Talking about local government in New Zealand nearly always comes back to one word: rates.

I was at a Labour party event earlier in the year, where party members asked a panel of current and potential council representatives questions about the upcoming local government election. There the conversation about local government funding in New Zealand (as it does nearly everywhere else) often revolves around the topic of rates. You can hear what I said here.

For residents of Porirua, like many across the country, understanding how our council is funded, and why those rates’ notices arrive, is a perennial point of discussion. Porirua City Council, for instance, reported an operating income of over $126 million in 2023, mostly (think about ⅔) derived from property rates.

It's hardly a straightforward system, and putting it in a snappy social media post or video, let alone trying to explain it in a pub on a Friday night is bloody tricky. That said, I have never put my 2c on this down all on paper, so I am going to do this as a “go read this” approach.

And to be absolutely honest, knowing the problem is one thing, solving it is another. I’ve seen some suggestions like GST off rates, and while it is a simple notion, it isn’t really going to lick the problem. 

So let's start with the status quo: Councils like Porirua are heavily reliant on rating properties, and face increasing pressure from rising costs, aging infrastructure, and growing community expectations (e.g. water quality). This is where I say capping costs to "inflation" is such a fatuous notion that I may have to write yet another long form blog post...I will save you the pain for now.

But here is a scenario that people don’t normally think about: a thriving local business, say, a shop in Porirua's North City Shopping Centre, could double its sales and customer numbers, yet its direct contribution to the Porirua City Council's operating income through rates wouldn't really change.

This creates a disconnect. While councils provide essential infrastructure and services (like roads and for now water) that facilitate economic activity, and even directly invest in events or (in very rare circumstances) urban development (an example would be Te Rauparaha Arena - I wasn’t on council when the decision to build this was made but if I had to guess, it was also to help incentivise healthier living in the city) to stimulate growth, they don't directly benefit financially from the increased economic vibrancy itself. The GST generated from those booming retail sales, for instance, goes entirely to the central government…the council gets nothing.

This raises a fundamental question: should councils be more directly incentivised by local economic performance? My feeling is that Councils do invest in economic development already:providing public utilities, maintaining infrastructure and financially supporting events.

Nevertheless, without a clear, calculable return in their own revenue linked to broader economic activity, making prudent (as defined in the Local Government Act) investment decisions for economic growth can be challenging, as the benefits will never be reflected in the council's books.

So, are there better ways for alternative funding as part of a more diverse, stable, and equitable revenue stream model for councils?

I want to show three hypothetical scenarios for how Porirua City Council (and others) could potentially receive revenue, discussing the implications of each.

Now before I go any further a word of warning. I am not a trained economist, accountant, nor tax lawyer, and the scenarios used here are completely hypothetical, but it helps if I can provide some context to chew through this. 

Also, get a cuppa before you go any further, this is going to take a while to read. 

1. Direct Retention of GST from Rates and Charges

One of the more frequently discussed proposals involves councils retaining the Goods and Services Tax (GST) they collect on rates and various other fees and charges. Currently, councils act as collectors of this GST, which is then remitted to the central government (the Crown). The argument from Local Government NZ is that this GST should remain within the local economy.

For Porirua City Council: A look at the recently passed Annual Plan showed the projected GST related revenue of approximately $132 million for the 2024/25 financial year, so the 15% GST component would equate to roughly $19 million NZD.

The Upside:

• Direct Money: It's money coming directly from services councils already provide and collect for. Some councils might think it feels like "their" money that they're currently just passing on.
• More Funds: Councils keeping it would give them a good financial boost, meaning they might not have to hike rates as much.

The Downside:

• No Growth Incentive: This money just comes from the rates the council sets. It doesn't give them a reason to help local businesses grow or attract more shoppers. If a business booms, the council doesn't get more from this source.
• Same Old Problem: It doesn't fix the basic issue that council income is (mostly) linked to property values.
• It Could Make Things Worse: If a council wanted to get more $$$ back then all they need to do is increase higher rates or charges…there is no incentive to keep costs down, in fact it would become a disincentive.

