The government recently ruled out a ‘bed tax’, which raised the hackles of Auckland mayor Wayne Brown, who said the proposed revenue-gathering tool was actually a levy. Is he right, and should we care?     

In line with National’s “no new taxes” campaign fixation, in late August Christopher Luxon ruled out implementing an accommodation levy if his party was re-elected. Auckland mayor Wayne Brown was “deeply disappointed” at this decision, not only because he felt it undermined the recently signed city deal, but because he reckoned what’s commonly described as a “bed tax” is in fact “not a tax”. “Taxes are unavoidable but the bed night levy is avoided by simply not staying in paid accommodation,” he wrote in the Herald.

Is he right? Does it matter? Confused? Fair enough. Let’s ask some experts.

Right, what’s the difference between a tax and a levy?

Tax specialist Terry Boucher says in the eyes of tax law, there isn’t one: the Tax Administration Act 1994 defines a tax as meaning a tax, levy or duty of any type imposed by tax law, regardless of how the tax, levy or duty is described. But while a tax is universal and applies to nearly everybody, like GST and income tax, a levy is more targeted and the revenue is ring-fenced. “What we call, in tax terms, hypothecated.”

OK, so taxes and levies aren’t the same thing.

But they’re easily confused. “There’s a lot of similarities,” says Geof Nightingale, an independent tax consultant. “They are both collected with government compulsion, so they’re not optional, and they both go to fund government activities.”

He likens the subtle difference to “dancing on the head of a pin”. Unlike broad-based tax, levies are “focused on a particular pool of people who are involved in a particular activity that the levy funds”, explains Nightingale. They’re generally more transparent, in that the people paying them know what they’re funding.

This distinction between broad and targeted is the main difference. “But it gets pretty blurry at the margin.”

So calling the bed levy a “tax” is inaccurate?

Correct. The proposed format was a nightly surcharge on hotel stays and targeted tourists, which sounds a lot like a levy (because it is).

New Zealand already has a tourism levy, which National has just proposed “resetting”. The International Visitor Conservation and Tourism Levy is imposed on overseas tourists, explains Sandy Lau, a tax expert with PWC. It’s intended to support tourism and conservation-related expenditure. “A levy tends to have a closer connection between the people or activity being charged and what the money is intended to fund.” Although this does not mean every levy is “strictly ring-fenced dollar-for-dollar”, there is generally a clearer link between the charge and the purpose than there is with general taxation.

What about tariffs and duties?

Globally, these have become quite popular. Even Aotearoa has some. Although most goods enter the country tariff free, some, like anchovies and particle board, require importers to pay a 5% rate on the value of the goods to the New Zealand Customs Service. This might sound like a tax, but there’s no mention of the word tax in the Tariff Act 1988. Instead, it uses the term duty to refer to the money that must be levied (there’s that word again) and paid on certain goods. (Tariff is usually used to refer to the broader framework or policy, while duty is the specific monetary amount.)

“A duty is essentially a particular type of tax,” says Lau. “Like other taxes, revenue from duties is generally not hypothecated.” The term is usually applied to certain goods or transactions, like customs duties on imports. Excise is another word for it.

Like the excise on cigarettes?

Exactly. That generated $1.47 billion in tax revenue last year. Although tobacco excise is designed to influence behaviour and reflect wider social costs, says Lau, it isn’t ringfenced like a levy. The revenue goes into the government’s main pot.

What about fuel tax?

This one’s a bit less cut and dry. Although the petrol excise duty has shades of a levy, it’s “really a tax”, according to Nightingale. (Increases have been postponed until at least 2028.) It’s collected at the point of sale (the petrol pump) and goes into the Land Transport Fund, administered by the New Zealand Transport Agency, which actually makes it “sort of a hybrid”, says Nightingale.

It’s not the only revenue the government collects via the petrol pump. There’s also the Local Authorities Fuel Tax, Petroleum or Engine Fuel Monitoring Levy and the ACC Motor Vehicle Levy (which is also paid through your car rego).

Wait, don’t I pay an ACC levy already?

Yes you do, either via PAYE or, if self-employed, directly to ACC. It’s mandatory for all workers, but only tax deductible for employers.

These payments are a good example of the difference between a tax and a levy, says Boucher. “They’re quite universal, they’re a compulsory levy, but they are hypothecated.” The revenue goes directly to ACC and it’s used for accident rehabilitation compensation.

But it’s not a tax?

Correct.

What about Auckland’s proposed congestion charges?

Not a tax. Not a levy either. They’re a form of user charge, which is the third revenue stream for the government. These are very specific, like paying at a public pool. “It’s a charge for a service,” explains Nightingale. “The key thing is that levies and taxes are collected by compulsion, and user charges are not.” (At one point Wayne Brown described the bed levy as a user charge.)

And rates?

“Rates are a form of tax,” confirms Nightingale. They’re framed as a payment for services and sharing the cost of councils, “but it’s just a form of tax, really”.

What about service fees on tickets? They’re mandatory and I hate those too.

Look, you didn’t buy your Bruno Mars ticket from the Ministry for Business, Innovation and Employment (which helped fund the concert) now did you?

True. And only the government can collect tax, right?

Yes, in the literal sense. “Tax is a thing that either the central or local government collects,” confirms Nightingale. There is one exception: the parlance of criminal activity, like protection rackets. “But that’s an informal use of it.”

Gotcha. So, is it all just semantics?

Kind of. And personal choice. “You can’t really avoid paying income tax because we all need an income,” Nightingale explains. “You could avoid paying excise duties on petrol if you didn’t drive anywhere.” However, he points out some levies are unavoidable, like ACC is for workers, so a lot of it comes down to semantics.

Boucher predicts more “absurd distinctions” as governments attempt to gather revenue. He says differences between tax, levy and duty are subtle and “a lot of it is political”.

Does what we call them matter?

Yes. Lau thinks that while the terminology may not matter greatly to the person paying it, it does matter from a policy perspective. “It can tell you who is being charged, why the charge is being imposed, and whether the revenue is connected to a particular purpose.”