David Spearritt - Maximising Own Source Revenue
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Transcript David Spearritt - Maximising Own Source Revenue
Maximising Own Source
Revenue
David Spearritt
Orion Consulting Network
Outline
Concepts & philosophy
Main types & use of OSR
Rates
User fees
Recoverable works/sales
Investment income
Famous Quotation
“The art of taxation
consists in so plucking
the goose as to obtain
the largest possible
amount of feathers
with the smallest
possible amount of
hissing.”
Jean Baptiste Colbert, Finance
Minister to Louis XIV
Implications
To maximise Own Source
Revenue (OSR)
Eg. Maximise feathers
Need to minimise hissing
Another Quotation
“The State is an elaborate fiction, where everyone tries to
live at the expense of everyone else” (Bastiat, 1700’s)
Most ratepayers’ concept of equity is for others to pay, not
them
Revenue Items as % of OSR (2010)
Revenue source as % of own-source revenue
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Net rates and
utility charges
Fees and
charges
Sales contract and
recoverable
works
Interest
received
Rental income Other recurrent
income
Revenue Items as % of OSR (2010)
(Profit only from Sales/Recoverable)
Revenue source as % of own-source revenue
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Net rates and utility
charges
Fees and charges
Sales - contract and
recoverable works (profit)
Other
Same Story per Capita
Revenue source per capita
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
Net rates and utility charges
Fees and charges
Sales - contract and
recoverable works (profit)
Other
Philosophy
People prefer to pay for services they receive rather than
general taxes (general rates) (Less hissing)
Make as much of revenue service-oriented as possible, and
minimise general rates
1. User fees & recoverable works
2. Investment returns (incl Dividends from BU’s)
3. Utility charges – water, sewerage, waste
4. Benefited area/service rates
5. General rates
Benchmark with others
Full Cost Pricing
Spearritt & Chalk Findings
Land Value taxing best for general LG Revenue
Shift from UCV to Site Value (land improvements now
accident of history, poor data etc)
User Fees/Utility Charges based on benefit principle
better wherever possible (minimise reliance on general LV
tax)
Need to improve payment and discount arrangements to
minimise ultra-visibility
Utility Charges
Rates other than General Rates
Utility Charges –
FCP with dividends offsetting urban general rates
Increases component of rates based on services received
Benefited areas
(Special and Specific Rates)
Eg. Roads levy
Also reduces land valuation volatility
Equity – Benefits Received
Benefit Principle
Often called ‘user pays’
Rates partially related
to service levels
Council roads and
facilities increase UCV
UCV also affected by non
LG factors (views/ other
facilities)
Benefit area rates
,Utility Charges & User
fees better linked to
benefits
General Rates
Rates Disconnect
Main function funded from general rates is roads (Qld)
Property tax funds roads, when fuel & road levies are available
No wonder rates are hard to understand
Need cause & effect relationship to moderate demand for services
higher services = higher rates
Benefit principle helps
Ken Henry Taxation review
Medieval Euro/UK roads funded by toll-gates
Road levies poor alternative to proper road pricing
Ability to pay
Capacity to pay = income levels
Ability to pay = all wealth
Rates not related to cash income (not an income tax)
Property wealth undertaxed in Australia
Dilemma of asset rich/income poor ratepayers (benefit
really goes to wealthy heirs)
Pensioner deferral v remission
Different Equity Definitions
Ability to
Pay
Benefit
Principle
Equity Dilemma
Rates on LV are
part benefit related,
part ability to pay,
but no strong linkages
No other tax is expected to be benefits related, and
many are not based on ability to pay.
Why are rates expected to be both??
High visibility creates this pressure
Tax Visibility
Most taxes are now relatively invisible
PAYG, GST, Fuel taxes etc
Rates are the only large, regular tax which requires an
out of pocket payment
Many ratepayers have to save up the money to pay the
rates
This creates question of what they get for it
Most visible services also
Same question not asked about much higher income
taxes
Ratepayer Complaints
Rates as a Growth Tax
Rates Visibility:
A big, ugly, in-your-face tax ,
versus
Other levels of Govt have stealth taxes
High visibility of property tax limits growth unless linked to
service levels
Understandability
Visibility
Other Bills Frequency
Bill Type
Change in frequency
Electricity & Gas
Quarterly
Phone
Monthly or pre-paid
Insurance
Full flexibility
Adjustment Devices
Device
Theory/Purpose
Differential Rates
Benefit & Ability links
Special & Separate Rates
Benefit Principle
Banding
Reduced benefit link with higher valuations
Minimum Rates
Minimum Benefits
Valuation averaging
Visibility of changes
Capping increases
Visibility of changes
Greater Billing frequency
Visibility
Payment arrangements
Capacity to pay
Alternative payment methods
Visibility & capacity to pay
Pensioner remissions
Capacity to pay
Adjustment Device Trends
Most adjustment devices improve benefit linkage or
reduce visibility (easier payments)
L-G Rating Dilemma
Rates are becoming more benefit oriented (user pays)
BUT
Can only ever be a second-best proxy for fees for service
Do We Have Rates on LV?
