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Waves crashing against a sea wall
Image: Getty Images/Tina Tiller

MoneyMay 2, 2022

With seas rising, who will pay for our most vulnerable coastal properties?

Waves crashing against a sea wall
Image: Getty Images/Tina Tiller

Insurance companies aren’t going to pay for homes made unliveable by sea level rises, so where should homeowners turn? Good question, writes Tom Logan.

The release of the NZ SeaRise project’s sobering data about projected sea level rise around New Zealand is yet another reminder that the water is now lapping close to a lot of New Zealand’s front doors. The ominous question is: who will pay when it crosses the threshold?

But that’s not a question worrying insurance companies. They’ve made their position clear — they won’t be paying for it.

Insurance is based on uncertainty and is reevaluated annually. When the chance of damage rises beyond what an insurance company is prepared to bear, it withdraws.

This leaves at-risk homeowners with no insurance, either private or through the state’s Earthquake Commission. In the meantime, homeowners will likely continue to pay rising premiums, possibly unaware of the tenuous nature of their coverage.

The latest research tells us coastal properties will start to lose insurance cover within the next 10 years, if not sooner. Technically, if your property has a 1% chance of coastal damage with today’s sea level, you’ll likely lose all private insurance once the chance rises to 5% — anticipated to be less than 25 years away.

That means potentially more than 30,000 residential properties – currently valued at more than NZ$17 billion – are expected to be uninsurable within the next few decades.

Furthermore, these timelines don’t account for the latest predictions of polar ice sheet tipping points: major sea-level rise is on its way.

Who will pay?

Domestic and international precedent suggests the central government might compensate some property owners. But there’s a significant caveat: the New Zealand government has so far followed a UK model for coastal property compensation. Called “Flood Re”, this only covers UK homes built before 2009.

Minister for climate change James Shaw has said the challenge for New Zealand lies in defining where the line falls. He also said developers of coastal properties today are doing so “with their eyes open”.

This is significant and suggests the government might be positioning itself to abandon more recent coastal developments.

It’s hard to argue with such a policy. Can we expect taxpayers and the government to pay such a massive bill? More pointedly, should the government be compensating for decisions made now when local councils should at least be aware of the risks?

We’re still building by the coast

While the total rateable value of exposed residential property is approximately $17 billion, $2.6 billion of that was built after 2009, according to our analysis.

Even today, local councils are continuing to grant consent for development in these immediately exposed places. The Christchurch City Council – already with one of the highest exposures to coastal hazards – last year announced a 65-home development in New Brighton, an area current modelling suggests is prone to coastal flooding.

At the same time, advice from the Ministry for the Environment suggests councils should be taking a risk-informed approach to land-use planning, and asks whether councils or investors can afford to write off these investments in future.

This guidance is not mandatory, however, and many councils do not have the resources or expertise to take a risk-based approach. Aside from the financial threat, there are the associated physical upheavals and mental health issues facing residents.

The Strategic Planning Act (one of the three pieces of legislation replacing the old Resource Management Act) should put an end to further development in at-risk places. But this still leaves the complex financial and ethical question of what happens to existing property owners.

Simply to say these residents knew the risks when they developed and should therefore be left on their own is not an acceptable long-term, compassionate strategy. Other solutions will be needed.

Government guidance is vital

We need to be wary, however, of local communities demanding sea walls or other protections to allow them to remain. Recent research indicates such structural defences can inadvertently raise long-term risk and exposure.

A more sustainable approach proposed in Hawke’s Bay involves charging ratepayers $30 a year for a coastal defence or managed retreat fund. Initially lauded as the country’s most sophisticated engagement process and strategy, it has since stalled due to councils being unable to agree which rates bill it should be on.

Another solution might be the creation of a government-managed coastal bond or insurance scheme. This would ensure the premiums paid by coastal residents stayed in the local economy to support them. Naturally, such a scheme should include conditions that limit or prevent development in risk zones.

Alternatively, New Zealand could adopt a framework for converting exposed property from freehold to leasehold, which would put time limits on occupying vulnerable properties.

The related idea of a “revolving loan programme” is being discussed in California. Essentially a creative buyout scheme, this would involve councils or communities buying vulnerable properties and renting them out to pay off the loan until the property is no longer safe.

