How much is a fair share for business ratepayers?
In an article about the Wellington City Council's proposed budget for next year, Chamber of Commerce Chief Executive Simon Arcus raised "grave concerns" about the proposal to increase the commercial rates differential. So, what's up with that?
What is the rates differential?
The rates differential tells you how many dollars of rates a commercial ratepayer will pay compared to a residential ratepayer. If the differential is 9, then commercial ratepayers pay $9 for every $1 of residential rates. Currently in Wellington it’s 3.25; WCC staff have proposed that this increase to 3.7 for next year.
That sounds pretty stink for businesses.
It would be stink if it meant that commercial rates bills were going up faster than residential rates bills, but they’re not. In the last few months, all properties in Wellington have been revalued for their RV. The residential values went up a lot more than commercial property values.
Okay... So what?
The average rates increase for next year is expected to be 8.2%. Because residential property values went up faster than commercial if we kept the differential the same, residential rates bills would go up by more than 8.2%, and commercial rates would go up by less than 8.2%. Increasing the differential means that a commercial ratepayer with a $20k rates bill this year, would get a $20k + 8.2% rates bill next year.
That makes no sense. If the differential is going up then commercial rates bills must be going up faster than residential rates bills.
You would think so, aye? But that’s math for you.
It makes more sense if you think about the proportion of total rates that are paid by the commercial sector compared to the residential sector. This year the commercial sector paid 44% of the total rates bill. (By the way, that’s the lowest share it's been in Wellington in twenty years.) If we keep the differential the same then their share would fall to 41% of total rates next year, and residential ratepayers would have to pay the other 59%. In real money, that would mean residential ratepayers paying another $8M of rates instead of commercial ratepayers. Instead, WCC staff propose that we adjust the rates differential to keep those shares the same next year, with commercial rate payers continuing to pay 44% of the total rates.
Why do commercial properties have to pay more than residential?
Because commercial ratepayers earn revenue from their businesses they have a greater ability to pay rates than residential ratepayers. Organisations like the Chamber of Commerce and Property Council generally accept that commercial ratepayers can and should pay more, but disagree about how much more. In Wellington commercial ratepayers pay 44% of total rates. In Christchurch the commercial share is 32%, in Auckland it is only 25%.
Is there a good reason why Wellington commercial rates are higher than Auckland and Christchurch?
I imagine the Chamber of Commerce might say no, but personally I think there is. Auckland and Christchurch City Councils include much more of their region’s urban areas than WCC does. Because of amalgamation, the Auckland Council now includes the whole of the Auckland region. The Canterbury region has a population of 624k, and Christchurch City Council a population of 392k. So Christchurch ratepayers makes up 62% of the wider region. The Wellington region has a population of 487k, and Wellington City Council a population of 202k. So Wellington city ratepayers make up 41% of the wider region.
This means that in Christchurch roughly 62% of the customers and employees who use these commercial businesses are also residential ratepayers for that city council. A lot of the people who work, shop, and use services in Wellington come from further out, like Hutt Valley, Porirua, Wairarapa or Kapiti. So aside from user charges (like parking or pool entry fees) they don’t help pay for the roads, or pipes, or parks that they use while they’re in the city. Charging commercial ratepayers (the businesses people come to town for) a bigger share of the city’s rates, pays for the share of the city’s services that are used by those people from out of town.
If Wellington’s councils amalgamated, like Auckland, there would an argument for reducing the share of total rates that are paid by commercial ratepayers. Until that happens, I think in comparison to Christchurch and Auckland our higher commercial rates are reasonable at current levels.