49% of rate bills in Qld are general rates on LV
But 45% of general rates = minimum rates
Only 1/4 of rates in Qld are exposed to LV
Rates Understandability
Toowoomba Overview
8 Councils into Toowoomba RC
60+ Diff rating categories + other levies
8 different rating approaches
Approach
Checked sector capacity to pay/revenue effort – reference
to taxable income of towns/agricultural production etc
Across region categories based on service impact/level
(Benefit Principle)
Community support – equalising similar properties, not
equalisation with Tmba City
Rural Categories Concept
Low Intensity
Grazing etc
Low roads impact
Medium Intensity
Broad acre farming
Average roads impact
High Intensity
Feedlots and Piggeries
High roads impact
Urban Rates
Variety of service levels in various towns vs Toowoomba
City
UCV only partly reflects Council service benefits
Developed hierarchy of urban areas
Toowoomba City
Toowoomba Environs
3 Major Towns
Smaller Towns
Remote Towns
Cross-checked to taxable income of each town
(Capacity to Pay)
General Rate Relativities by Town Size
100%
90%
80%
70%
60%
WDRC
50%
TRC
Qld Average
40%
30%
20%
10%
0%
Large
Medium
Small
Very Small
Modelling
Strategic
Macro
Micro
Modelling Levels
Strategic (Orion)
Cost & Benefit relationships
Capacity to pay (taxable incomes/rural production)
Macro (Orion)
Revenue generations
Sector impact analysis
Micro (Council & IBIS)
Detailed property analysis
Identification of anomalies
Data cleansing
Phase-in tools analysis
Phasing In the Changes
3 year time-frame
Front-end loaded
Phase-in methods
Valuation Averaging (3 years)
Increase capping (high level eg. 30+%)
Price paths (by former area)
Extracting Rates from Extractives
Huge wealth generator
Impact on Council facilities & services
Social impacts
Usually low UCV (eg. grazing lend purchased)
Paying much lower % of turnover than other industries
(Acland $1m, 2% = $12m)
QG 10% royalty = $60m
General Rates
Benefit Principle –
Often called “User Pays”
Rating categories based on service levels
eg. Intensity of agricultural activity (Toowoomba)
Shopping Centre size (GFA)
Heavy industry (road damage)
General Rates
Ability to Pay
Can only assess the ability of the land to generate income
from which to pay rates, not the ratepayer
Land Value poor measure of economic activity from which
to pay rates (See graph)
Top-down – Rates as % of GRP by sector
Rental Properties (non-owner occupied now validated by
law). 30% Commercial Tax Deductibility equiv to 43%
higher rates
Workers accommodation – on a residential worker
equivalent basis
Max Feathers , Min Hissing
Minimise visibility
More frequent/convenient payments
Improve understandability
Rationale for rating policy
Seen as equitable
Links to benefits/costs
Ability to pay
User Fees
Fees & Charges
From 5 to 20% of OSR
Huge revenue opportunity for many Councils
Cost recovery & commercial fees
Can recover on full cost pricing basis
Costs include all of that regulatory regime (eg dog
control)
Corporate overheads
Under recovery means subsidy by gen ratepayer
Fee Model Concept
Council-wide Information
Individual fees
Cost compilation
Fee Model Features
Activity Based Cost modelling (labour related)
Cost recovery graphs, Council Section reporting
Calculates
staff productivity,
Revenue generated,
GST (if applicable)
Prints –
Customised reports
Schedules
Annual update – just budget update & review transaction volumes
Sales/Recoverable Works
Sales/Recoverable Works
Really should only treat the profit (eg
TMR 6%) as Income
Watch out for risks – why should
ratepayers subsidise Government or
private
Risk of payment delays and disputes
Matrix of cost items to unit rates (eg.
Orion model)
Negotiate variable contracts with
workloads (eg $ per area cut, rather
than annual fee) so Council bears less
risk
Good documentation to support
invoices is critical
Investment Income
Investment Income
Dividends from Business Units
Income from cash investments
Rental income
Some SEQ Councils getting considerable returns from
Water Businesses
Dividends & Tax Equiv payments
Subordinated debt
Working capital loans
Summary
Opportunities to increase OSR
Greater use of fees & charges (user pays – FCP)
Greater use of benefit-based rates
General rate categories either benefit related or related to
ability of land to generate income
Use adjustment devices to minimise visibility or improve
understandability of general rates
Well managed - recoverable works & sales
Investment revenue incl Council Business Activities
Contacts
David Spearritt
[email protected]
1300 767 466