                         24

                                                                         25




                                                                          Property Valuation




                                                                                   Figure 4.

                        Every ratepayer pays a fixed amount and then an amount proportional to the
                        value of the property. The effective impact of a fixed charge is to increase the
                        amount of rates paid by the owners of lower valued properties and reduce the
                        amount of rates paid by higher valued properties at the point where the two
                        lines cross in Figure 4. Except for the fixed component, the incidence of the
                        tax is strictly proportional to the value of the property. This is a slight
                        bending of the equity principle. In terms of the benefit principle, the imposition
                        of a fixed charge is considered to be a reasonable application of the principle
                        that everyone benefits from the goods and services provided and that
                        everyone should make a contribution to the cost of provision. Depending on
                        the level of the fixed charge there will be a greater or lesser proportionate
                        impact on lower income earners and this could introduce some difficulties in
                        terms of ability-to-pay. The efficiency principle is largely met although, like the
                        minimum rate, the higher incidence of tax on low income ratepayers will limit
                        their ability to consume other resources. The introduction of a fixed charge


Revised – April 2001                                                                                        Page 17
Local Government Rating – A Consultation Paper

      makes the tax system slightly more complex, but it is perceived to be more
      readily understandable than a minimum rate. This is a marginal effect on the
      simplicity principle.

      The difference between a minimum rate system and a fixed charge system is
      demonstrated in Figure 5.


                                            Rating Systems - Minimum Rate(MR) vs. Fixed Charge(FC)


                           800                                                                                   $1,200

                                                                                    Property Distribution
                                                                                    Rates Raised - MR
                           700
                                                                                    Rates Raised - FC
                                                                                                                 $1,000


                           600


                                                                                                                 $800
       No. of Properties




                           500




                                                                                                                          Rates Raised
                           400                                                                                   $600




                           300
                                                                                                                 $400


                           200


                                                                                                                 $200
                           100




                            0                                                                                    $0
                                                                                     0

                                                                                     0

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                                       00

                                       00

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                                        0




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                                    ,0

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                                 10

                                 20

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                                                                             22

                                                                             23

                                                                             24

                                                                             25

                                                                              Property Valuation




                                                                                 Figure 5.

      The minimum rate severely distorts the equity principle of taxation at the
      lower end of the property valuation spectrum. Under the Local Government
      Act up to 35% of properties can be paying the same amount of tax (rates) over
      widely differing values. Under the fixed charge system there are two
      elements to the tax, one a fixed charge that each ratepayer pays and then a
      proportional rate based on the value of the property. From a ratepayers
      perception, the anecdotal evidence appears to be in favour of a fixed charge
      which is uniformly paid by each ratepayer.

      For the sake of completeness the following figure compares the minimum rate
      with the simple capital value system.




Revised – April 2001                                                                                        Page 18
Local Government Rating – A Consultation Paper


                                Rating Systems - Simple Capital Value(SCV) vs. Minimum Rate(MR)


                         800
                                                                               Property Distribution          $1,400

                                                                               Rates Raised - SCV
                                                                               Rates Raised - MR
                         700
                                                                                                              $1,200




                         600
                                                                                                              $1,000



                         500
     No. of Properties




                                                                                                                       Rates Raised
                                                                                                              $800


                         400


                                                                                                              $600

                         300



                                                                                                              $400
                         200




                                                                                                              $200
                         100




                           0                                                                                  $0
                                                                   0

                                                                   0

                                                                   0

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                                     00

                                     00

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                                                   00

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                                      0




                                                                00

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                                                                00
                                  ,0

                                  ,0

                                         ,0

                                         ,0

                                                ,0

                                                ,0

                                                       ,0

                                                       ,0

                                                               ,0

                                                              0,

                                                              0,

                                                              0,

                                                              0,

                                                              0,

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                               10

                               20

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                                                           19

                                                           20

                                                           21

                                                           22

                                                           23

                                                           24

                                                           25
                                                                  Property Valuation




                                                                          Figure 6.

                  Two-tiered rates are discussed in Section 5.2.6 of this report. The impact of the
                  different systems is shown in the following table, compared to a simple capital
                  value system.

