Local government operates in an increasingly complex and dynamic environment and needs to cope with changing needs, and with expectations of improving services but with low taxes and charges.
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In NSW, rate-pegging in its contemporary form commenced in 1978 when the newly-elected Wran Labor government introduced a scheme to limit the rapid increases in council rates.
This had its genesis in the fact that in the period from 1973 to 1976, rates increased by an average of 188 per cent.
Under the current rate‑pegging regime, the Independent Pricing and Regulatory Tribunal (IPART) sets an upper limit on the total increase in rates allowable, but it also allows councils to apply for “special rate variations” above the rate peg.
As a general trend, the rate cap and the CPI track each other closely. The CPI is a measure of the rate of increase of a given basket of goods and services rather than a measure of local government production costs.
Assessment of local government costs now occurs as IPART has responsibility for determining the annual rate peg percentage.
The NSW rating system has been tried and tested over many decades. It in my view has, on the whole, worked reasonably well, rate pegging aside.
Rate capping can have effects such as facilitating “blame‑shifting” by councils for fiscal distress, exacerbating financial sustainability concerns due to restricted opportunity for “own‑source” revenue, increasing the discordance between the rate base and resident ability to pay, and an under-utilisation of borrowing to fund capital expenditure due to uncertainty regarding future rate rises.
The NSW rating system has been tried and tested over many decades. It in my view has, on the whole, worked reasonably well, rate pegging aside.
The Local Government Act now provides an effective tool with Special Rate Variations to address financial sustainability, infrastructure maintenance and renewals gaps, and revenue needs with genuine community engagement, as required under the Integrated Planning and Reporting (IP&R) provisions.
The theoretical basis for municipal rating has spawned robust debates in NSW over many years. The central pillar is the proposition that a tax based on land is efficient.
However, a tax based solely on land value is usually undermined by concessions and exemptions.
Rates are politically unpopular. In the Australian milieu, where local government is controlled by its respective state and territory governments, this has seen popular pressure applied to these governments to exert control of rate setting.
In NSW, this led to the introduction of rate pegging between 1901 and 1952 and then again from 1978 to now.
In NSW, the levying of rates is complicated by minimum base rates, rate concessions, exemptions and rate pegging. With base rates, NSW councils have full discretion regarding whether they should be imposed. However, a base rate ceiling is prescribed.
In NSW, the levying of rates is complicated by minimum base rates, rate concessions, exemptions and rate pegging.
Use of a base rate reduces the influence that property values exert on council rates. In many respects, a base rate undermines the economic arguments for levying tax on property values.
Municipal tax exemptions can undermine the equity and sustainability of extant council rating practice. Whenever an entity is exempted from municipal taxation, then other residents will be required to accept lower levels of service or pay higher rates. Forty-one exemptions have been progressively added to NSW municipal taxation over a long period.
Rate pegging limits the increase in total rate revenue levied by councils to a fixed percentage increase calculated by IPART.
However, rate pegging does not necessarily limit the rise in a given person’s local tax liability which may still rise substantially as a result of a new property valuation in excess of the average increase in valuation for the entire local government area or due to a re‑categorisation of land use.
The main arguments against rate-pegging in NSW are five-fold. It limits a council’s ability to respond to community demands for additional and/or improved services. It reduces municipal financial sustainability, prevents remedial action to address infrastructure backlogs, encourages councils to cross‑subsidise services through user charges and fees, and it can run counter to local council accountability.
However, proponents of rate-pegging declare that it prevents misuse of municipal monopoly power, imposes fiscal discipline on councils and increases operational efficiency.
It is unlikely that rate pegging will be discontinued in NSW. It is to be hoped that future IPART assessments factor in the real cost increases experienced by local government.
Dr Ian Tiley is the administrator for Armidale Regional Council.
Armidale Regional Council can be contacted on 1300 136 833. The council also has a direct communication method called Your Say Armidale, an online hub for the Armidale region to engage with council and provide views, opinions and feedback on projects and initiatives affecting the region. Participation in this online engagement portal will have a meaningful impact on the decisions council makes and will contribute greatly to the community and lifestyle Armidale residents enjoy. To take a look at the online hub, visit yoursay.armidale.nsw.gov.au