Tuesday, July 08, 2008

Tuesday Column: Take a look at the head office of the ACT Planning Authority

Take a good look.

Next time you go out for a meal at Dickson, take a look at the head office of the ACT Planning and Land Authority.

It’s around the corner, in Challis Street. The sign at the front reads “Dame Pattie Menzies House,” but it should really read “Houses”. The “House” is actually two quite buildings linked by a glassed-in foyer and a thin walkway.

Why was what is now the head office of the ACT planning authority designed that way? In order to comply with the letter but not the spirit of the ACT’s planning rules. Really.

The developer wanted a big building, the planning authority wouldn’t allow it, so the developer instead built two smaller “separate” buildings and then happened to end up with the authority as a tenant.

The ACT Planning and Land Authority works in a building that is a moment to its impotence...

It is also a monument to the way things are done more generally in the ACT.

A few years back the ACT government agreed to give the ANU the first right to use the parcels of government land bounded by Barry Drive, Marcus Clarke Street and Childers Street.

The University is hemmed in by the lake to the south, Black Mountain to the west and Turner to the north. It can only grow east. The arrangement made sense.

At first it worked well. The ANU and a private partner used some parcels to build accommodation for students.

Then the University developed bigger plans that happened to have very little to do with the business of being a university.

It asked for a new parcel, agreed to pay an (undisclosed) price, and then sublet its 99-year lease for 99 years minus one day to the Motor Traders Association of Australia Superannuation Fund.

The MTAA Super Fund is busily seeking tenants – office tenants – for what will be an office block over which the university will have no rights. The prospective tenants include IBM, the Department of Education, Employment and Workplace Relations and the Government Solicitor’s office.

The ACT government - which probably meant well - has been outfoxed again. It has missed out on the revenue that it could have got in an open auction and also lost its ability to properly plan Civic. The ANU and the MTAA must be laughing up their sleeves.

Putting one over the ACT government is easy. It has been for years. Ever since self-government.

The biggest heist took place ten years ago.

These days the ACT has, in the words of the Chief Minister, the “narrowest revenue stream” of any State or Territory.

It didn’t then.

The Constitution required that all of the land on which the national capital was built be “vested in and belong to” the Commonwealth.

Speaking in the House of Representatives in 1903 Sir Edmund Barton made the intention of Canberra’s founding fathers absolutely clear, declaring that “within the area that is chosen the Commonwealth should be the landlord or the proprietor of every square inch of private land.”

Rather than selling blocks of land, the Commonwealth sold leases permitting the use of that land for specified periods of time. Householders were sold 99-year leases (later converted to 999 years) but businesses were given much shorter terms - most of them 50 years.

These leases were set up to be a source of continuing revenue. After the first 50 or so years of Canberra’s life, business leases began coming up for renewal virtually every year. Because the leases were sold and valued in the knowledge that they had an expiry date, businesses planned in the knowledge that they would have to shell out fresh money to buy new ones when they expired.

Canberra economist Terry Dwyer says the Commonwealth was “like LendLease or any other developer collecting the profits and rents of its enterprise”.

But after self-government it became easier and potentially far more lucrative for the tenants to lobby the landlord to let them keep the land for free.

They told the baby ACT government that it was “important for the economy of the ACT that conditions be as similar as possible to the conditions elsewhere in Australia” - apparently oblivious to the conditions in leasehold cities including London and Hong Kong in which seemed to suit business quite well.

The spoke of attracting new businesses to Canberra, but the reality was that extending the leases without charge would push up the price of land for new businesses while handing existing lease-owners a windfall.

The ACT government, led at the time by Kate Carnell and Gary Humphries were prevailed upon to gave away a windfall estimated at the time as worth up to $1.2 billion.

An ANU economist Julie Smith wrote that “present and future ACT citizens will pick up the tab with either a 13 per cent addition to residential rates, or further cuts to health, education and community services.”

She turned out to be right.

Economist Terry Dwyer told the Senate inquiry that that the fledgling ACT government was “giving away its only long-term financial asset”.