Regardless, the NZ SeaRise project should remind us of the need for clear guidance and support at government level. The proposed Climate Change Adaptation (or Managed Retreat) Act will hopefully provide this guidance, but this is possibly two years away at best. With coastal development still happening, it’s clear we need it sooner.

In the meantime, those who are aware of the risks will be tempted to sell their vulnerable property to those who aren’t. That is no solution. New Zealand will still have vulnerable citizens in vulnerable places — regardless of whether or not they bought with their eyes open

Tom Logan is a lecturer in civil systems engineering at the University of Canterbury

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Keep going!
Revenue minister David Parker (Photo: Getty Images; additional design by Tina Tiller)
Revenue minister David Parker (Photo: Getty Images; additional design by Tina Tiller)

MoneyApril 28, 2022

David Parker’s long, long game towards a fairer tax system

Revenue minister David Parker (Photo: Getty Images; additional design by Tina Tiller)
Revenue minister David Parker (Photo: Getty Images; additional design by Tina Tiller)

The revenue minister wants to measure the fairness of our tax system and legislate to effectively outlaw unfair tax changes, but he hasn’t signalled Labour wants to try again for a wealth or capital gains tax. Yet.

This is an edited version of a post first published on Bernard Hickey’s newsletter The Kākā.

Revenue minister David Parker is one of the bigger and more ambitious thinkers inside the core of the Labour cabinet, and has been thinking about tax and the politics of tax for the longest time. He doesn’t have much of a choice, but he is also engaged in a “long game” to build the political, evidential and policy framework for a much fairer tax system. He hopes to build the case for tax changes that will last through the ups and downs of political and economic cycles, and ultimately be fairer and hold up for the long run.

But it’s a very long run.

So it was useful to read Parker’s big speech on the lack of fairness in the tax system to see what that long game plan might look like. It was also a breath of fresh air to see a speech about tax that was about more than raw politics and that had some cohesive logic. He even talked about the challenges of the political economy of tax, and complemented National’s previous political strategy for tax reform.

It was a feat of deeper political thinking done out loud in speech form. That’s rare to see these days, and hard to do for a politician near the top of a government. Usually they keep their heads down and try not to get run over by the soundbites of news bulletins and the partisan sub-tweeters on Elon Musk’s new plaything.

No, this is not Labour’s wealth tax plot

Firstly, let’s cleanse the timeline of this article of the soundbites you might have heard about the speech to cover off what it was not. Here’s what the opposition’s leaders said about it:

“Labour is planting the seed for increased taxation to fund their addiction to spending.

“While talking about how ‘unfair’ our tax system is, the minister failed to acknowledge the government has taken in a massive $14 billion more in income tax revenue than expected due to record inflation. That, minister, is unfair.”

– Act leader David Seymour in a statement about the speech.

Seymour has the most efficient and speedy soundbite production machine of the political parties at the moment, but to be fair to Act, those bites are usually backed up by a big policy that is usually coherent and simple. Seymour’s Act wants a single 17.5% income tax rate and no tax on wealth or capital gains. He deems anything different unfair and puts quote marks around the word “fairness” when Labour uses the word.

National leader Christopher Luxon told Morning Report it was unclear what Parker was trying to achieve with the speech. He said it felt like an “intellectual fishing trip”, and was another sign that Labour believed in more taxation while his party favoured less.

National is proposing tax cuts for those on higher incomes by raising the tax rate thresholds to adjust for inflation and removing the new 39c rate for those earning over $180,000. National would also reverse the tax deductibility changes for landlords and the longer bright-line test. For more on Luxon’s thoughts on tax, here’s a useful interview he gave Tova O’Brien at Today FM on Tuesday.

Parker anticipated focus on his speech would be on finding the “smoking gun” of another Labour attempt to tax wealth. So he put the rebuttal in the first sentence of the speech:

“Those coming here expecting announcements of new tax policy will be disappointed. None are being made. We have no secret plan to introduce a CGT nor a wealth tax or a deemed income tax, nor others. The IRD is not doing any work to even develop these or other options.”

In answer to subsequent questions from reporters, Parker also restated the Labour Party’s 2020 election position that no new wealth or other taxes were planned for this term. A busy person tired of endless debates and elections about wealth taxes and no action might be forgiven for skipping on to the next thing in their news feeds without reading what Parker said next. That would be a mistake.

National leader Christopher Luxon and Act leader David Seymour (Photos: Getty Images)

So what was the speech about then?

