by Nick Clark, Manager General Policy, Federated Farmers of New Zealand
OPINION: In April 2019, in responding to the report of the Tax Working Group, Prime Minister Jacinda Arden categorically ruled out a capital gains tax, not just in the short-term but for as long as she is leader of the Labour Party.
Fast forward 18 months, during its victorious election campaign Labour promised no new taxes apart from a 39% top rate of personal income tax on income over $180,000.
Its firm line on tax neutralised it as an election issue and helped secure Labour’s ability to govern alone. But only a few months later taxes on property could be back on the table. This is because the Government has come under acute pressure to rein in New Zealand’s runaway housing market and its skyrocketing prices. This has prompted the Minister of Finance to promise ‘bold action’ in announcements due in late February, with particular focus on demand-side measures against speculators and investors.
Although its money printing and ultra-low interest rates have stoked the housing market, the Reserve Bank has reimposed loan-to-value restrictions removed during the COVID response. But demand side measures also include tax. Although there’s little detail on what might be on the table, there are at least three ‘big bang’ policy options. These include capital gains tax, wealth tax, and land tax, all of which would impact farmers. Let’s take a look at each of these.
First, capital gains tax, which put simply is a tax applied to the increase in an asset’s value.
Many economists like the notion of a capital gains tax, or at least the theory of a broad-based tax on income from assets to ensure all income sources are taxed, not just from wages and salaries or from businesses’ profits.
Forgetting that New Zealand already has a form of capital gains tax through a ‘brightline test’ on residential investment property, some claim we are an ‘international outlier’ in not having one and that apart from local government rates we make relatively little use of property taxes. They fret that favourable tax treatment of property encourages speculation, makes housing less affordable, increases inequality, and potentially denies the Government much-needed revenue.
But most people, even the cheerleaders for a capital gains tax, acknowledge big problems in practice. Overseas equivalents are riddled with exemptions and loopholes, including for the ‘family home’, and New Zealand would be no exception. Indeed, the 2018-19 Tax Working Group was told by the Government before it started its work to exclude the family home from any capital gains tax it considers.
Other problems come from questions like what assets to tax (or not tax); what tax rate to apply; whether to apply the tax only on sale of the asset or an annual ongoing tax on its notional value; what valuation dates and methods should be used; whether to discount for inflation; how to ensure business succession is not unduly impeded; and what level of reporting is needed. All of which combined would have been a dream for valuers and accountants but a nightmare for asset owners and even the IRD.
Furthermore, the exemptions in the Tax Working Group’s capital gains tax meant estimates of revenue raised were never going to be high, initially only 0.4% of annual tax revenue rising to around 4% after ten years. Certainly not high enough to justify massive compliance and administration costs.
The Tax Working Group’s approach for ‘roll-over relief’ would have helped ease the pain for farmers looking to pass their farms to the next generation, but exemptions for the family home would have put a disproportionate burden on farms (and other businesses) than could ever be justified by a tax supposedly focused on reining in the housing market. There would have been no escape from a complex web of rules to navigate and associated compliance costs.
A capital gains tax would be bad for farmers but the Prime Minister’s unequivocal rejection of it should put it well down the list of options and it might not even be on the table. That would be good but what about a wealth tax or a land tax? Worryingly, these could be worse.
…If ever implemented, a wealth tax would be a punitive ongoing burden costing a typical farmer tens of thousands per year…
At last year’s election the Greens proposed a wealth tax of 1% per annum on individuals’ net wealth over $1 million. If ever implemented it would be a punitive ongoing burden costing a typical farmer tens of thousands per year even before considering compliance and administration costs. Although Labour gave it the cold shoulder, a wealth tax remains a top priority for the Greens and they continue to promote it.
A land tax would be a lot less costly to implement and administer as it could be tacked onto council rates. However, politics would make it hard to apply it to land under a family home, so it would be less effective in addressing house prices. And by being a tax on land it would impose a disproportionate burden on land intensive businesses like farms. In 2010 an earlier tax review suggested a land tax of 0.5%. Such a tax could cost a typical farmer thousands per year. It was quickly rejected by the John Key government.
The biggest argument against a capital gains tax, wealth tax, and land tax is simply that overseas experience has shown these sorts of taxes do not stop or even slow runaway house prices. Strong growth in property prices has been and is a global phenomenon and is mainly a result of constrained supply of housing in places people want to live and work.
The Government should continue to rule these taxes out. If it wants to focus on speculators and investors (and leave the rest of us alone) it should confine its tax policy work to making existing tax rules work to ensure they are paying the tax they should be paying.
But ultimately, what has been shown to be effective overseas for housing affordability is central and local governments ensuring policies and planning processes boost the supply of houses. Cities with fewer planning restrictions and innovative infrastructure arrangements have been found to be the most affordable. Here at home Christchurch’s post-quake rebuild showed how fast-tracking housing development resulted in an extended period of stable house prices.
The good news is that the Government is promising to help boost supply by, for example, reforming the RMA and building more state houses. In the meantime, the private sector has also been delivering with strong growth in residential building consents. Close to 40,000 dwellings were consented last year despite disruptions from the pandemic – the most in a year since 1973.
Measures to boost supply will take time and they may be boring compared to big-bang tax changes. But they will be much more effective in finding a solution to what has been a complex and enduring problem. And they won’t involve backtracking on tax promises.