He begged it to “put a stop to this nonsense.”

“If a trustee of a private trust disposed of trust land on the terms and conditions set out… he would be dragged into court to be charged with a criminal breach of trust,” he said.

Another witness, Mark Dunstone, said it was as if the ACT government had said to single mothers living in public housing “okay, we will give you the house now, you can stop paying rent”.

It hadn’t. it had said it to business, with whom it was quite close.

Terry Dwyer asked the Senate committee to “inquire into who made representations and what are market valuations of the value of commercial lease renewals.”

The Senate Committee might have also inquired into who made representations to the ACT Labor party. It voted with the governing Liberal Party to give away the ACT’s only unique revenue-raising asset.

Julie Smith described the resulting Coalition as the “Liberal and Labor branches of the ACT Property Party.”

Few people respect the way planning takes place in the ACT these days. And few people who know what happened have sympathy when the ACT government cries poor.

Many of us aren’t looking forward to voting. Things aren’t run well, but its hard to see them being run better.


Published in The Canberra Times ahead of self-government

ACT finances will come from three sources - taxes, grants and borrowings. I do not propose to say much about borrowings because borrowings are not a source of current revenue. Australian Governments are generally coming to the realization that borrowing for current deficits is a dead-end road . The end comes when you have to flog whatever you can to pay your accumulated debts and you still can't pay the housekeeping bills. Borrowing, other than for capital works which will repay principal and interest, is a shifty expedient in Government finance which is best avoided.

Turning to grants, much is clearly outside the ACT's control. We do however need to point out firmly and clearly to the Grants Commission that there are features of the ACT which do reduce its taxable capacity in comparison to the States. Apart from the obvious National Capital functions and the ACT's increasing service role for the South-East of NSW, there are other disabilities such as the high prortion of exempt governmental or diplomatic activity here. Again the ACT suffers more than the States from the Federal monopoly of income tax because of the high proportion of higher income and two income households in Canberra. Many of Canberra's fiscal disadvantages are well set out in the ACT submission to the Grants Commission.

This brings us back to taxes, ultimately the linchpin of any system of ACT finances. What I want to say today is that ACT tax policy should NOT follow blindly the tax policies of the States, that indeed the ACT can build a better and stronger local tax base by NOT doing whatever the States do.

The ACT is a small open economy. Any attempt by it to tax the returns to labour or capital whether directly or through taxes on transactions are likely to fail in the long run. We will simply drive away both jobs and productive investment. We will always be at a disadvantage to Sydney if we try to tax labour and capital as NSW does. We need to do the reverse to untax local labour and capital: to attract labour and capital to Canberra by giving them a better deal than they can get anywhere else in Australia.

What taxes on capital and labour would a self-governing ACT be able to abolish? Four stand out immediately - payroll tax, stamp duties, financial institutions duty and the new petrol tax. There are other candidates for abolition of course. Maybe you too have noticed that your driver's licence renewal went from $25 to $60 and that you now have to pay $14 for the privilege of getting up in the cold to go and take your car through its rego inspection!

But let's start with payroll tax. Payroll tax is a tax on employment in the private sector. It necessarily tends to reduce jobs or wages or both, neither of which we want. The ACT can't levy payroll tax on the Commonwealth and the ACT revenue base is thus smaller than the States'. There is therefore all the more reason to abandon it as soon as possible, if we are serious about Canberra competing with larger cities for job creation and ceasing to be a one-company town. The abolition of payroll tax and the expansion of private sector employment opportunities would also benefit Commonwealth employees through increased competitive pressure on the Commonwealth in the many areas where it is presently underpaying its employees.

The next candidate for abolition is the mass of stamp duties. In regard to land transactions, these like capital gains tax, are taxes on transactions which impede the transfer of land to more highly valued uses. Land is more efficiently taxed through ad valorem holding taxes such as rates or land tax which are more stable.