                                                               Low Value                Bulk of          High Value
                                                               Properties              Ratepayers        Properties
                         Minimum Rates                  Pay Higher Rates          Little change        Some lowering
                         Fixed Charge                   Pay Higher Rates          Pay Higher Rates     Lower Rates
                         Two-Tier                       Pay Higher Rates          Pay Higher Rates     Lower Rates

                                                                          Table 4.

5.2.5 Differential Rates

                  The Local Government Act allows councils to differentiate rates based on the
                  use of the land, the locality of the land or the use and locality of the land.
                  Definitions of the use of the land are prescribed by regulation and the current
                  definitions are:
                   Residential
                   Commercial – Shops
                   Commercial – Office


Revised – April 2001                                                                                        Page 19
Local Government Rating – A Consultation Paper

         Commercial – Other
         Industrial – Light
         Industrial – Other
         Primary Production
         Vacant Land
         Other.

      Differentiating by locality is restricted to differentiation based on the zone in
      which the land is situated; whether the land is within or outside a township
      and differentiation between townships. Note: A „zone‟ is defined in the Act
      as “…an area defined as a zone, precinct or locality by a Development Plan
      under the Development Act 1993.”

      Simply applying the equity principle would not allow for any rate differentials.
      However, it is clear that the benefits received by taxpayers are not uniform
      and this is particularly the case in regard to rural ratepayers in a largely urban
      council or, alternatively, ratepayers in sparsely populated council areas with
      one large town or centre and a number of small townships. Typically, the
      services not provided to some ratepayers could include street lighting, waste
      management, kerb and guttering, footpaths, sealed roads. In addition,
      remoteness from the urban or district centre may preclude the use of libraries,
      neighbourhood centres and other council provided services. The application
      of the benefit principle suggests that those ratepayers should pay less than
      ratepayers able to have access to the full range of council services. (Note that
      this does not mean that a ratepayer who either chooses not to use council
      services or has no current need of some council services should pay less in
      rates. The reality is that the use of council services varies at different periods
      in the lives of all ratepayers.)

      The ability-to-pay principle is another reason why differential rates may be
      applied, particularly to rural properties and primary production. Rural
      incomes tend to be irregular and some reduction in the taxation burden results
      from this. A further point to consider is that the taxation in Australia of
      primary production has always been subject to exemptions on the basis that it
      is important to minimise the impact of taxation on the input side of primary
      production – an application of the efficiency principle. The Commonwealth
      government has the ability to collect the taxes it foregoes on primary
      production when it taxes farmers and primary production companies on their
      income. Unfortunately, when local government foregoes property taxes it has
      not other mechanism to collect such taxes and redistributes the tax burden to
      other ratepayers. There is potential for the use of the postponement
      provisions of the Act to allow for rates to be deferred in „poor‟ years and
      collected in „good‟ years.




Revised – April 2001                                                       Page 20
Local Government Rating – A Consultation Paper

      Differential rates may also be applied as a policy mechanism. A number of
      councils use differential rates for vacant land, with a higher differential rate
      being applied to discourage the holding of vacant land.

      The use of differential rates makes the rating system more complex, but not
      usually to the extent that it offends the simplicity principle. However, an
      extensive use of differentials with many different rates can introduce such a
      level of complexity that ratepayers find it hard to understand why they are
      paying more and thus perceive that the system is flawed.

      It is important to remember that a lower differential rate for one set of
      ratepayers means a higher tax rate for other ratepayers. In terms of equity,
      benefit and ability-to-pay can this be justified?

      For the 1999/2000 rating year 60 of the 68 South Australian Councils used
      differential rates, as shown in the following table:

                                 Single Rate         Differential Rates   Total
             Metro                    7                      12            19
             Non-Metro                1                      48            49
                   Total              8                      60            68

                                          Table 5.

      Primary Production Differentials (% change in relation to Residential rates)

                             Quantum             Councils
      Reduction
      Metro              Up to 25%                     0
                         > 25%                         5
      Non-Metro          Up to 25%                     5
                         > 25%                        30
                                      Total           40
      Increase
      Metro              Up to 25%                     0
                         > 25%                         6
      Non-Metro          Up to 25%                     1
                         > 25%                         5
                                      Total           12

                                          Table 6.