Parker used the speech to detail how, despite umpteen tax working groups and official tax inquiries, IRD, Treasury and Statistics NZ don’t actually know how much wealth our wealthiest have and whether it’s being taxed at all, or enough. They also don’t know whether the overall tax system is progressive or not, once you analyse the effects of different groups from the income tax and welfare systems, GST and the lack of taxes on wealth and income.

In theory, we already have a progressive tax system if you only take PAYE income and corporate tax into account, along with Working For Families and accommodation supplements. As Luxon mentioned yesterday, the top 9% of wage and salary income earners pay 42% of the wage and salary income tax.

But how fair is the tax system overall? Those on the lowest incomes spend much closer to 100% (and sometimes more) of their income on goods and services, and therefore pay a 15% tax on their disposable income. Much wealthier people on higher earnings invest a lot more of their disposable income in bank accounts, property and other assets, some of which are taxed, and others are not. Corporate tax payers pay tax on their profits, but not on their spending (they pass through GST to the government) and not on their capital gains, unless the gains were from “trading” rather than holding.

Here’s how Parker describes the situation, which, bizarrely, was not measured or analysed by the last two tax working groups, only asserted generally:

“Currently many people look at our headline personal income tax rates and see a system that charges higher rates on higher taxable income – and they assume that the system is progressive overall. It isn’t.

“What’s hidden is that the effective marginal tax rate for middle-income Kiwis is generally higher than it is for their wealthier co-citizens. Indeed, some of their wealthier Kiwi compatriots pay very low rates of tax on most of their income.”

Parker is talking in particular here about how half of those on Working For Families are paying effective marginal tax rates of well over 50% as they move through the abatement thresholds as their incomes rise. Over 10% have marginal tax rates of over 75% and a couple of percent actually pay over 100% for a short period.

Parker also focused on GST and wealth, where he pointed to big gaps in the IRD’s information. The gap on the amounts paid was smaller for GST, but just as large on the issue of regressivity:

“It is rare for the debate to properly factor in the effective rate of that regressive tax – GST – as a percentage of income, or for that debate to include economic income that is untaxed.

“I support our GST system, but it is regressive. While not all taxes need to be progressive, the system overall should be. We can’t properly assess our tax system without knowing what effective GST rates are for different cohorts in New Zealand. So we will better analyse this.

“We have good, largely automated systems underlying the GST payments that are due to IRD. However, we have much more limited understanding of how much different groups in our population pay.

“While GST is collected by businesses, they pass that cash cost on. The actual cost is borne by those who buy GST-inclusive goods and services. Thus GST is really paid out of our earnings when we spend them. In economic terms GST is mainly a tax on labour income. Who bears that cost?

“Data is limited on the effective overall GST rate paid by New Zealanders. We don’t really know this by either income or wealth decile. I have asked IRD to remedy this. I expect we’ll be using the best data we have, rather than collecting more.”

illustration of a person being shaken and money falling out
Image: Getty Images

‘The Household Economic survey is useless’

The data collected on wealth was very poor, Parker said, pointing to how the Household Economic Surveys (HES) don’t ask the right questions or the have the power to delve deeper:

“We have virtually no idea what rate of tax is paid by the very wealthy. As wealth concentrates into the hands of an ever smaller cohort at the very top, more and more of their income, and a greater proportion of national income, is represented by returns on capital. 

“How much this amounts to, and how much of it is taxed or untaxed, is currently unknown in New Zealand. Our statistics are worse than Australia’s and Europe’s.

“Our rough measure of net assets suggest that outside the family home, 65% of all wealth is held by the top 10%. In fact, it could be that more than two-thirds of all financial assets are held by the top 5%, with most of that concentrated in the top few percent.

“I said the 65% held by the top 10% is a rough measure, because it is undoubtedly an underestimate based on the Household Economic Survey, which has severe limitations at the top end.” 

‘The NBR rich list is better’

No Parker speech on tax and wealth would be complete without a name check for Thomas Piketty.

“[Piketty] explained that survey measures of wealth don’t work at the top end because survey questions are too general to burrow into the multiple and complex discretionary trust and private company legal structures used by the very wealthy.

“Questions don’t delve into capital income. Valuation methodologies are inconsistent. 

“And at the top end there is a propensity to understate when making disclosures to government agencies. When I delved into our survey measure, we proved that the highest net wealth ever surveyed in the Household Economic Survey was $20 million. 

