Wellington rates debate misses the future city we’re not talking about

Thursday, 25 June 2026

Dr Kirdan Lees is an economist and director at Sense Partners

OPINION: Today Wellington City Council’s Planning and Finance Committee will decide whether Wellingtonians should be consulted on a shift from capital value rates to land value rates.

Officers are recommending against progressing consultation.

Their reasons deserve consideration. The council paper discusses transition costs, implementation challenges, uncertainty around local government reform and the distributional impacts on different groups of ratepayers.

But the recommendation also reveals something important about how Wellington approaches taxation.

Read more:

• Wellington City Council set to deliver lowest rates rise in years

• Lies, damn lies and percentages as Wellington annual plan locked in

• New report shows Wellington rates now among NZ’s least affordable

The council’s 81-page agenda document is overwhelmingly focused on the city as it exists today. It examines who would pay more, who would pay less, affordability impacts and implementation challenges.

Those are important considerations.

What receives far less attention is how different rating systems might shape the city of tomorrow. Which system encourages more housing? More investment? More productive use of scarce urban land?

That omission matters because rates are not simply a way of raising money. They are one of the most powerful tools local government has for shaping the city.

The debate is fixated on who pays. But taxes do more than distribute costs. They shape investment, development and land use decisions. The more important question is which rating system creates the incentives that determine Wellington’s future prosperity.

Under Wellington’s current capital value system, rates rise when people improve property.

Strengthen an earthquake-prone building and your rates increase.

Build apartments on an under-utilised site and your rates increase.

Invest in a commercial fit-out and your rates increase.

In effect, we tax people who have a crack at building something better.

Land value rating works differently. Rates depend on the value of the land, not the value of the improvements sitting on top of it. Build apartments, offices, homes or commercial premises and your rates bill does not rise simply because you invested.

That distinction goes to the heart of what behaviour Wellington chooses to encourage.

Unlike jobs, investment, housing or business activity, the supply of land does not shrink when it is taxed. Nobody creates less land because rates go up. Nobody moves it offshore.

That is why economists have long regarded land taxation as one of the least distortionary ways governments can raise revenue. It raises money without discouraging the investment, development and housing cities want more of.

There is another reason land value matters.

Much of the value embedded in land is not created by the landowner alone. It is created by the rest of us.

When councils build infrastructure, when businesses cluster together, when transport links improve accessibility, when population grows and when planning rules allow more development, nearby land values rise. Owners can receive substantial gains without making any additional investment themselves.

The value of a site in Te Aro, Thorndon or Oriental Bay reflects decades of public investment, economic activity and city growth.

A land value rating system recognises that reality. It allows some of that value created by the community and local infrastructure investment to help fund the services and infrastructure that created it.

Critics often respond with concerns about affordability. That concern is understandable. Rates have risen much faster than incomes and many households feel under pressure.

But affordability is not the same thing as equity.

A family’s income tells us how much they earned this year. Land values tell us how much value has accumulated over decades of city growth.

Land values also capture something that capital values often miss. In many of our lower-income suburbs, a greater share of property value comes from the building itself. In many of the city’s expensive locations, a much larger share of value comes from the land beneath it. So land value rating can improve equity as well as efficiency.

If the goal is fairness, suburb-level income averages tell us only part of the story.

Nor is local government particularly well placed to solve income inequality through the rating system.

Wellington already has rates rebates and remission schemes. If a pensioner or low-income household faces genuine hardship, the answer is targeted relief, not a rating system that discourages housing, investment and redevelopment across the entire city.

The same logic applies to Wellington’s commercial differential.

Businesses currently pay $3.70 in rates for every dollar paid by residential ratepayers, among the highest commercial differentials in New Zealand. That is a strange position for a city concerned about attracting investment, filling empty shopfronts and creating jobs.

There is another irony. Historically, taxing improvements could be justified because larger buildings were a rough proxy for greater use of services such as water and wastewater. But as water metering and user charging become more common, that rationale becomes increasingly difficult to sustain.

None of this means Wellington should immediately abandon the current system.

Consultation is not implementation.

The decision before councillors is simply whether Wellington should have a serious conversation about replacing a tax on improvement with a tax on land.

That conversation is long overdue.

The real choice is not between capital value and land value. It is between taxing improvement and taxing scarcity. As Wellington considers how to grow, house more people and strengthen its economy, it is worth asking which side of that choice best supports the city’s future prosperity.