What happens when policymakers limit increases in property taxes?

Yarram et alSubba Reddy Yarram, Brian Dollery and Carolyn Tran

In our recent article in Policy & Politics,  we examine the impact of a ‘cap’ on property taxes in the local government system of the Australian state of Victoria. ‘Fair Go rate capping’ was introduced in Victoria from 1 July 2016. Prior to this, general rates charged by local councils in Victoria had grown by an annual average of 6% over a 10 year period. Under the Fair Go policy, the Minister for Local Government sets a maximum permissible rate increase on the advice of the Victorian Essential Services Commission. The actual rates cap was set at 2% for 2016-17 and 2.5% for 2017-18 based on the forecast Consumer Price Index.

In principle, the rate caps limit the ability of local councils to raise revenue required to fund their ongoing operations, often in the hope that this will stimulate increased operational efficiency. In our article, we empirically investigated two main questions: What were the short-term impacts of the Fair Go rate capping on different types of municipal expenditure? Did Fair Go rate capping have a differential impact on the different categories of Victorian local councils? Analysis of these questions can shed light how best to frame local government policy tailored to accommodate different categories of local council facing different expenditure constraints.

In order to assess the impact of rate capping on council outlays in local government in Victoria, we analysed changes in expenditure among two categories of local authorities – urban and rural – before and after the imposition of the rate cap. We also investigated this rate cap influence on expenditure by council type while controlling for demographic and other extraneous factors.

Employing a three-step empirical strategy for the period 2014-15 to 2017-18, we found that – contrary to expectations – total municipal expenditure did not fall. Instead, councils typically reduced their budgets for ‘invisible’ services, such as aged care and disability services. Moreover, limitations on property tax affected metropolitan, regional and rural councils differently. This highlights the dangers of using a ‘one-size-fits-all’ policy in local government systems that contain local authorities with divergent characteristics in terms of population size, population density, median incomes and factors.

Our findings add to existing knowledge on local government finance by demonstrating that the impact of rate capping varies according to different expenditure types classified by local council categories.

From a public policy perspective, given the differential impact of rate capping on different categories of local council and on different components of expenditure, our research suggests that if a rate capping regime is imposed on a local government system, then it should not simply be a ‘one-size-fits-all’ policy. Instead, it should be tailored to meet the specific circumstances of the different kinds of local authorities in order to be the most effective.

You can read the original research in Policy & Politics:

Yarram, Subba Reddy; Dollery, Brian; Tran, Carolyn-Dung Thi Thanh (2020) ‘The impact of rate capping on local government expenditure’Policy & Politics, DOI: https://doi.org/10.1332/030557320X15910206974407

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The impact of austerity on policy capacity in local government

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