2. A Share of the GST Pūtea (Per Capita Distribution)

This scenario proposes that a fixed percentage (e.g., 1% or 5%) of the entire amount of GST taken in across the entire country be allocated (by IRD)  to each local government (to be clear, we are talking territorial and unitary authorities, so not regional councils). This collected amount would then be redistributed to individual councils on a per-capita basis, meaning each council receives a share proportional to its population.

For Porirua City Council (based on 2023-24 GST revenue of $29 billion and 2023 census populations):

• 1% Scenario:
  • National pool: $290 million NZD
  • Porirua's share (approx. 1.19% of NZ population of 5 million, based on Porirua's population of 59k): $3.4 million NZD
  • This represents about 2% of PCC's 2023 operating income.
    
    
• 5% Scenario:
  • National pool: $1.4 billion NZD
  • Porirua's share: $17 million NZD
  • This represents about 13% of PCC's 2023 operating income.

The Upside:

• Broad Economic Incentive: Councils indirectly benefit from a stronger national economy. A larger national GST pool means bigger allocations, providing a broad incentive to support national economic development.
• Equitable Distribution: Funds are distributed based on population, ensuring all councils receive a baseline share. This can foster more equitable service delivery across regions, regardless of local commercial density.
• Stability: Revenue is tied to the (relatively) stable national economy, reducing vulnerability to volatile local economic fluctuations.

The Downside:

• Weak Local Economic Link: Councils that excel at fostering local economic activity (e.g., attracting new businesses) won't see a directly proportional increase in funding. Strongly performing regions might feel they're losing out.
• Central Government Revenue Impact: This directly reduces the revenue available to the central government. Giving up potentially billions in revenue isn't a cost-free decision for the Crown.

3. Local Sales Incentive Rebate (LSIR) - GST from all Local Economic Activity

This model suggests that councils would receive a percentage of the GST generated specifically within their Territorial Authority area from all economic activity: retail sales, services, manufacturing, etc., not just council charges. Inland Revenue (IRD) possesses the underlying data for this already, as all GST-registered businesses are linked to a geographic address (even if it is a Private Bag or Post Office location).

For Porirua City Council: So this is more challenging to illustrate, so we are going to make some big assumptions here.

According to Infometrics' Regional Economic Profile, Porirua City's Gross Domestic Product (GDP) was approximately $3.3 billion NZD in 2024. GDP measures the value added from the production of goods and services within the city.

To be clear, GST is a consumption tax, not directly a tax on GDP. However, it applies to a significant portion of economic transactions.

• Let's assume that a significant portion of a city's GDP (e.g., 60-70%) reflects activities that generate GST, or that total GSTable consumption broadly correlates with local GDP. For a conservative illustration, let's use 65% of GDP as a proxy for the value of local economic activity that generates GST.
  • $3.317 billion (Porirua GDP) * 0.65 = $2.156 billion (Estimated GST-generating activity)
• If the council were to receive a share of the 15% GST generated on this estimated activity:
  • Total potential GST generated on this activity: $2.156 billion * 0.15 = $323.4 million.
  • If the council received 1% of this total GST generated locally, it would be approximately $3 million NZD.
  • If it were 5%, it would be approximately $16 million NZD.

This indicates that while the LSIR model could provide a substantial boost, its size is directly dependent on the economic output of the council area: large retail centres, thriving industries, or significant tourism would see much larger returns than those with more residential or less active commercial bases.

Pros:

• Strongest Direct Economic Incentive: Councils would have a direct financial incentive to foster a vibrant local economy, attract businesses, and boost consumer spending, as these activities directly increase their revenue. This directly addresses the current disconnect where increased local economic activity doesn't directly translate to more council funding.
• Direct Reflection of Local Prosperity: Funding directly reflects the economic dynamism of the specific council area.

