7 December 2004 Property Rating Formulas Need Review

A call for a big picture review of current property rating formulas and policies has been made by Lincoln University Kellogg Rural Leadership Scholar Emily Wood Crofoot, an owner and CEO of Castlepoint Station, Wairarapa.

Emily is concerned that good productive New Zealand farm land could be rated out of existence. She has seen it happen elsewhere.

"Having emigrated from America to a coastal station in New Zealand where our Regional Council rates increased by 100 percent and our District Council rates by 70 percent last year, I see the potential for the same pattern to emerge here as in the United States," she says, in a research report prepared for the 20th Kellogg Rural Leadership Course at Lincoln University.

"As rates are a 'fee for service' provided by councils, the questions have to be asked: is property value in fact the most equitable basis for assessing rates and is Capital Valuation reflecting a proposed land use change an equitable base to be used for establishing rates when the demand for services related to the existing use has not changed? 

"Historically the Capital Value of agricultural land has been linked to its production capabilities. Recently there has been an increase in the Capital Value of some land as a result of market forces other than 'production capability'. This is especially noticeable with high country stations, land near towns and coastal properties.

"Market forces set land values based on purchasers being willing to pay for scenic beauty, proximity to town, and potential changes of use. Is it therefore fair to base the rating formula on an inflated Capital Value since the rates are actually a fee collected to cover activities and services provided by the Council? 

"Should a radically different funding base be considered? Would a base built on economic activity such as GST make more sense? Or another form of across the board charges? Should councils be encouraged to utilise the 30 percent Uniform Charges formula as allowed under the Rating Act, or should that percentage be increased? Would the American system of agricultural assessments help to keep agricultural land in production, with rates reflecting the actual demand for services?"

Emily says in her report that a perception exists that the owners of high value properties have the ability to pay in excess of the fees for services received. 

"Historically, when agricultural land sold only for its productive value, this may have been true, however when production value is not the main driver of market value, which is currently the case for some agricultural land and is certainly the case for all residential property, this perception causes problems.

"If someone has owned a residential property for a long time in an area that suddenly gets 'hot', property values can skyrocket. The rate levied on individuals in that 'hot' area can suddenly skyrocket and for someone retired on a fixed income that can be devastating. 

"As property values increase, one cannot assume that the wealth of the owners and therefore their ability to pay, has risen at a commensurate rate."

In her report Emily says that with agricultural land there are market forces at work that have decoupled the market value for some land from its productive value and that the market value of property is therefore no longer a good indicator of ability to pay rates. 

Emily is concerned about the sale of high country land to DOC at levels well above the actual and potential agricultural production value of such property.

"For existing high country landowners the sales will be considered when establishing market value next time their properties are valued," she says. 

"To add insult to injury, because the land has gone to DOC it will no longer be part of the rating base for district services so the rates for the neighbours will have to increase. Additionally, as tax payers they will have to fund weed and pest control on the new DOC land."

Emily hesitates to draw any conclusions on rating formulas and policies in her research report, preferring instead to use the document to pose questions that Councils and the public need to ask themselves.

Those questions include –

Is the current system equitable? What alternative systems could be considered?

Should differential rating bases such as agricultural assessments be considered?

Should an economically driven base such as GST be used instead?

Should roading costs be shifted to users via road user charges and excise duty?

Should councils rate ahead of a use change, or does that in fact force the hand of change?

"These and other questions are all food for healthy debate," she says.