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Consultation on alternative options to fund Fire and Emergency New Zealand (FENZ) instead of the levy on insurance will get underway soon. Readers will be very familiar with the arguments to do this including free-riding, unfairness, reducing the incentive to insure as well as the cost and complexity of collection.
Lately, removal of the levy stands out as one of the options to help relieve the impact of some of the premiums increases in Wellington on commercial property.
Minister Tracey Martin, who has responsibility for FENZ, says she wants a clean slate approach to funding FENZ. She wants any new funding arrangement to be stable, universal, fair, and flexible. Although the current tax on insurance fails those tests, it is understood that officials want to explore how to improve the current levy system in case a decision is made not to shift it from insurance.
It will be challenging to submit on how to improve a system that should be dispensed with. The focus must be to argue for a principles-based approach, rather than a functional ‘tidy up’.
The Minister has called out four principles and there is no quibble with them. But there are others that should be considered.
There are well established principles for designing a tax that must be part of the mix.
Good tax policy ensures the deadweight cost of collection is kept at a minimum. Linked to this, taxes should also be simple to apply, so taxpayers understand the rules and can comply in a cost-efficient manner. The FENZ levy collection is more costly and complex to collect than either direct taxation or via the rateable property base.
Those paying the tax should know the tax exists and how and when it is imposed on them. Many homeowners and motorists would be oblivious of the FENZ levy tax rules and obligations. FENZ does not attend motor accidents to protect cars.
It’s also important that the revenue yield can be readily calculated from a known stable base. The insurance base is in constant change.
Taxes should avoid creating distortions. One of the consequences of attaching a fire service levy to commercial property on an uncapped basis in high risk regions is that it magnifies the total cost of insurance. This can contribute to unaffordability and lead to decisions to under-insure.
Taxes should minimise non-compliance. Insurance is not compulsory.
On the principle of fairness, similarly, placed taxpayers should be taxed in a similar way. Also, the revenue base should include all entities with common risks. But only property owners that insure fund FENZ.
The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum. Yet, many attempts have and continue to be made to construct ways of minimising levy obligations. Again, general taxation or rates are unavoidable.
Some dimensions to having a fair tax would, if applied to insurance, make collection of the FENZ levy much more costly and complicated. One principle is that entities with different risks should be treated differently or entities should be assessed according to some proxy for wealth.
These are some of the tax principles that need to be considered. There is no doubt that funding FENZ from general taxation ticks the box for fairness, simplicity, cost-effectiveness and minimises distortion. The question is whether there is a political will to do something.
We can see the challenge of adding $600 million of FENZ costs onto Crown expenditure, but it could be phased in over time. It is the right thing to do. The levy on motor vehicles could pass to the vehicle registration system in the way that ACC vehicle levies are collected. This would barely be noticed.
