The New Zealand Initiative’s Eric Crampton had a good column in Saturday’s Post making the case for land-value rating in Wellington. It was written with Eric’s customary clarity and, on the surface, makes a pretty persuasive case for change. I would normally provide a link but…….despite being a subscriber to the hard copy Post, the new website is anything but welcoming and I don’t feel inclined to send readers their way. But as I’m going to be arguing more with what isn’t in Eric’s column rather than what is, it shouldn’t matter unduly.

For a long time I’ve been more inclined than not to sympathise with the idea of land value rating. But in recent months there has been a group championing change in Wellington (including via an anonymous Twitter account), and since their arguments seemed less than entirely honest it got me thinking a bit harder about whether or not the case for change is really as persuasive as I might previously have been inclined to grant. (And before anyone asks, on the numbers this group used in a Stuff article a month or two back – that I can no longer find – my rates bill wouldn’t have been materially changed by what they were proposing.)

The basic argument for land-value rating is along the lines that, at the margin, it encourages a more economically efficient utilisation of land (a scarce fixed factor which is not going anywhere). The anonymous Twitter account was using as an example a section in the central city currently used as a (single level) carpark. On that site, capital value rates will be lower than land value rates would be, all else equal, and thus at the margin a shift in the rating base might encourage the owner to develop more quickly (or sell the land to someone else who would).

Which sounds fine on paper until one remembers the huge other distortions on land use that Wellington City Council already imposes.

The most obvious, in the rating space, is the egregious business differential, which the left-wing champions of change are very very quiet about indeed.   From Eric’s article

If an apartment tower is right next to a commercial office tower [of identical capital value]…..the commercial tower will pay 3.7 times as much in rates

As Eric notes, Auckland and Christchurch also have differentials, but they are materially smaller than the one applied in Wellington (Christchurch is apparently increasing its to 2.2 times).  I guess you get away with it in Wellington because of the huge captive industry (central government and all the supporting consultancies and other support services) but if I were interested in reforming the rates system in Wellington, and at all interested in providing a better environment for private sector business investment in the moribund Wellington economy

I’d be looking very hard at slashing (ideally abolishing) that business rate differential. All else equal, that would increase the average rates burden on the typical residential ratepayer………which wouldn’t be popular with the voters, but which might prompt harder questions about the extent of the wasteful spending undertaken by the Council (starting with uneconomic convention centres, moving on to super-expensive Town Hall refurbishments, or tens of millions on repairing (rather than replacing) a 30 year old library building, just as examples). Anyone proposing shifting to land value rating without doing something about the business rate differential isn’t making a serious contribution around economic efficiency at all, and is advocating a policy that could actually worsen overall outcomes.

And all that is before we focus in on the way the Wellington City Council (like many/most councils round the country, but egregiously so given Wellington prices) actively rigs urban land prices, by making it difficult, or often impossible, to develop the abundant amount of land (often, in Wellington’s case in particular, land with rather limited economic alternative uses) that the territorial local authoritiy includes. In the last year, their ideological allies on the Wellington Regional Council have also been at it, trying to entrench restrictions on expanding the physical footprint of urban areas. Those restrictions drive up the price of existing urban land, solely as a result of the artificial scarcity those same local authority politicians and their planner allies championed. There is nothing at all natural or fundamental about the land values the left-wing councillors and their allies want to tax: it is all the fruit of a rigged market of their own creation. So count me cautious of those campaigning for land value rating, when the same people show no willingness at all to free up land use and drive down land prices. In fact, having once made the change, they’d have a vested interest in not lowering land prices, because a reduction in land prices relative to capital values would shift the burden of rates back to those you promised relief to when making the case for change.

If, by contrast, the Wellington City Council (or any other local authority) was to see the light and actually allow land to be used as its owners desire (not just as politicians prefer), the case for land value rating might then be strengthened somewhat since as all private land would again be on a more or less equal footing, and the relationships between land values across space, and between land and typical capital values, would be more fundamentally grounded.

All that said, I might still be wary for a couple of reasons.

First, the same argument the champions of land value rating propound – encouraging development – could also be used to argue for higher rates generally (the heavier the burden on undeveloped or lightly developed land the more the incentive to develop it and earn some income off it). I have no enthusiasm for still-higher rates given the evident low quality of so much of the spending already – and yet the councillors reputedly keen on land value rating are mostly also big government people.

Second, it isn’t obvious that encouraging efficient land use is any natural part of a local authority’s business (let alone that local authorities would consistently seek to do so – the evidence of recent decades being against them, given the arbitrary, ideological preference-based, restrictions they’ve actually imposed). One might mount a central government case for a revenue-focused land tax which, if comprehensive and enduring (unlike past land taxes in NZ) might have some economic efficiency benefits (fewer efficiency costs than other possible revenue streams per dollar of revenue raised), but this is an issue of local governments. From them we might want efficient building consenting, clean and paved streets, functioning street lights (that don’t drop on heads), public libraries perhaps, and not much more, generally keeping themselves out of interfering with the choices of private firms and households as much as possible.

