Keywords: Environment & Resources; Regulation & Taxation;
I. My name is Brian Henry Easton. I am an independent scholar with particular expertise in economics, social statistics and public policy professor at the Institute of Public Policy at the Auckland University of Technology, and also hold honorary positions in Massey University, the University of Otago and Victoria University of Wellington.
II. Over the last 40 odd years I have worked in a number of areas pertinent to this evidence, including resource economics and tax and regulation policy. I have written books and learned articles.
III. I agree to abide by the standards set down in the Environmental Court code of conduct for expert witnesses. I am also a Fellow of the Royal Statistical Society and a Member of the Royal Society of New Zealand, both of which have their own codes of conduct, consistent with the Court’s code, and by which I also abide.
IV. I have been asked by Margaret and Stephen Thompson to assist the Court by presenting evidence which will enable the better economic understanding of the issues involved with the application of coastal occupancy charges.
V. In particular I address in this evidence the following paragraph which appears in Judge J. R. Jackson’s decision of 30 November 2007 (C155/2007) of the Environment Court:
As to whether the purpose of the RMA under section 5 is better or worse met by the breach: section 64A shows that it was enacted to ensure there was consideration of charging regimes for occupation of the coastal marine area . Section 7(h) of the Act refers to efficient use of resources. Section 5(2) seeks to enable people and communities to provide for their social, economic and cultural well being. Efficiency and wellbeing might be improved if a charging regime were introduced . Or they might not … (para 37)
VI. I shall also have to say something, because the term appears in Subsection 5 of Section 64A, on the issue of sustainability.
VII. In order to deal with these issues, I have examined a number of other briefs of evidence put before the Court, and will source the ones I use directly. I will also draw widely upon the relevant economics literature and the resources management and taxation policy frameworks which began evolving in the 1980s.
VIII. This brief of evidence provides an overview of the key issues which I consider are pertinent.
IX. Section 64A (Imposition of coastal occupation charges) of the Resource Management Act states:
A. Unless a regional coastal plan or proposed regional coastal plan already addresses coastal occupation charges, in preparing or changing a regional coastal plan or proposed regional coastal plan, a regional council must consider, after having regard to-
1. The extent to which public benefits from the coastal marine area are lost or gained; and
2. The extent to which private benefit is obtained from the occupation of the coastal marine area,
whether or not a coastal occupation charging regime applying to persons who occupy any part of the coastal marine area (relating to land of the Crown in the coastal marine area or land in the coastal marine area vested in the regional council) should be included.
(2) Where the regional council considers that a coastal occupation charging regime should not be included, a statement to that effect must be included in the regional coastal plan.
(3) Where the regional council considers that a coastal occupation charging regime should be included, the council must, after having regard to the matters set out in paragraphs (a) and (b) of subsection (1), specify in the regional coastal plan-
3. The circumstances when a coastal occupation charge will be imposed; and
4. The circumstances when the regional council will consider waiving (in whole or in part) a coastal occupation charge; and
5. The level of charges to be paid or the manner in which the charge will be determined; and
6. In accordance with subsection (5), the way the money received will be used.
(4) No coastal occupation charge may be imposed on any person occupying the coastal marine area unless the charge is provided for in the regional coastal plan.
(4A) A coastal occupation charge must not be imposed on any person occupying the coastal marine area if the person is carrying out a recognised customary activity in accordance with section 17A(2).
(5) Any money received by the regional council from a coastal occupation charge must be used only for the purpose of promoting the sustainable management of the coastal marine area.
X. For the rest of this paper I shall abbreviate Coastal Occupancy Charges to the acronym COC.
XI. Since Section 64A was inserted in 1997 (and subsection 4A in 2004), individual regional councils have contemplated which of the options offered in subsections 2 and 3 they should take.
XII. In particular, as I understand it, the economic content of this case centres on whether the Marlborough Regional Council should take the option of no COC (subsection 2) which appears to be its current choice, or instead take the option of making a COC (subsection 3) which Margaret and Stephen Thompson submit.
