Central versus Local Government Funding

59. There are three separate issues here:

• The allocation of ‘government' responsibilities between central and local government;
• Which tax base should be used to pay for the central or local government services; and
• Which layer of government should be responsible for collecting which tax base.

60. An infrastructure plan is not the place to address the first and third of these issues. But given the existing allocation of responsibilities, and the fact that in New Zealand central government is responsible for the collection of income tax and GST while local government is responsible for collection of land-based taxes, there is a question whether there is a case for financial transfers from central to local government or vice versa. This principle addresses this point.

61. The economic analysis of taxation shows that land-based taxes are more efficient and cheaper to collect than income tax or GST. In short, land-based taxes are one of the most economically efficient taxes available. A land tax has no economic costs,[12] avoidance is almost impossible and collection costs are very low. By comparison, the economic cost of GST and tax on labour income (part of the income tax) has been estimated at around 20c per dollar raised. Tax on capital income (the other part of the income tax) is likely to carry even higher economic costs.

62. The economic cost of a tax is also a function of the extent of exploitation of the tax. The exploitation of the rating base is very low. Local Authority rates comprise only around 2-3 per cent of GDP compared with core Crown tax revenue of around 30 per cent of nominal GDP on average.[13]

63. We conclude therefore that the local government property tax is an efficient tax that is cheaper to collect than income tax or GST.

64. One valid exception is the funding of local roads because the Funding Assistance Rate (FAR) is in effect a transfer of nationally collected user charges from the collecting agent (NZTA) to the local entities responsible for carrying out the works.

Project Evaluation, Prioritisation and Decision-Making

65. Prioritisation is necessary in a world of limited resources.

66. After identifying needs, problems or opportunities, a feasible and creative set of potential solutions is required. The potential solutions should be evaluated for their contribution to economic welfare. The best solution should then be prioritised against other projects in terms of its contribution to social welfare and the economy’s productivity.

67. The concept of welfare includes economic growth, environmental and health considerations, and is measured by a social cost benefit analysis (CBA). A full CBA is a systematic way of analysing a project’s benefits and costs, including wider economic development benefits and intangible social benefits and costs, and of determining whether the project is likely to add or detract from welfare. While it is necessarily an imperfect technique, it is the best tool available.

68. Because of the complexity of the analysis and the large numbers that are usually involved, bias can result from analysis being led astray by ‘intuition’, ‘common sense’ or ‘judgement’. Therefore, if the result of a CBA does not seem intuitively right, further inquiry or an independent review may be appropriate.

69. The value of equity or distributional effects cannot be quantified objectively or empirically and needs to be considered separately. However, even where a policy is promoted for distributional reasons, decision makers should have a CBA to support their decisions and ensure they understand the costs of any distributional decision.

70. All central government investments are also subject to confirmation and comparison across projects through the normal budget process.

71. A primer on carrying out cost benefit analysis can be found on the Treasury’s website.[14]