Third, somewhat linked to the second point, I’d like as much as possible of what local bodies do to be funded directly on a user-pays basis, and what can’t reasonably be done user-pays directly should be done using a revenue (rates) structure that bears as close a relationship as possible to those who benefit pay. And there I’m unpersuaded by the argument that land values are a better proxy for those who benefit than capital values (6 townhouses on one section will use more services than one house on the same section).

Fourth, there are localities in New Zealand (and Australia) that already (or still) use land-value rating. None of the advocates for change in Wellington have yet (that I’ve seen) produced careful studies showing the sustained difference the choice of land value rating can make (or has made). I recall doing a speech to the Property Investors Association in Nelson several years ago and the land-value rating issue came up. The people I was talking to told me that the Nelson and Tasman District Councils (both covering bits of the Nelson urban area) each had quite different rating bases: one land-based, one capital-based. If so, it would be really interesting to see a serious paper looking at what difference that choice had made (to, for example, land utilisation issues, house prices etc).

The actual experience of other localities and other models is relevant because what those calling for Wellington to shift to land-value rating as proposing is really quite a big redistribution, and it seems reasonable that the onus should be on those proposing material windfall gains and losses (even if for most the difference might be modest) to demonstrate that they system they propose has genuinely produced materially better results where it has been used (and thus represents a potential Pareto improvement).

In talking this over with my son, at one point I suggested that I’d have been fine with land-value rating had it been introduced in 1840 when modern Wellington was founded. But, on reflection, I’m not even sure I hold to that, and am quite sure that the left-wing of the Wellington City Council wouldn’t have been. After all, Wellington wasn’t some terra nullius but had Maori residents and landowners, many of whom would have had little or no market income from their land. The rational economist might have come along and suggested a land-value rating system to encourage efficient utilisation of scarce land, and to cries of “but we have no cash income” or “but this undermines our deep connection with the land” those rationalists would perhaps have responded “oh, no problem, just sell the land and move somewhere else; downsize, put the proceeds in the bank and sit back and watch the new city flourish”. Or they might have excluded the Maori land, which then would have dramatically undermined their original efficiency case.

But if that was 1840 hypotheticals, what about 2023 reality? Shift to land-value rating in a city where land prices have been rigged (by artificial regulatory scarcity) by the same council, and what happens to the economics of the local bowls or tennis club (properties that may, not incidentally, actually use very few council services). No doubt the council and the Crown would protect their own playing fields (schools, government reserves, and council parks don’t pay rates) but why should we be adopting a revenue model (quite unrelated to use of council services) that would have the effect of driving out private sector green spaces from our cities and towns (unless of course you are a left-winger who doesn’t really like private provisions and intermediate civil associations at all).

And then there are the elderly. There are many (private) reasons why an older person or couple might rationally choose to downsize, shift to a retirement village or whatever (stairs, maintenance burdens, or just freeing up some capital) but there is no public policy interest in seeking to affect or accelerate that process (contrary to some rhetoric you hear at times, about how old people “need” to move out – or be moved out – of big old family houses). But that is exactly the sort of effect land-value rating has – and to some is designed to have. If some elderly couple wants to sell their grossly overpriced Wellington house (mostly section) and move to (much cheaper) Christchurch, that is their affair and potentially a quite rational response to the Council’s artificial land-use scarcity. But a lot of elderly people want to stay in the locality they have lived in for decades, close to the people and institutions they’ve been part of for decades. There is no public policy merit in whacking a tax on their backyard – quite unrelated to any council services they are likely to be using – to encourage them to move on and allow conversion into townhouses (after all, the Council could – and should – simply free up greenfields development in the land-abundant Wellington City. And it is no consolation to be told “oh, never mind that you don’t have the cash – you can give us a charge over your estate and build up a big debt to be settled by your heirs”. There is just no public policy case. The underlying issue – which should be easily affordable readily available housing – could, and should, be dealt with directly.

There is a case, at least on paper, for a modest land-value tax, applied equally to all land, at a national level. That such taxes are not widespread should give pause for thought (when I was involved in the 2025 Taskforce and the issue came up David Caygill reminded us that he’d been the Minister of Finance who’d abolished New Zealand’s land tax which by then had been whittled down to applying only to CBD commercial properties), as should the fact that land is becoming steadily less important as a factor of production. But there is a reasonable debate to be had at a national level, as one strand in a national efficient revenue strategy.

At a Wellington City Council level, it all has the feel of something that appropriates in bastardised form the economic arguments and wants to use them to serve the ideological interests of the same councillors who have no general interest in economic efficiency at all, but are keen on some intensively-developed, relatively poor, pseudo Manhattan on Port Nicholson, not because the fundamental economics and individual personal choices drove such outcomes (if they did, then fine) but simply because this sort of urban leftist really hates New World cities and the sort of well-spread cities that wealth and transport technologies (and modest populations – Wellington City has less than 250000 people) made possible. They really don’t like backyards, sunlight, gardens, or soccer or cricket with the kids down the drive. And, refusing to accommodate private choices (costs appropriately internalised) they now want to transform the rates system to reinforce their personal and ideological preferences.

But if the councillors want to surprise us and (a) remove that huge business differential, and (b) free up land use across the whole city (abundant land and all) then perhaps it might make sense to have a conversation as to whether a shift to land-value rating, or perhaps a 50/50 mix (that might better reflect service use), would on-balance make some sense.