In regard to commercial transactions, such as share transfers and insurance business, stamp duties in the ACT have a narrower base than in Sydney or Melbourne. If they were abolished, we could see a large influx of sharebroking and insurance business, which would strenghten Canberra's commercial sector and enhance its land revenue base. Before stamp duties were imposed on marketable securities here in the late 1960s, Canberra was developing a flourishing sharebroking industry. Given the advent of computer links across the country and across the world, we could become a major commercial centre. I must say that I personally prefer people to gamble on a stock exchange rather than in a casino - you have a better chance of winning a dividend or a capital gain and your money is doing something socially productive by helping companies employ people or produce goods.

Another prime candidate for abolition is financial institutions duty. It should be abandoned like loan security duty before it. It is not a neutral or non-distorting tax, save in the very restricted sense that there are worse taxes conceivable. Evidence given to the Grants Commission on banking patterns (at page 76 of the final ACT submission) suggests that abolition of this tax would also draw business to the ACT and expand our local economy.

The abolition of FID would complement the abolition of stamp duties: banking, financing, stockbroking and insurance services would all expand together. These are all highly mobile activities and likely to be highly responsive to a favourable tax climate here in Canberra.

That brings me to the last tax I want to mention for abolition for the moment - the new petrol tax. It simply does not make sense for an isolated city like Canberra to tighten the tyranny of distance by raising transport costs. Similarly, it would make no sense for us to aggravate the winter climate by incrasing energy costs through State-type statutory corporation levies.

Well its easy to think of taxes we don't want but you may well ask what will we tax? We do need some source of public revenue. My answer is to tax what can't walk across our borders, tax what does not reduce its supply in response - tax land. The ACT was set up on the leasehold system precisely because far-sighted people, such as Edmund Barton and many others, saw its land rents as a self funding source of local revenue. The Commonwealth was to be like LendLease or any other developer collecting the profits and rents of his enterprise. With self government that sovereignty over land will pass to the ACT Treasury. There is a long history to land taxation and some of you may be familiar with Frank Brennan's excellent little book "Canberra in Crisis" which Dalton's used to have. That book sets out the history of why Canberra was designed to have a land revenue system for its public finances. Land taxation has been supported by economists from before Adam Smith to the present. The reason is basically simple. We can only tax land, labour or capital. Taxing labour or capital reduces work, wages and productivity. Taxing land does not. Land is passive and does not reduce its services in response to being taxed.

A big advantage of land taxation for the ACT is that the ACT will not be able to levy payroll tax or stamp duty or financial institutions duty on Commonwealth financial transactions (e.g. SFIT, Medicare, DFRDB, Trust and Loan Funds) but the ACT will be able to collect rates and land revenues from sites where these commercial activities are carried on by the Commonwealth.

I would also like to draw your attention to the close connexion between land rates and user charges for water, sewerage and electricity. Like curbing and guttering, much of the costs of supplying these - the reticulation systems - are land improvement works . The correct formulation of the "user pays" rule is really "beneficiary pays" and pays in proportion to benefit. To achieve this, a two part charge is required: an annual availability charge, based on land value, to the landholder to pay for the costs of the reticulation systems and a consumption charge, based on unit flowthrough, to be paid by the user or tenant, which will pay for the costs of dams or bulk electricity purchases etc. The current system in the ACT departs somewhat from this principle. Electricity users are being charged for capital works for tomorrow's consumers and sewerage rates are based on flushing units: the number of toilets however bears no real relation to either the enhanced value of a sewered block nor the number of times you push the button.

In closing, I want to emphasize my major theme here today that it is crucial for a self-governing ACT to tap its land revenues - including land owned or tenanted by the Commonwealth. Apart from the Parliamentary Triangle, the Commonwealth must pay the same land rent, land tax, land rates, water, sewerage etc rates as any other business in the ACT. Using land revenues we can then proceed to abolish taxes on capital and labour which destroy jobs, lower wages, employment and living standards. By making the ACT a haven from senseless State taxes, we can ensure that Canberra grows lustily. It's time the bush capital showed a lead.