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Maximising Own Source Revenue
David SpearrittOrion Consulting Network
OutlineConcepts & 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
ImplicationsTo 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)
Net ra
tes an
d ut
ility
char
ges
Fees
and
cha
rges
Sale
s - c
ontra
ct a
nd re
cove
rabl
e wor
ks
Inte
rest
rece
ived
Renta
l inc
ome
Other
recu
rren
t inc
ome
0%
20%
40%
60%
80%
100%
Revenue source as % of own-source revenue
Revenue Items as % of OSR (2010)(Profit only from Sales/Recoverable)
Net rates and utility charges
Fees and charges Sales - contract and recoverable works
(profit)
Other0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Revenue source as % of own-source revenue
Same Story per Capita
Net rates and utility charges
Fees and charges Sales - contract and recoverable works
(profit)
Other -
500.00
1,000.00
1,500.00
2,000.00
2,500.00
Revenue source per capita
PhilosophyPeople 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 rates1. 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 FindingsLand 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 ReceivedBenefit Principle
Often called ‘user pays’Rates partially related
to service levelsCouncil roads and
facilities increase UCVUCV also affected by non
LG factors (views/ other facilities)
Benefit area rates ,Utility Charges & User fees better linked to benefits
General Rates
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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 DefinitionsAbility to
PayBenefit
Principle
Cost Impacts
Benefit Links
User Charges
Property Wealth
Capacity (income)(eg.Pensioners)
Equity DilemmaRates 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 VisibilityMost 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 TaxRates 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 FrequencyBill Type
Electricity & Gas
Phone
Insurance
Change in frequency
Quarterly
Monthly or pre-paid
Full flexibility
Adjustment DevicesDevice 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 TrendsMost adjustment devices improve benefit
linkage or reduce visibility (easier payments)
L-G Rating DilemmaRates 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 Overview8 Councils into Toowoomba RC
60+ Diff rating categories + other levies
8 different rating approaches
ApproachChecked 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 ConceptLow Intensity
Grazing etc Low roads impact
Medium IntensityBroad acre farming Average roads impact
High IntensityFeedlots and PiggeriesHigh 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 areasToowoomba CityToowoomba Environs3 Major Towns Smaller TownsRemote Towns
Cross-checked to taxable income of each town(Capacity to Pay)
Large Medium Small Very Small0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
General Rate Relativities by Town Size
WDRC
TRC
Qld Average
Modelling
Strategic
Macro
Micro
Modelling LevelsStrategic (Orion)
Cost & Benefit relationshipsCapacity to pay (taxable incomes/rural production)
Macro (Orion)Revenue generationsSector impact analysis
Micro (Council & IBIS)Detailed property analysis Identification of anomaliesData cleansingPhase-in tools analysis
Phasing In the Changes3 year time-frame
Front-end loaded
Phase-in methodsValuation Averaging (3 years) Increase capping (high level eg. 30+%)Price paths (by former area)
Extracting Rates from ExtractivesHuge 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 RatesBenefit Principle –
Often called “User Pays”Rating categories based on service levelseg. Intensity of agricultural activity (Toowoomba)
Shopping Centre size (GFA)Heavy industry (road damage)
General RatesAbility 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 sectorRental 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 HissingMinimise visibility
More frequent/convenient payments
Improve understandabilityRationale for rating policySeen as equitable
Links to benefits/costsAbility to pay
User Fees
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Fees & ChargesFrom 5 to 20% of OSR
Huge revenue opportunity for many Councils
Cost recovery & commercial fees
Can recover on full cost pricing basisCosts include all of that regulatory regime (eg dog
control)Corporate overheadsUnder 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 IncomeDividends from Business Units
Income from cash investments
Rental income
Some SEQ Councils getting considerable returns from Water BusinessesDividends & Tax Equiv paymentsSubordinated debtWorking capital loans
SummaryOpportunities 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