Revised – April 2001                                                      Page 21
Local Government Rating – A Consultation Paper

      It is worth considering some specific examples to determine an appropriate
      basis for levying rates.
      1. Commercial and Industrial Properties. Do businesses receive a greater level
          of benefits than residential property owners? This is a difficult question to
          answer, but only from the perspective that some of the perceived benefits
          that are attributed to businesses are enjoyed by all citizens, e.g. in CBD,
          shopping and office areas: more parks, improved street lighting, greater
          parking control, public conveniences, streetscaping and other aesthetic
          treatments. It is wrong to say that only the businesses get the extra
          benefits. In fact, it may be the case that the opposite is true – in many
          council areas businesses do not get a garbage collection; businesses do not
          use aged care services and other council provided services; businesses are
          subjected to other local government controls that increase their costs –
          provision of parking, signage fees, inspection costs, fire and other safety
          considerations, etc. So, although it is difficult to answer the answer is– no!
          Do businesses have a greater ability to pay than residential ratepayers?
          There is a perception that businesses do have the ability to pay, but is this
          really the case? There is strong anecdotal evidence that councils have set
          commercial rates on the basis that commercial ratepayers will receive a tax
          benefit from paying the rates of 36%. This assumes that the business will
          pay tax and, of course, there is sufficient evidence to suggest that many
          small businesses do not make a profit and therefore do not pay tax. Many
          small businesses operate on very slim margins (it is still the case that more
          than 50% of small businesses fail within three years of starting up) and any
          cost increase or excessive cost makes those businesses shaky. This extends
          to the impact of a large minimum rate on a small strata office or shop.
      2. Non-Urban Properties.             Many non-urban properties are used for
          primary production and tax policy in Australia has always been to
          minimise the input costs to primary production and tax the profits of
          primary producers. Local government does not have the option of taxing
          profits as it has a single tax base - property rates. It must consider its
          taxing policy in relation to primary producers and other non-urban
          ratepayers on the basis of the principles of taxation. It is usually the case
          that non-urban properties do not receive the same standard of local
          government services that urban ratepayers receive, either because the
          service is not provided (street lighting, garbage collection, footpaths, parks
          and gardens) or because they are too remote from the service to be able to
          use it (neighbourhood houses, aged care facilities, libraries). This suggests
          that there is a basis for reducing the level of tax because the benefits
          provided to non-urban ratepayers are less than those provided to other
          ratepayers.
      3. Ward Differentials.       Historically, local government accounting was
          ward-based (a „ward‟ is an area of the council that forms a voting area).
          The ability to levy differential rates on a ward basis was removed from the
          Local Government Act in the late 1980‟s. While it had been considered




Revised – April 2001                                                       Page 22
Local Government Rating – A Consultation Paper

         that the cost of service provision to each ward was well-known, this was
         not really the case for two main reasons:
          There was a large element of arbitrary allocation of joint activities to the
              various ward accounts; and
          There is no accurate and fair way of allocating the use by non-residents
              of a ward of the facilities in that ward.
         It is difficult to perceive that in a metropolitan council there would be any
         significant difference between the services provided in one ward or
         another, although in developing councils it may be the case that areas
         under development do have less services during the development period.
         A counter-balance to the argument that they should pay less in rates is the
         fact that the council may well be concentrating its resources in developing
         that area while other areas of the council receive less resources for the time
         being. In councils with urban and rural wards the arguments discussed
         above in relation to non-urban properties would apply.
      4. Owner/Occupier vs. Absentee Owners. This is a similar situation to
         commercial and industrial properties and the arguments are the same.


5.2.6 Tiered Rating Systems and “Maximum” Rates

      In some local government areas there is a large number of low valued
      residential properties with relatively few high valued properties. The rate in
      the dollar will be set to obtain a reasonable contribution from every property
      towards the cost of providing goods and services. It may well be the case that
      the few high valued properties are paying three, four or more times the rates
      of an average property, thereby paying disproportionately more as compared
      to the impact of services on their property values. The State Government has
      recognised the problem and has included in the Local Government Act a
      provision which allows councils to make adjustments to the rate in the dollar
      applied to properties in a specified range of values, provided that no more
      than 35% of rateable properties in a council‟s area are affected by this measure
      or by the minimum rate.

