The group recommends including agriculture in a more tax-like emissions pricing scheme, introducing a nitrogen tax and taxing those who pollute and extract water, though it concedes establishing a mechanism to do that is problematic.
The report says more work is needed to develop tools to more accurately estimate diffuse water pollution and extraction but in lieu of such a system it recommends a general fertiliser tax.
It also recommends expanding the waste disposal levy but has ruled out a land tax.
Farming will also be caught by the group’s proposed extended capital gains tax, expected to raise $6 billion by 2030-31, though the farm home and up to 4500 square metres around it will be exempt.
An extended capital gains tax is projected to raise close to $500 million in 2021-22 with the rural component contributing about $80m of that but rising to about $700m in 2030-31.
New Zealand generates $5b a year from environmental taxes, ranking it 30th out of 33 Organisation for Economic Co-operation and Development countries based on its 6.2% share of NZ’s total tax take.
“There are clear opportunities to increase environmental taxation, both to broaden the revenue base and to help address the significant environmental challenges we face as a nation.”
Policy makers are urged by the group to consider new taxes, such as an environmental footprint tax – a modified form of land tax levied according to the intensity of land use.
The group supports agriculture being included in an emissions pricing regime but admits it is difficult to accurately estimate biological emission sources.
“However, the group does not have a view on whether this is best done inside the Emissions Trading Scheme (ETS) or through other pricing approaches.”
Assuming a NZ unit ETS price of $50 a tonne, if there was no free allocation of emissions units, the report estimates it could raise $2.1 billion a year, comparable to replacing the ETS with a carbon tax.
The report says while tax is a tool to change behaviour it isn’t the only tool and sometimes rules and regulations are more effective.
The report notes challenges in setting a system and price for water pollution and acknowledges issues with Overseer as a management and budgeting tool but says taxing pollutants such as nitrogen is better than the status quo.
“They can provide a price signal that is sensitive to land use and intensity decisions and incentives to abate below consent levels.”
Measuring water pollution is challenging and can be expensive while taxing inputs such as fertiliser, while easier, can be poor proxies for actual emissions and environmental impacts.
It suggests an alternative to the catchment wide nitrogen discharge trading schemes in Taupo and planned for Rotorua could be a national tax levied on estimated emissions, such as from fertiliser, with catchment-level variation rates.
“The group encourages the further development of tools to estimate and ultimately directly measure diffuse water pollution, which would enable more accurate and effective water pollutant tax instruments.”
If this does not happen in the near term the group recommends introducing input-based tax instruments, including in fertiliser.
Taxing water abstraction would ration water, improve efficiency of use, tax natural resource use and fund restoration of degraded water bodies.
Any tax should be sensitive to reflect scarcity of water and its value.
“The distributional impacts on households of a water tax will also need to be considered, both from the direct cost of water charges and the incidence of any water charges imposed on firms, eg agriculture and electricity providers.”
Support among the tax working group for broadening the extension of the capital gains tax was split, with three opposing such a step.
A broadened capital gains tax would apply at the point of sale to gains and most losses from all types of land and improvements, except the family home, shares, tangible property and business assets.
Personal items such as boats and art work will be exempt along with the house and up to 4500 square metres on farms.
The applicable tax rate would be at the person’s marginal rate and exclude any adjustment for inflation.
Residential rental and second homes are projected to contribute the lion’s share of capital gains tax followed by shares and commercial, industrial and other property then rural.
The inconsistent treatment of capital gains has reduced the fairness of the tax system, the group says.
“It is also regressive because it benefits the wealthiest members of our society.
“Both effects weigh against the sense that New Zealanders are all making a fair contribution and risks undermining the social capital that sustains public acceptance of the tax system and so our shared prosperity in the long term.”
The group agreed with submissions that land covenanted by the QEII Trust be treated as a deductible expense along with privately incurred costs associated with the care of Nga Whenua Rahui, which protects indigenous ecosystems on Maori-owned land.