Cons:

• "Rich Get Richer" Effect: Economically robust areas (e.g., those with major retail hubs or thriving industries) would generate substantially more GST, leading to higher LSIR allocations. This could exacerbate existing disparities, making it harder for less economically diverse or struggling regions to fund services. This probably isn’t the biggest concern of a single council, but from a nationwide perspective it should be a concern.
• Volatility ("Yo-Yo" Effect): LSIR returns would be highly susceptible to local economic downturns, industry-specific slumps (consider shocks like the end of oil and gas exploration, or native logging), or shifts in consumer behaviour (e.g., increased online shopping). This creates significant budgeting challenges for councils, who need stable, predictable funding for long-term planning and infrastructure.
• Central Government Revenue Impact: This would mean a direct reduction in revenue for the central government.

Mitigation Strategies (Drawing on Overseas Examples): To address the "rich get richer" and volatility concerns of an LSIR model, or to enhance the equity of other models, approaches from other countries could be considered:

• Equalisation Funds (which is used in Australia): A portion of central government revenue is pooled and redistributed to sub-national entities (states/territories) based on their fiscal capacity and need, aiming to ensure all can provide a similar standard of public services, regardless of their own revenue-generating ability. This helps balance disparities.
• Revenue Smoothing: Implementing rolling averages (e.g., over 3-5 years) for LSIR calculations can dampen short-term fluctuations and provide greater predictability for budgeting. This would mean a longer lean in time, and there would need to be political support on this. 
• Hybrid Funding Models: Combining different approaches, such as a base per-capita grant plus a growth-sharing component, or an LSIR with a minimum guarantee from the central government.
• Fiscal Capacity Grants: Providing additional support to Territorial Authorities with lower revenue-raising potential to ensure a baseline level of service delivery.

Let’s recap the options:

No matter how you do this, it is a big call that only the beehive can make.

The current revenue system for local government in New Zealand, heavily reliant on property rates, is increasingly recognised as not fully equitable or sustainable for the demands placed on councils. The lack of a direct link between a city's overall economic performance and its council's revenue is also a fundamental challenge.

But trying to pick a different approach means choosing from options with their own set of advantages and challenges. Nevertheless, a big challenge for any of these options is the impact on central government revenue. If a portion of GST, currently totalling billions, were redirected to councils across the country, the Crown's overall revenue would diminish. This presents a significant fiscal and political hurdle, as central government would need the fortitude to implement such a substantial shift in public finances. A government might think “we could use that for a tax cut” or “we could spend that better on healthcare or education”.

At the same time, the public’s trust and confidence in the ability of local councils to charge fairly and get value for money has been shaken badly after three waters (and i’m not just talking about Wellington). It would be hard to see how a government would want to go down this path without a reform of the role of local government, in an attempt to build public confidence. 

Any transition to a new funding model would undoubtedly need to be phased in over time, rather than implemented abruptly. The goal would be for these new measures to be revenue neutral for ratepayers in the short term, meaning property rates would not have to increase as sharply, with any new revenue sources offsetting any overall increases in spending.

But perhaps the elephant in the room is the very nature of taxation. While GST is generally considered a regressive tax (disproportionately affecting those on lower incomes, who spend a larger percentage of their income on essentials or as the economic books might describe as “inelastic costs”), the current reliance on property rates also has its equity challenges. Property rates can effectively act as a property tax, but they also disproportionately impact "asset rich, cash poor" households, such as long-term homeowners on fixed incomes or those with low liquidity – who may struggle to pay increased rates even if their property value has soared (relative to other households in the same city). It gives me no joy to talk about these as options, because they might spread the burden across more sources of income (and help councils make better informed decisions about the economic impacts), but the structural issues of regressive taxation still remain.

It's also worth noting potential secondary impacts. If a shift in funding reduces the reliance on property rates, landlords might see a decrease in their outgoings. However, the expectation that this would automatically translate into lower rents for tenants is often met with skepticism…

Ultimately, improving the financial resilience and fairness for councils like Porirua requires courageous policy decisions from Wellington. 

It's not a simple fix, but here is my final word for you in the meantime: you want to make sure that those who are making these decisions (which includes anyone around the Porirua City Council table) have some understanding of these complexities (and can competently answer the question, what happens next?), because the consequences of inaction are intolerable in the long term.

OK, if you made it this far, well done. Go for a walk or something. This felt like writing an essay for an economics paper. I hope I pass.