      The effect of this provision (often called a „two-tier‟ rates system) is shown in
      figure 7, compared to a minimum rates system.




Revised – April 2001                                                      Page 23
Local Government Rating – A Consultation Paper


                                             Rating Systems - Minimum Rate(MR) vs. TwoTier(TT)


                        800
                                                                                    Property Distribution     $1,400
                                                                                    Rates Raised - TT
                                                                                    Rates Raised - MR
                        700
                                                                                                              $1,200




                        600
                                                                                                              $1,000



                        500
    No. of Properties




                                                                                                                       Rates Raised
                                                                                                              $800


                        400


                                                                                                              $600

                        300



                                                                                                              $400
                        200




                                                                                                              $200
                        100




                         0                                                                                    $0
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                              10

                              20

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                                                                           90

                                                                          10

                                                                          11

                                                                          12

                                                                          13

                                                                          14

                                                                          15

                                                                          16

                                                                          17

                                                                          18

                                                                          19

                                                                          20

                                                                          21

                                                                          22

                                                                          23

                                                                          24

                                                                          25
                                                                           Property Valuation




                                                                                   Figure 7.

                        Another approach has seen some councils rebate the full amount of the tax
                        applying above a certain valuation point, effectively capping rates at some
                        “maximum” point.

                        Both approaches offend the equity principle - in particular, the setting of a
                        “maximum” rate. However, in considering the benefit principle and ability-to-
                        pay there is probably some justification for easing the rate burden in this
                        situation. The effective setting of a “maximum” rate by fully rebating the tax
                        impact above a certain value as a matter of policy is a clear distortion of the
                        equity principle, in particular the concept of vertical equity. Local governments
                        adopting such a practice leave themselves open to challenges by ratepayers
                        adversely affected by such practices and it is likely that an appeal would
                        succeed.

                        In determining the amount of reduction to be applied to higher value
                        properties a local government should consider the impact of the transfer of the
                        rate burden to lower valued properties.




Revised – April 2001                                                                                        Page 24
Local Government Rating – A Consultation Paper

5.2.7 Remissions and Rebates

      The Local Government Act makes provisions for the remission and rebate of
      rates. Some of the provisions are specific, relating to particular types of
      landowners or land use (e.g. other governments, educational institutions).
      Rebates and remissions are a concession granted by the council. The granting
      of such rebates and remissions redistributes the rate burden to other
      ratepayers, although the re-distribution is not usually significant. A local
      government has a general power to grant rebates and remissions and the
      exercise of such a power allows for:
            local discretion;
            the pursuit of local policy objectives;
            assistance to worthwhile community groups;
            assistance to local businesses; and
            assistance in the case of hardship.



5.2.8 User Charges

      The basis for raising general rates from ratepayers is to pay for the goods and
      services that a local government provides to its community. Many of the
      services provided cannot be charged out on an individual basis. For example,
      you cannot charge the property owner who has a streetlight outside the
      property for the benefits received from the streetlight because many people
      share in the benefits. However, there are goods and services that the council
      provides that are specifically provided to individuals and for which a user
      charge can be set. Councils already make such user charges – e.g. swimming
      pool fees, hall hire, tennis court hire, recreation centre activities. Local
      governments need to give careful consideration to the goods and services
      provided to determine whether user charges should be adopted for some
      goods and services.

      User charges are an appropriate mechanism for councils to use to reduce the
      rate burden on ratepayers. From the benefit principle perspective it is
      obviously fair that people pay for the services they use, if the benefit is
      restricted to a particular individual. This is even more important in cases
      where individuals from outside the council area use the services – if the cost is
      recovered through general taxation, ratepayers are subsidising non-
      ratepayers. The ability-to-pay principle must also be considered when setting
      user charges to ensure that the economically disadvantaged can still access the
      services. Concession fees or vouchers are appropriate means of providing
      such services.

