Land tax talk is a classic political tactic

7:50 am on 29 April 2016

Power Play - Talk of a land tax this week is classic tactic - float an idea to test the public mood, gently introduce it into the political dialogue and then if and when it is introduced it does not come as a rude shock.

Handy though for a government under consistent pressure to be able to talk about something 'in its toolbox' to possibly deploy in the future, to make it look like it intends doing something about the problem - in this case the overheated housing market.

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Photo: 123rf

Prime Minister John Key has once again raised the prospect of a land tax, as he in fact did last July when asked what the government intended to do to dampen housing demand, in Auckland in particular.

What has given his comments more prominence this week is the imminent release of data relating to overseas purchasers.

A land tax is an annual levy based on the value of the land owned. In its 2010 report the Tax Working Group advocated for a land tax to make the system fairer, i.e. a way to broaden the tax burden away from income, but the option it presented was to apply the tax in New Zealand.

The disadvantages of a land tax, as outlined in the report, are that any tax levied on a piece of land automatically decreases the value of that land and it disadvantages groups likely to own large land masses, for example farmers and Māori authorities, and groups with fixed incomes.

In short, constituents the government would not want to mess with - its traditional farming base, homeowners in leafy suburbs enjoying the benefits of high house prices and the growing number of ageing New Zealanders moving onto a pension.

But that is never going to be a problem for Mr Key because he has no intention of levying the tax on anyone living here, in fact he has also talked about exempting New Zealanders who have moved overseas and still own a home here.

And there are still several ifs and buts.

The most significant is the government's dogged insistence foreign buyers are not pushing up prices in the Auckland market.

John Key during bridge run on the GCSB/ SIS report.
Last photo of JK for RNZ 2016!

Photo: RNZ / Alexander Robertson

This is where the politics of race get interesting; the prime minister has specifically said he doesn't think there are "people in Shanghai who get out of bed and think 'oh - I want to buy a house in New Zealand'".

But when people in Auckland talk about foreign buyers they are usually talking about those visibly different to the European constituents, mainly Asian people.

That's not to say there are plenty of Australians, Americans, Canadians and people from the United Kingdom at the auction houses, they're just not as easy to differentiate.

Mr Key makes the point many of the 'foreigners' in the Auckland market are in fact residents, citizens or have connections to New Zealand, for example a child studying here.

A land tax would not affect the vast majority of those people, but the message the government is taxing 'foreign buyers' is delivered nonetheless.

Last year the government introduced what it calls a "bright line test", that results in capital gains from houses other than the family home being taxed if that property is bought and sold within two years.

Not a capital gains tax though, insists the government.

As the National Party's ally and governing support party ACT points out, the introduction of a new tax would be breaking an election promise National campaigned on at the 2014 election.

Alongside the bright line test came new requirements for foreign investors to have a New Zealand IRD number and bank account, and for the Inland Revenue to keep track of that information.

That data will be released in the next few weeks, and will provide the first indication of how many foreign investors are active in the New Zealand property market. One limitation however, is the data will only show the number of foreign investors, and not the number of properties they have purchased.

If that data shows foreign buyers are having an impact on the market, Mr Key says a land tax is the strongest measure the government could take in response.

He has once again ruled out banning foreign sales, and a one-off payment in the form of stamp duty runs contrary to the large number of free trade deals and double tax agreements New Zealand has with other countries.

As well as running contrary to the spirit of those deals, New Zealand would not want to prompt retaliatory action from its partner countries.

Which leaves the land tax, which by all accounts would not cause any such difficulties.

There is no detail about what that tax would look like, for example at what percentage of its value would land be taxed, but we do know it would not be applied to land-owners in New Zealand.

Politically convenient in that case - a tax that sounds like the government is taking action in response to a problem, but one with little, if any, impact on constituents at home.

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