1 July 2004

United Future's 'GST Off Rates' Campaign Misguided

"United Future's proposal to remove GST from rates is bad public policy and anti-business", Roger Kerr, executive director of the New Zealand Business Roundtable said today.

Mr Kerr said local authority rates are subject to GST because they are treated like a price for the supply of goods and services. There are two main reasons for this treatment.

First, if local authorities were exempt from GST they would be tax-preferred relative to private businesses. This would mean an unlevel playing field when council activities compete with the private sector and would discourage contracting-out of council services.

Secondly, if GST were applied only to goods and services that are charged for (eg trading activities), as opposed to those that are not (eg genuine public goods), there would be complex boundary problems. Hence the best approach, supported by an expert tax task force in the 1980s, is to apply GST to all council supplies of goods and services, including those funded from rates.

If local government rates were exempt from GST, local government would not be permitted to claim a credit for GST paid on its inputs. Councils would only benefit significantly if they increased their rates. Why should they be encouraged to do so?

Central government would lose substantial revenue which would have to be made up by increases in other taxes, most likely by increasing marginal rates of income tax. This would be harmful for economic growth.

"The most important plank in United Future's tax policy has been its stated desire to move toward a more uniform income tax scale. This is in line with the recommendations of the Tax Review 2001 and the views of business organisations. The 'GST off rates' campaign, together with other tax proposals from United Future, such as tax concessions for savings and income splitting, is inconsistent with the goal of a flatter tax scale and misguided", Mr Kerr concluded.

ENDS

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