      A local government can impose service rates and charges on ratepayers who
      receive certain services that other ratepayers do not get. Service rates and


Revised – April 2001                                                      Page 25
Local Government Rating – A Consultation Paper

      charges are a specific type of user charge. The Act permits councils to apply
      such charges for water supply and septic tank effluent disposal schemes.
      However, a number of councils have also sought and received approval to
      levy such charges for waste management.

      Separate rates or charges are also a specific type of user charge. The Act
      provides that a council can “…declare a separate rate on rateable land within a
      part of the area of the council for the purpose of planning, carrying out, making
      available, supporting, maintaining or improving an activity that is, or is
      intended to be, of particular benefit to the land, or the occupiers of the land,
      within that part of the area...” This allows the council to levy a charge only on
      the ratepayers who will benefit from the actions of the council.


5.3   Other Taxing Methods - Potential

      A major difficulty for local governments is that they have one basis of taxation
      – a property tax. This generally the case around the world although some
      countries have widened the tax base for local government. For instance, in the
      USA councils can piggy-back earnings taxes and sales taxes for collection by
      the relevant state body.

      Tax reform is also difficult. No-one likes to pay tax and the prospect of a new
      tax is met with a strong wave of opposition. The attempt to introduce a poll
      tax in the UK is a classic example. The opposition was so strong that the
      legislation was rescinded.

      A poll tax is a tax mechanism where a tax is levied against every adult
      taxpayer and the amount payable is usually the same for each taxpayer. In
      terms of equity there is no consideration for the principle of vertical equity.

      In the United States, some State governments permit local councils to raise
      revenue through sales taxes where the State collects the tax on behalf of the
      local government.




Revised – April 2001                                                      Page 26
Local Government Rating – A Consultation Paper



Appendix 1             Taxation – Its Roles and Nature

1.1   The Roles of Government


1.1.1 The Allocative Role of Government

      Governments allocate resources to produce goods and services that
      would not otherwise be produced, or produced in sufficient quantities,
      because of a failure of private businesses to produce the goods. The
      technical term for this is „market failure‟ and market failure usually
      occurs where businesses perceive that they will be unable to recover
      the costs of production through some charging mechanism. The
      provision of public infrastructure, street lighting, defence and police
      services are classic examples of this allocation of resources. Local
      government is a major provider of infrastructure.


1.1.2 The Distributive Role of Government

      The distributive role of government is also concerned with market
      failure – the failure of the market to provide equity or social justice.
      Government use taxation to re-distribute wealth, either directly
      through the provision of pensions, unemployment benefits, sickness
      benefits or similar benefit payments or indirectly (generally the case
      with local government) through the provision of goods and services at
      less then the cost normally charged – e.g. pensioner remissions,
      concession fees and charges.



1.1.3 The Regulatory Role of Government

      This role of government is concerned with the regulation of individual
      behaviour – the making of good citizens and the provision of a suitable
      environment for the community. Taxation revenue is used to make
      and enforce laws that regulate an individual‟s behaviour. Sometimes
      the level of tax on certain goods is such that it discourages the
      consumption of those goods – e.g. alcohol and tobacco taxes. Local
      governments have a role to enforce state laws on planning, animal
      control, noise abatement and clean air amongst others. They also have
      the power to create local laws to regulate local communities. Some of
      the taxation revenue raised in this area comes from the penalties
      imposed for breaches of the regulations.




Revised – April 2001                                                     Page 27
Local Government Rating – A Consultation Paper


1.1.4 The Stabilisation Role of Government

      This relates to the actions taken by governments to minimise the
      cyclical nature of economic activity – inflation, lack of economic
      growth, unemployment, interest rate rises. Local governments do not
      have the capacity to significantly affect either the national economy or
      a state‟s economy. However, they are able to take actions that will
      influence their local economy – e.g. local purchasing policies, rate
      holidays for new business start up, business incubators.


1.2   Principles of Taxation

1.2.1 Introduction

      There are five principles that apply to the imposition of taxes on
      communities. They principles are – equity, benefit, ability-to-pay,
      efficiency and simplicity. To some extent these principles are in conflict
      with each other. Governments must balance the application of the
      principles, the policy objectives of taxation, the need to raise revenue
      and the effects of the tax on the community.


