How fair is ‘User Pays’

The principle of user pays is eagerly directed at as many council services as possible by those who seek to relieve property of rates, thereby increasing land values.

If you don't want people to use a general community service, put a charge on it.

User charges lead to inefficient unintended consequences. For example, a service charge on a refuse dump might lead to its non-use, and people throwing rubbish all over the municipality. Council is then forced to embark on a campaign against rubbish dumping. All ratepayers bear the cost; which is inefficient.

Service charges should be restricted to the small and remote services that councils provide. They should not be relied upon as a major source of revenue. They lead to the restriction of services and limited hours.

Who should pay for the Municipal services?
According to the advocates of ‘user-pays’, the only consideration is: “How much do we need to pay the bill, and how many are there to pay it?”

What has been forgotten in the rush to embrace “user pays” is that the correct economic prescription is “beneficiary pays”. Where an asset such as a dam or reticulation system adds value to land both now and in the future it is sensible, rational and optimal to eschew up-front user charges (on young homebuyers, for example) and use loan finance with the loans to be amortized by rates charged on the value of the land benefited by the infrastructure. This simple approach was the basis of Australian local and semi-government finance for decades.

The true principle of municipal rating is that all citizens should contribute to local revenue on the basis of benefits received from local expenditure. That is, the cost of services should be shared between property owners in proportion to the value given to each property by the services made available. The ideal would be for a local authority to receive the additional income directly associated with the benefit.

The question:
"Is a rate on land the most appropriate method of financing the services which councils are authorised to provide, and if not, how should they be financed?"

was answered by the New South Wales Royal Commission on Local Government Finance and Valuation, 1967. It gave a clear-cut answer:

“A rate on land is the most appropriate method of financing the services which councils are authorised to provide under the Local Government Act.”

One of the injustices of the user-pays system is that both tenants and freehold owners pay for services. While both tenants and freeholders pay for council services, those services increase land values, and freehold landowners gain a benefit that a tenant cannot. The gap between ‘haves’ and ‘have-nots’ will be opened wider in a ‘user-pays’ system.

Properties which are exempt from rates or are subject only to service charges are subsidised by other properties. They receive an unearned capital gain on their property, receiving a benefit at the expense of other members of the community.

In New Zealand, direct charges, user pays and uniform annual charges have reduced rating on land value from about 80% of local government revenue to about 40%. But the lower rates have contributed to higher land values.

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Developer levies
A disturbing tendency has been the increasing resort to upfront user charges or developer levies to finance the cost of infrastructure which benefit more than the immediate user in space or time. These charges increase the price of land, making it harder for first-home buyers to get a start. In turn, this has a dampening effect on economic activity.

Land Value Rating will allow the collection of sufficient funds to pre-finance subdivision infrastructure, and then to collect rates progressively in favour of the rest of the community - recovering the community-created land value to pay for council services available to all.

Infrastructure is a core function of local government that has a direct cost/ benefit reflected in land values. The capital cost should be recovered from the land values enhanced, rather than be privatised. That would provide a natural, ever-increasing fund of money to pay for additional facilities, with each project providing the funds for the next service.

Water use is a hot topic, but the debate must be framed by a recognition that water (like land) is a natural resource, freely provided by nature. Ideally, it should be free to all users. But there is a limited amount of water in many municipalities.

Water is provided through infrastructure, which adds value to each site. That should therefore be paid for through Land Value Rating. Wherever a shortage of water exists, an agreed allocation of water per household may be necessary, and paid for through Land Value Rating; a charge could then be made for excess use above the agreed allocation.

Rates are, in fact, a payment according to the value given to the site by the community, as distinct from the effort of the individual holder. This added value is closely linked with the services available to the site, whether they are used or not.

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