Australia's Future Tax System

Architecture of Australia's tax and transfer system

10.5 Local government taxes

In 2006‑07, local government rates and other minor taxes on immovable property raised $9.4 billion (see Section 2.5 for a description of rates). Local governments are created by statutes of state parliaments1, although state governments do not have access to local government revenue.

While revenue from rates levied by local governments is available for local governments to spend as they wish, the States exercise legislative controls over the manner in which local governments levy rates (see Table 2.20). This includes restrictions on: the valuation methods which can be used; the ability to charge different rates on different categories of rate payer; the provision of exemptions and concessions; and restrictions on the annual percentage increase in rates revenue (in NSW and, for three years from 1 July 2008, in the Northern Territory).

In 2005‑06, rates accounted for 37 per cent of the $23.9 billion of total local government revenue in Australia.2 The remaining local government revenue was comprised of: sales of goods and services (29 per cent); grants and subsidies (17 per cent); interest and dividend income (3 per cent); and other revenue (14 per cent), which includes fines and developer charges.

Box 10.3: User charging — paying the cost of a benefit received

In some cases, rather than impose a tax, governments charge users directly for a publicly provided good or service. An efficient user charge recovers the cost of providing that good to the next user (its marginal cost). For example, in the case of a public road, this is the cost directly attributable to the driver making another trip, including road damage costs.

By definition a user charge is not a tax, because those who pay the charge receive a direct benefit that is proportionate to it. However, if the charge is in excess of the cost of providing the service, or unrelated to it, then some portion of it is a tax (see Chart 10.1 and Box 2.2).

Chart 10.1: User charging

Chart 10.1: User charging

If a good or service is provided at no charge to a user, then some users will consume it even if the benefit that they receive from it is less than the cost of providing it. This outcome will reduce the overall wellbeing of society as resources are being used to undertake activities where the benefit to society is less than the cost society incurs for providing that activity. When demand outstrips supply in this way, the service is typically rationed (for example, users must queue or suffer congestion), or service quality declines.

If usage of a publicly provided good or service can be clearly identified and one person's consumption reduces another's use, then it is efficient for government to impose a user charge. This equates the price of accessing the good or service with the cost of providing it. Only those who value the good or service at this price will be willing to pay to use it. Supply can then be matched with demand, and the service can be provided without additional funding from general tax revenue.

Efficient user charging depends on being able to measure accurately the use of a particular service. This may change through time due to technology.

Although user charging gives rise to more economically efficient outcomes, it also gives rise to equity concerns. This is because those with limited capacity to pay may not be able to access essential services, even if they value them very highly. For these reasons, some products are not thought to be suitable for user charging and some user charges are provided at concessional rates to particular groups. However, to the extent that compensation can be provided through the tax‑transfer system, user charging can enable the public provision of goods and services at a lesser cost to society as a whole.

1 The exception is the ACT, where the Federal Parliament legislated self-government. The ACT Government has responsibility for both state and local government functions.

2 For a detailed description and analysis of local government revenues, see Productivity Commission (2008a).