“That’s right. The NBR rich list is a better data set than the official statistics. I was not surprised, but I was still shocked. A $20 million max. Really?

“How come, in a country with billionaires, our data set used for policy purposes effectively ignored the wealthiest? It’s not out by a factor of 10 – that would be huge in itself. But that maximum is out by a factor of hundreds. Until recent years most people thought the HES was pretty reliable. In fact it is close to useless in disclosing the wealth or income of the top few percent.” 

Two bowls of goldfish: one is big with lots of lovely plants and only one fish; the other is small and crammed with four fish. Cash is falling into the bowls – loads of notes into the big bowl, a couple of coins into the smaller.
Image: David Aubrey/The Image Bank via Getty Images; design: Archi Banal

‘IRD now have the power to ask for the detail on wealth’

Parker said he learned on becoming revenue minister that the intermediaries holding data on the wealthiest 1% did not provide information to IRD not needed for tax administration.

“They could say ‘all taxes properly payable are paid, so bugger off’.

“It beggars belief that we currently don’t know what rate of tax is paid by the top cohort in New Zealand on their economic income. We do know the rate paid by wage and salary earners, and by small business owners.

“I was advised that the UK revenue department has an information-gathering power for policy purposes. Other countries already collect the information because they ordinarily tax capital income in some way. I concluded we were an outlier. Cabinet agreed. That’s why, in last year’s budget, we moved to address this data gap.

“Parliament conferred this much needed information-gathering power on the commissioner of Inland Revenue here, and Inland Revenue was allocated funds to conduct research relating to the tax paid by the wealthiest New Zealanders relative to their economic income.”

Parker said the work was under way and he aimed to release it before next year’s election.

“While we already have evidence that the wealthy pay lower rates of tax than middle-income earners, no one can tell you how much lower their effective tax rate is. 

“Currently it really is a stab in the dark. Until we have a more accurate picture about how much tax the very wealthy pay, relative to their full ‘economic income’, we can’t honestly say that our tax system is fair. 

“I think the gap will shock some people, but whether my instincts are right or wrong will be proven by the data. 

“It will mean that in the future, our tax policy advice is better informed – whatever the political stripe of the government of the day.”

A law to ensure unfair tax changes are blocked

Parker did the surprising thing of complimenting the political strategy of the National Party, albeit under the now-departed Bill English, in the way the 2010/11 “tax switch” helped frame the debate in a way that change was politically possible.

“While I did not agree with the proportion of that ‘tax switch’ that went to higher-income earners, the way he carried that debate was a master class in the politics of changing the tax mix.”

His attempt to create a framework that forces any change to consider fairness as well as efficiency and fiscal responsibility is to create a Tax Principles Act, which was the other main part of the speech.

“It surprises some who witness the heat of tax debates that there is widespread agreement about core tax principles. These are long settled.

“Adam Smith in his 1776 book The Wealth of Nations laid out four maxims that still hold sway. Successive tax enquiries over many decades in New Zealand and similar countries overseas have all enunciated similar principles.

They all endorse the same principles, based in that most core value of New Zealand – fairness.

The main settled principles are:

–       horizontal equity, so that those in equivalent economic positions should pay the same amount of tax

–       vertical equity, including some degree of overall progressivity in the rate of tax paid

–       administrative efficiency, for both taxpayers and Inland Revenue

–       the minimisation of tax induced distortions to investment and the economy.

New Zealand is renowned for our fiscal responsibility legislation and reporting framework – now in the Public Finance Act. It has served us well.

So do reporting frameworks for child poverty and climate change.”

Parker hopes to table a bill before the end of the year on progress with those principles after wide public consultation.

“They need them to be clear enough to avoid ambiguity, without determining outcomes which are political.

Lots of people have strong views on what tax policy should seek to uphold. Many hold opposing views. The trick will be to find that higher level, common ground from which information can be reported and the debate can be had.

In the context of a tax principles statutory reporting framework, this could mean a set of high-level, general principles in legislation, with a legislated requirement for the government to issue a guiding statement setting out its views on the development of tax policy. Tax policy officials would be required to independently report information relevant to those tax principles.

It could also entail more detailed principles and defined measures in legislation with officials reporting according to those defined criteria with a focus on the data controversies of the day.  For example, it could require officials to report on the progressivity of the tax system.”

So the big tax debate starts again, hopefully with better information.


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