1.2.2 Equity

      Equity is the concept that a tax will be fair to the taxpayer and that
      each taxpayer will be fairly taxed relative to other taxpayers. There are
      two dimensions to equity. Horizontal equity – which says that persons
      with the same income and circumstances will be taxed the same
      amount. Vertical equity - which provides that a taxpayer with greater
      income should pay more than a taxpayer with lesser income. The
      fundamental principle is that taxpayers in similar circumstances will
      pay similar levels of tax, but taxpayers with greater income levels will
      pay greater amounts of tax.

      In local government the value of a ratepayers property is the proxy or
      surrogate for income. However, the circumstances of an individual
      ratepayer are generally not taken into account, with the general
      exception of pensioner concessions. Rates are levied on an ad valorem
      (by value) basis, that is, pro rata to the value of the property. This is
      generally considered to meet the equity principle because two
      taxpayers with the same property values will pay the same amount of
      tax (excluding any pensioner or other concession). A taxpayer with a
      high valued property will pay proportionately more than a taxpayer
      with a low valued property.




Revised – April 2001                                                       Page 28
Local Government Rating – A Consultation Paper


      In the local government context the application of the equity principle
      would suggest that the tax (the rate in the dollar) would be the same
      for all ratepayers in a municipal area, unless some compelling
      application of the other taxation principles applied to change the
      incidence of the tax. The two main reasons why one ratepayer may
      pay a different rate than another ratepayer are:
       Differences in the services provided (e.g. urban versus rural
          ratepayers); and
       Concessions, rebates and remissions for hardship.


1.2.3 The Benefit Principle

      The benefit principle has its basis in the concept that „he who pays
      benefits, he who benefits pays‟. This is not to suggest that the benefit
      must be equivalent to the tax paid. The equity principle requires that
      wealthier taxpayers pay more tax than less wealthy taxpayers. The tax
      paid by an individual taxpayer is not a „fee for service‟. However, to
      some extent, every action of a local government affects the amenity of
      life of individual taxpayers and the property receives value from the
      services provided by the local government. There are direct benefits to
      properties and there are indirect benefits to properties. The totality of
      services provided by a local government act to maintain and enhance
      the value of all properties in that municipality.

      Some commentators have suggested that the „benefits‟ received by each
      category of ratepayer, e.g. residential, commercial, industrial etc.,
      should be equal to the taxes paid by that category of ratepayer. There
      may be some merit in that argument, although it acts to „water down‟
      the equity principle. However, it is difficult to put a boundary around
      what is a benefit for one category of ratepayer over another when the
      services provided are available to all ratepayers. Who benefits from
      the park in a shopping precinct – the business ratepayer, the residential
      ratepayer, a tourist using the facility?

      Benefits are consumed by ratepayers in differing quantities over their
      lives in a municipal area. Young families may use more of the services
      provided by a local government than couples whose children have
      grown up and left home. In the same way, elderly ratepayers may use
      more facilities than middle-aged couples. The nature of service
      consumption is cyclic and varying. Taking a snapshot of current
      service consumption is not a good guide to the average level of benefits
      received by ratepayers.




Revised – April 2001                                                      Page 29
Local Government Rating – A Consultation Paper


1.2.4 The Ability-to-Pay Principle

      The ability-to-pay principle is grounded on the concept that there is only
      a certain amount of income that a taxpayer can be expected to sacrifice
      (afford to pay) and that government should minimise the impact of
      taxation on individuals. This has developed in two ways. The concept
      of ability-to-pay has led to the development of progressive tax systems
      where higher earners pay an increasing proportion of their income as
      tax as their income increases. Personal income tax rates are an example
      of a progressive tax system, with the tax rate increasing, in a stepped
      manner, as it is applied to higher incomes. Local government rates are
      generally proportional, as property value increases rates increase, but
      at the same „proportion‟ of the property value. There has been some
      discussion that the rating system should be progressive. However, the
      generally low impact of rates on a ratepayers disposable income and
      the fact that property value is only a proxy for income have been used
      as an argument to maintain the simplicity of the rating system.

