Treasurer Ted Quinlan has certainly got his politics right with the new rates system – at least for the short term.
Whether he has the long-term financing right is another matter.
Quinlan introduced his rates legislation this week in line with an election promise that would cap rates increases for existing residents to the consumer price index. However, if a resident moved to another dwelling the rates would be set according to the value of the new property at the time of moving and only thereafter locked in to the CPI provided the resident did not move.
The short-term political benefit is that there will be no yelps from the suburbs when rates jump with increasing property values. Property values go up unevenly. So often the big increases will hit one or two areas. And residents of those areas scream in vote-changing ways. If the rates only go up by the CPI there will be no quarterly reminder of a major government sting.
Further, when people move to a new dwelling, they expect the rates to change, so it not a politically sensitive issue. When the move the new rates hit gets subsumed by the other large sums of money that go with a property transfer.
The CPI method will also apply to rented investment properties for as long as the property is held. So no ugly reminders of rate hikes even for investors.
That all helps Quinlan and the Stanhope Government to the next election.
Before looking at the long term, though, I should state an each-way conflict of interest. As a resident of the inner south intending to stay put for the indefinite future, the new system suits me fine, thank you very much. But as I have some investment property I fear that what I win on the swings, I will more than lose on the roundabouts. But in any discussion on housing everyone has an interest – and is therefore interested.
So how will Quinlan’s system work in the long term? People staying put will do well on the rates front. However, when they move some years from now, they will find that they will be paying much higher rates than the people in a similar dwelling next door. That might cause some resentment.
For example, say rates are $1000 for a house in a street in O’Connor. In nine years’ time someone moves to O’Connor where, say, property values have gone up 10.5 per cent a year. The incoming resident pays almost $2500 in rates. The person next door who has lived there for the past nine years gets just the CPI increase of, say, 2.5 per cent, and in the ninth year pays just under $1250 – half that of the incoming neighbour.
That will have political fall-out in the future when neighbours compare rates notices. By then, though, it is someone else’s problem. It is a time bomb. This is because property values (especially in some areas) go up by much more than the CPI and the resulting rates increases are exponential. The longer it goes on the worse the comparisons become. It takes 30 years for the CPI at 2.5 per cent to double a non-moving resident’s rates. But a modest eight per cent increase in property values will double rates for movers in just nine years. And in 30 years, the new resident will pay $10,060 in rates while the stay-put is paying just $2500. It is unsustainable – to use the buzz word that applies to the environment but not to public finance.
Inevitably, people will factor the extra cost in when deciding whether to move. Coupled with the huge increases in stamp duty (which are not indexed), it will present a major disincentive for people to move to more suitable housing as their personal situation changes. As people get older more people will tend to hang on to their inappropriate large houses. More people in outer areas will tend not to move in to small dwelling in the centre. People will live in less efficient housing to the detriment of the whole community.
Taxation changes behaviour.
Further, the new formula will increase the total amount of government rates grab. In the past, government has adjusted the rate in the dollar struck to assess rates downwards as property values have gone up, so the overall take would go up only by around CPI plus a bit. Under the Quinlan scheme, however, the rate will be set in cement at 0.7820 cents in the dollar.
So while the non-movers are protected by the CPI cap, the movers will get hit as that rate is applied to the new value of properties, no matter how high they go. And given most people move eventually, ultimately the government’s grab is going to go up with property values – not with CPI or average weekly earnings or some other socially acceptable method.
The ACT has among the highest property taxes in Australia. The politically sensitive rates grab in the past three budget years has gone from $101.6 million to $105.0 million to $110.5 million – a tad above CPI, which is fairly restrained. But the stamp-duty grab in the last Budget estimate went up 34 per cent to $38.5 million and land tax went up 43 per cent to $170.4 million. But those big changes are not politically sensitive because stamp duty only comes once or twice a life time for most voters and land tax gets passed on to tenants and the landlord gets the blame.
It is very astute politics. But too bad if the goose gets killed and fewer people move within the ACT making housing less efficient and cutting stamp-duty revenues and fewer invest in the ACT.
But at least government has to be more open these days. The total rates take in 2001-02 was a published $105 million and the 2002-03 estimate was $110.5 million. My guess is that the rate of increase is going to go substantially higher (and higher than the CPI) as time goes on.
And we’ll monitor it. So don’t move to another address.