Nobody knows exactly what cities of the future will look like, but the Productivity Commission thinks it knows what future city taxes should look like.

As cities grow, councils will have to find new ways to tax residents to pay for infrastructure development like roads, rail and water pipes, a report finds.

The Productivity Commission's Better Urban Planning report suggests a list of "fair" ways councils could raise funding from homeowners and businesses.

Those who benefit most from new infrastructure would pay most of its costs.



The commission's suggestions including "value capture" taxes, allow councils to tax the increases in the value of property resulting from improved infrastructure in an area, such as a new train line making an area a more desirable place to live.



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VALUE CAPTURE



The upgrade of Auckland's western train line and stations made some suburbs more attractive places for commuters to live. Land values in those suburbs rose by an estimated $667 million, broadly matching the $620m cost of the rail developments.

FAIRFAX NZ Productivity Commission chairman Murray Sherwin.

Local property owners were not taxed on those "windfall" gains, but in the future homeowners in an area where a council builds new infrastructure might be, whether they want to use it, or not.

Even a rezoning that allowed denser developments could result in a land value uplift locals could be taxed on.

"Increases in land values generated by public action such as rezoning or investments in infrastructure directly benefit private landowners," the commission said.



The commission gave an example of how value capture could be applied.



If the land value of a property benefiting from new infrastructure investment increased from $100,000 to $250,000 over five years – a rise of 150 per cent, compared to a rise of 120 per cent in other land values in the wider area – tax could be levied on the $30,000 gain attributable to the infrastructure improvements.



The council might decide to levy a tax of 10 per cent of that gain to be paid over five years, resulting in an annual targeted rate of $600 in each of those years.



Such targeted rates can be hard on homeowners with low incomes, like many superannuitants, or families with young children.

GRAHAM COX A local benefits from New Lynn's better rail link to central Auckland.

"Instances could arise where landowners have substantial increases in land values but lack funds/earnings to pay the targeted rate," the commission said.

MUCH MORE USER PAYS

There are legal barriers to councils charging more user-pays fees, such as congestion charges on roads.

The commission wants the law changed to make it easier for councils to adopt user-pays charging, saying the current laws "unnecessarily limit the revenue sources of local authorities".

Over 40 per cent of councils would like to introduce more user-pays mechanisms.

Water consumption and road use are two of the largest infrastructure services provided by councils, the commission said.

"Other countries make more use than does New Zealand of charging for water consumption and road use," the commission found.

The United Kingdom has congestion charges in London and Durham, and charges on some motorways as well as on many bridges, tunnels on other roads.

In Victoria in Australia urban water businesses charge their customers for water by volume. In New Zealand similar volumetric charges for water were rare, the commission said.

Such changes could hit lower-income people hard, and the commission said it was essential with road tolls to ensure the availability of alternative (cheaper but slower) routes, or public transport.

MORE TARGETED RATES

At the moment, much infrastructure for new developments is paid for by development contributions from developers. But the commission said councils should be able to use targeted rates as an alternative.

This would enable the costs to be shared between the developers and other local ratepayers who benefit from the new infrastructure.

"Targeting rates towards those ratepayers who benefit from an investment is a fair way of allocating this burden," the commission said.

A NEW WAY TO RATE

The commission suggests calculating homeowners' share of their council's rates on unimproved land values, rather than the conventional capital value, which includes land and buildings.

In any change there will be winners and losers, including people on lower incomes living in modest homes who find their rates going up because of the value of the land on which they live has risen, perhaps as a result of rezoning.

But, the commission said: "Both land value and capital value are strongly associated with income, and some national evidence shows that the relationship between land values and income is stronger".