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
 david@orionco.net
 1300 767 466