Govt won’t prioritise any Tax Working Group environmental tax proposals

So, no Capital Gains Tax to rule them all, not even a wafer-thin mint partial extension of the existing bright-line test to cover all residential investment property/holiday homes.  I’m almost certainly not the only one who didn’t see that coming.

The other big surprise for me is the decision to not prioritise any new environmental tax proposals for now.  When introducing the TWG’s final report Michael Cullen made much of using the funds from these measures to help farmers transition to a lower-carbon economy.  That appears to have fallen by the wayside for the moment.

The Tax Working Group made a dozen recommendations regarding environmental and ecological outcomes.  One of these was to develop a framework for taxing “negative environmental externalities” (i.e. pollution).

The TWG report noted that the approximately $5 billion of environmental taxes raised in 2016 represented about 6.2% of tax revenue.  According to the OECD, New Zealand ranked 30th of 33 OECD countries for environmental tax revenue as a share of total tax revenue in 2013.

Surprising and a little disappointing

Accordingly, given our dependence on the environment for our agricultural and tourism sectors, it’s surprising and a little disappointing that the TWG’s recommendation for developing a framework is simply rated “Consider for inclusion in the 2019/20 tax policy work programme.”  Furthermore, the Government has decided not to advance any new environmental tax proposals other than those within the current tax policy work programme.

The other eleven environmental proposals covered Greenhouse gases, water abstraction and water pollution, solid waste and transport. All are within the current tax policy work programme, but critically the Government has ruled out both resource rentals for water and the introduction of input-based instruments such as a fertiliser tax in this term of Parliament.  Unlike CGT these issues are not completely off the table.

Although property owners in particular will be relieved by Wednesday’s decision, there will be far more losers as a result because the TWG’s suggested options for recycling the revenue raised from a CGT through reductions in personal income tax are off the table entirely.  This would appear to include any changes to tax rates and thresholds which might come out of any proposals made by the Welfare Expert Advisory Group.

So which TWG recommendations has the Government marked out as high priority?

The most significant would be introducing measures to counter land-banking and land speculators.  The TWG’s final report suggested residential vacant land taxes were best levied by local government.  There are few other details so far apart from a direction for the Productivity Commission to include vacant land taxes into its enquiry into local government funding and financing.

The other high-priorities include the tax treatment of seismic strengthening work which frankly should already have been a priority; an interesting proposal from the New Zealand Superannuation Fund to develop a regime encouraging investment into nationally significant infrastructure projects; and a number of technical tax integrity items relating to loss-trading, and better tax collection.

Overall the TWG made 99 recommendations.  Eleven have been deemed high priority for progression in the 2019/20 current tax policy work programme.  The Government rejected 14 including CGT; another 14 such as the current rate of GST are current tax policy and will remain unchanged; work is already underway on considering 30 recommendations and the remaining 30 should be considered for inclusion in the tax policy work programme in due course.  This last group includes business taxation changes aimed at reducing compliance and the TWG’s suggested changes for KiwiSaver.  Given the well documented imbalance of tax treatment between residential property and KiwiSaver funds this is particularly disappointing.

‘Not healthy for a democracy for interest groups to wield such influence they can effectively exempt themselves from tax’

Finally, a note on the politics of the decision. I do not believe it is healthy for a democracy for interest groups, whether property owners, business owners or multinationals, to wield such influence that they can effectively exempt themselves from tax.

Over the past 50 years various working groups at regular intervals have reviewed the tax system, considered the merits or otherwise of a capital gains tax and then backed off. In between each review governments of both hues have steadily broadened the scope of taxation.

The Prime Minister may have said no this time, but the pressure for widening the scope of capital taxation still remains whether it’s from widening inequality or the continued tax-favoured status of property investment. We will therefore be re-litigating the issue of capital taxation within 10 years.

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