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Submissions on policy proposal: change to fire levy calculation

14 August 2007

In May we let you know that submissions were being sought on proposed changes to the structure and funding of New Zealand’s fire and rescue services ("FRS"). Some 368 submissions were made.

This alert comments on the submissions that have been made on FRS funding, and outlines the next steps in the review.

Significant interest and mobilisation on this issue was obvious in the submissions, with many demonstrating a coordinated approach.

Submitters included:

  • individual fire-fighters, and representative groups
  • insurance industry participants
  • local government
  • state agencies
  • businesses, including some self-providers of fire and rescue services, and
  • other interest groups.

In relation to funding of fire and rescue services, key themes included:

  • Requests for better analysis of the options before a decision is made.
    1. Many submitters called for cost/benefit analysis of the various funding options, and of the value being received by levy payers
    2. Without that analysis, some submitters preferred maintenance of the imperfect status quo to the implementation of an inadequately considered alternative
    3. The Department had acknowledged in its policy proposal that the information available to it was limited. Submitters thought the proposal had not been properly costed and said that this was an insufficient basis for the suggested reform. Some attempted to remedy this by providing figures
    4. Some submitters requested the chance to be heard again once more detail was available.
  • Consistent support for motor vehicles to be levied by vehicle registration, rather than vehicle insurance .
  • Widespread support for funding from general taxation, rather than from an insurance-based levy.
    1. Submitters discussed the difference between public and private "goods", and tended to conclude that fire and rescue services were, at least to some extent, of national benefit and ought to be paid for by all taxpayers, rather than just by those who insure
    2. Funding from general taxation would eliminate compliance costs to insurance companies and insured property owners
    3. The loose linkage between insurance values and the need for or use of fire and rescue services was cited
    4. Levying insurance sends poor economic signals – incentivising under- or non-insurance
    5. At least one submitter said that they would have to consider self-insurance if the proposal was implemented – thereby avoiding fire levies completely (but perhaps negotiating a voluntary payment)
    6. The Insurance Council of New Zealand observed that some parties are allegedly insuring off-shore in order to more easily conceal their arrangements and minimise levies. They feared this practice would spread under the proposal
    7. At least one submission suggested that the move to funding from general taxation should be gradual in order to avoid a shock to the consolidated fund.
  • A number of submissions cited the principles of good taxation, and found that the proposed levy failed to comply on a number of grounds.
  • Some support for a level of user-pays charges
    1. While there was broad recognition of the FRS as meriting at least partial taxation funding (as a service which few New Zealanders would wish to see denied to those who could not pay), there was a variety of approaches to user-pays charges, with some submitters considering the possibility of cost recovery by the FRS, and others keen simply to ensure that the likelihood that the services would be used was better reflected in levies paid
    2. The suggestion emerged that there might be taxation-based funding for FRS services to households, and a risk-based levy charged on all other buildings.
  • The suggestion of various alternatives if general taxation funding was not to be implemented.
    1. Many of these suggestions included vehicle registration levies as a component
    2. Other suggested components included an ACC contribution, GST charged in relation to non-real property, and a levy linked to either rates or QV valuation to cover real property.
  • Support for continued exemption of some assets from the levy, if insurance-based levying is to continue.
    1. Many submitters supported the continuation of the exemption from the levy of infrastructure assets with low need for fire and rescue services relative to their value
    2. One submitter pointed out that one potential impact of the exemptions is the creation of a perverse incentive to invest in uninsured or exempt ‘old world’ assets like poles and pylons. This point was made in demonstrating the irrationality of insurance-based levying.
  • Particular difficulties with insurance-based levies were identified in relation to assets under construction.
    1. Construction works are often at least double insured (by contractor and sub-contractor) and therefore incur disproportionately high levies
    2. Construction works also present particular difficulties in calculating levies, and therefore suffer a high compliance cost.
  • General concern about compliance costs.
    1. Concerns about compliance costs were reflected in a number of the submissions in support of general taxation funding
    2. There was a concern that the levy should be calculated on a clear value which was already determined, to avoid additional calculation cost. The New Zealand Fire Service Commission’s submission reflected this concern, preferring a calculation basis from the insurance contract (the maximum amount payable) and cautioning that precise statutory wording was necessary to minimise the costs of disputes
  • The suggestion that the costs of insurers in collecting the levy ought to be recognised by the payment of a collection fee (in the order of around 2.5%).
  • Suggestions that the funding regime should incentivise fire prevention and harm minimisation measures.
    1. A common suggestion was that a discount should be applied for the installation of sprinklers
    2. Sprinkler systems were also given as an example of the irrationality of linking levies to insurance values. Installing a sprinkler system will increase the value of the building (and therefore the levy paid on a value basis), while decreasing the building’s need for fire protection.
  • Support for Crown contribution.
    • Many submitters understood the Crown to self-insure, thereby avoiding levies, and thought that the Crown should commit to a funding contribution.
  • Concern over instability of the levy base.
    • Reliance on insurance-based levies, and undertaking significant change without being fully aware of its likely implications, was considered risky.

Next step: Internal Affairs report to Minister on submissions

The Department of Internal Affairs is expected to release an analysis of the submissions before the end of the year. This will be reported to the Minister for Internal Affairs, who will then decide whether new fire and rescue legislation will be drafted. Any new legislation would then proceed through the legislative process with opportunities for further submissions at the select committee stage.

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