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Local Government NZ suggests new taxes, central govt support could bridge spending gap

New Zealand's 78 local government organisations could close the gap between spending and revenue with new taxes or a share of existing central government levies, according to a discussion paper from their national body.

Local government revenue amounted to $9.49 billion in 2013, excluding non-cash income, of which rates made up $4.6 billion, or 49 percent of the total, according to the Local Government Funding Review paper. Councils account for about 10.5 percent of public spending but raise only 8.3 percent of all public revenue, creating what the World Bank called a 'vertical fiscal gap', the report says.

"A growing number of councils face financial challenges at a time when demand for infrastructure and services is greater than ever," said LGNZ President Lawrence Yule.

The paper says a one-size-fits-all approach to local authority funding doesn't work in an evolving economy, where some councils are facing increased costs for additional infrastructure such as roading as their population grows, while other regions faced a dwindling or aging population, with a fixed or low income on which to levy property rates. Such councils are then faced with the prospect of downsizing services and reducing community facilities or transferring them to community groups.

The paper considers six potential sources of taxes revenue that local government could tap into - local income tax; a share of central government income tax such as from the profit on land sales or a tax paid by extractive industries, such as those currently paid as royalties to central government; local expenditure tax, such as a reasonable sales tax or hotel room tax; 'selective' taxes such as on water and waste disposal; a regional fuel tax; and a transactions tax, which could be a type of stamp duty imposed locally.

Of these it says local income tax could spur avoidance behaviour and distort economic activity.

Sharing revenue with central government from extractive industries like mining may have more merit as it would "help build the partnership that is needed between investors, local communities and central government to maximise the benefit of our mineral estate," the report says. Such activities are often made possible because of local investment in housing, roads and amenities and typically local communities bear the cost of clean-up after an industry has moved on, it said.

A broad local expenditure tax such as a regional sales tax or hotel room tax would face high hurdles and risk undermining the existing goods and services tax. Attributing the spending to specific geographic areas could also be problematic and big centres such as Auckland where consumption was high, could win out over rural areas which produce more.

Selective taxes, such as on clean water and refuse disposal could be considered as long as there were ways to prevent environmentally damaging activities simply relocating to regions with lower taxes. A regional fuel tax had been much debated in recent years and there was a risk fuel companies would indulge in "price spreading", raising the price around the country to compensate. Such a tax may also give rise to avoidance behaviour and impose administrative costs.

Many potential new revenue options for local authorities amounted to a transaction tax but such taxes have been phased out by central government because of their high economic cost, the report said.

LGNZ is seeking submissions on its paper, the first in a two-stage review, by March 27 in readiness for a final report to be released mid-year.