      The second development of the ability-to-pay principle is that, like the
      benefit principle there is a recognition of the cyclic nature of income.
      Low incomes for younger taxpayers, increasing as income earning
      potential increases, with a return to lower incomes later in life. In the
      income tax system this is recognised by paying out tax income as
      benefits. In the local government rating system this is recognised in
      pensioner concession arrangements and remission and rebate of rates
      and charges.

      The nature of rates as a property tax give rise to the consideration of
      how to deal with temporary „incapacity-to-pay‟. As rates are a charge
      against the property a number of local governments have adopted tax
      deferment options – deferring the payment of the tax until the
      ratepayer can pay the tax – as opposed to remitting the tax (giving up
      the right to collect the tax). The administrative implications of either
      course of action need to be weighed against the ability to replace the
      income lost through other sources or to sustain the temporary income
      shortfall.


1.2.5 The Efficiency Principle

      Efficiency of a tax relates to the effect of the tax on the behaviour of the
      taxpayers on whom the tax is imposed and the impact or effect of the
      tax on the consumption of goods and services. If the reason for
      imposing a tax is to change consumers behaviour (e.g. tobacco and
      alcohol taxes) and the behaviour changes (e.g. reduced cigarette
      consumption, reduced alcohol consumption) then the tax is considered



Revised – April 2001                                                         Page 30
Local Government Rating – A Consultation Paper


      efficient. If the behaviour did not change then the tax would be
      inefficient. If the tax is being imposed solely to raise revenue and it is
      not designed to change a consumers or taxpayers economic behaviour
      – tax neutrality – then the tax will be inefficient if it can be passed on or
      changes the taxpayers economic behaviour. Local government rates
      are efficient because the decision to buy a house is not based on the
      level of rates paid for the property.

      Local government rates are generally considered to be efficient. The
      incidence of the tax is known, it does not change markedly from year
      to year, it is built into property values and the amount of tax paid is a
      low proportion of income. Some distortions of the efficiency of the tax
      can occur with sudden or unexpected movements in property values.
      This is particularly the case where a „spike‟ occurs in valuation levels –
      i.e. an abnormal rise or fall in property values for certain types of
      properties – and the spike occurs as properties are being revalued. The
      „spike‟ needs to be contrasted with the cyclic nature of economic
      activity. It is normal for the relativities between values of different
      types of properties to vary because of economic conditions at particular
      times. In general, when viewed over a longer time frame, the
      relativities are maintained unless there is some fundamental change in
      their nature – e.g. the redevelopment of a depressed residential area
      into one of greater economic value.


1.2.6 The Simplicity Principle

      The simplicity of a tax relates to its understandability by taxpayers, its
      certainty of application and its ease of collection. Complex tax
      systems, with numerous provisions for „special cases‟, give rise to
      loopholes, uncertainty of application, uncertainty of collection and
      significant costs in tax enforcement for both the taxing authority and
      the taxpayer.

      Local government taxes generally have the criteria of certainty,
      transparency and simplicity. Local government taxes are:
       Unavoidable in their application;
       Levied on a regular and consistent basis;
       Open to public scrutiny; and
       Collected at specific intervals.




Revised – April 2001                                                          Page 31
Local Government Rating – A Consultation Paper



Appendix 2             Glossary of Terms


This is a brief glossary of some terms used in discussing taxation.         It is
intended as a useful guide, not a definitive document.

Average Tax Rate       Total tax paid divided by total income.

Marginal Tax Rate      The amount of tax paid on the next dollar earned.

Progressive          A tax is progressive if the tax rate increases as incomes
increase, e.g. Australia‟s personal income tax system.

Proportional          A tax is proportional if it is applied with a uniform rate,
e.g. 10% tax for all income levels. Local government taxes are proportional,
although this may be distorted by the use of minimum rates and fixed
charges.

Regressive          A tax is regressive if a higher rate is paid by lower
income earners, that is the tax rate decreases as income increases.

 Tax                A charge made by government on some income or
expenditure basis (income tax, property tax, sales tax) by which governments
raise some of the revenue they require to provide goods and services to the
broad community.




Revised – April 2001                                                        Page 32

								
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