City-dwellers are invited to have a say on whether they could stomach "value capture" taxes to help pay for infrastructure.

Value capture taxes, which are used in some cities overseas, are paid by property owners on increases in the value of their properties as a result of a local council building infrastructure like a train link, or a new road, or rezoning the property.

It's one of a number of possible new ways to tax households and businesses to pay for maintaining and upgrading infrastructure in towns and cities, outlined by the Productivity Commission in an issues paper.

Others include local GST-like expenditure taxes, and switching from using capital values to land value to calculate property rates.

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The commission will report on its conclusions in the middle of 2019, and issue a final report to Government by the end of November, said commission chairman Murray Sherwin, who acknowledged that proposals for new forms of taxation could raise strong reactions.

"It is a sensitive area," Sherwin said.

Once the final report was delivered, it would be up to Government, and opposition parties, to decide how to take it forward.

The commission said increases in property values as a result of council investments in infrastructure were enriching private landowners, and targeted rates, or fixed charges, were poor ways of taxing them on their gains.

"Neither of these approaches strongly reflects the windfall gains that a private owner receives," the commission said.

A law change would be needed to allow the "uplift" in land values to be taxed by councils.

Sherwin said value capture had been used in Melbourne, Australia, to help pay for inner city rail.

Auckland Council is interested in value capture as well. Last month it published a paper on how rapid transit investments lifts property prices.

It found owners of properties close to the proposed light rail project would get "a significant windfall gain"

The commission was also seeking views on whether councils should switch to using land value from capital value to calculate rate bills, which could result in some people struggling to pay, and being forced to sell up, though that would free land for developers.

"A trend in recent decades has been for councils to abandon land value rating in favour of capital value rating," the commission said.

This was because councils felt it was fairer, as there was a closer link between capital values and owners' ability to pay rates, than land values, but evidence on a national level suggested the opposite, the commission said.

Other suggestions from the commission were changing laws to allow councils to borrow more, and to do deals letting private investors pay for infrastructure, for example on a new subdivision, in return for being able to recoup costs from new residents.

Sherwin said local councils needed new ways to fund their work.

"We have a problem with cities. The rapidly growing ones are right up against their debt limits, and they are struggling to raise the revenue they need off their rates bases," he said.

This included Auckland, which had grown rapidly over the past two decades, and its population was projected to increase by another 550 000 people over the next 20 years.

But some councils face quite a different problem: population stagnation or decline.

There are 54 district councils, 12 city councils, 11 regional councils, and Auckland Council.

CARYS MONTEATH/FAIRFAX NZ Murray Sherwin is chairman of the Productivity Commission.

They make up a big part of the economy. In June 2017 local governments owned $119 billion worth of fixed assets, employed 25,300 full-time staff, and had annual operating expenditure of $9.9b.

Local councils were "creatures of statute", and need law changes to be able to create new targeted taxes leaving them heavily dependent on rates for their incomes, the report said.

The commission found council funding was failing some people - including around 750,000 people with water supplies that don't meet national standards - and fostering an anti-growth sentiment in cities, especially as current ratepayers were paying for infrastructure that would benefit future generations.

"This magnified ratepayers' opposition to new development, creating an environment where councils were reluctant to embrace growth which in turn contributed to a sluggish supply of land for housing and worsening housing affordability," the commission said.

SUPPLIED Local government in New Zealand currently has a smaller scope of responsibilities than local governments in many other countries, and this is reflected in local government accounting for a small share of total government spending. This is in part because many of the functions undertaken at the local level in other countries, such as health services and education, are funded centrally in New Zealand and provided through Crown entities.