XIII. I interpret the intention of the legislation is that the COC is a resource levy and not a resource rental. My evidence is focussed accordingly.
XIV. I observe that there is a view that ‘COC is a not a [local body] rate, but is akin to a rate, or more like a rate than the other revenue gathering tools of local government’. (Para 5.10 of Coastal Occupation Charges – draft report n.d.) I take it to mean that the COC is not legally a local body rate, but both are examples of resources levies, the purpose of which is to charge the resource user (land owner or user of a marine resource) for services from the local authority which cannot be directly charged on a user charge basis.
XV. In this case analysis and design of the COC should be as far as possible parallel to that for a regional council rate. I am comfortable with that approach, and will develop it below. In doing so I will be particularly aware that the relevant parallel is with local body rates on businesses.
Efficiency Consideration of a Resource Rental
XVI. In principle an appropriate resource level may be designed to increase the efficiency of an economy in at least three ways.
Limiting Distortions from the Avoidance of Taxation or Levies
XVII. First, if some it may be used to discouraged tax avoidance insofar one activity is levied but a second is not. An example from Marlborough’s past will illustrate the principle.
XVIII. Up to the middle of the Nineteenth Century, Cloudy Bay was a major calving location for whales – perhaps it could be described it as a Whale Maternity Hospital. In the early Nineteenth Century whalers converged on Cloudy Bay and caught the whales and their newborn calves extinguishing the site for calving. Having caught a whale it is necessary to rend its blubber into whale oil. This was first done in New Zealand on board the whaling ships; indeed it is argued that the whaling ships were the first modern factories (in part because their limited size meant the industrial processing had to be managed very efficiently). Later it was found that in the case of inshore whaling, such as at Cloud Bay, it was more efficient for the processing to be done onshore. That explains how whaling was one of Marlborough’s oldest European businesses.
XIX. Suppose 170 years ago there had been a rate’s levy on the onshore whalers but not the offshore whalers. This would have encouraged offshore processing, even though onshore processing was more efficient. This illustrates the principle that a taxation or levy regime should be neutral as possible as to the location of the business.
XX. It could be argued that it is nigh on impossible for a marine farming to be moved onshore so that a discriminating levy between onshore and offshore businesses would have no effect on business location. But this is an extreme example. Businesses will seek to avoid taxation and levies in any way they can, and they will be inventive at doing so. Unequal treatment of onshore and offshore businesses may lead to some relocation at the margin or in other relevant business. That is why tax theory (which treats resources levies as a tax) recommends neutrality by location unless there are good reasons for a differential.
XXI. I cannot think of a persuasive reason to treat onshore and offshore activities differently, although I return to one possible case below.
XXII. A major effort in the last twenty five years has been to ‘internalising externalities’. The explanation of this phrase is as follows.
XXIII. Market economies are based on the principle that the decisions of individuals and businesses take into consideration the resources they are used, via the charges that are made for their use. Almost miraculously the (relative) social value of most resources is imbedded in the market price. (I have not laid out here the technical reasons for this miracle as it would extend this evidence to many pages. They arise from one of the fundamental components of economics, ‘value theory’. The application of the theory was central to the economic reforms of the 1980s. In my opinion it is a robust theory providing its limitations are understood.)
XXIV. Where the social values of resources are embodied in the market prices, it follows that each market decision takes in to consideration the social values of those resources; it can be shown that it does so in a certain socially optimal way.
XXV. However there are resources for which there is no market charge (or the charge is substantially below the social value of the embodied resources). In such cases the decision maker is unlikely to take into consideration the social value of the resource – in effect treating it as zero. The probable outcome is the resource will be wasted, or depleted to extinction (as were the calving whales in Cloudy Bay).
XXVI. The effects on resources which are not properly priced in a market are called ‘externalities’. The standard economic prescription to avoid this waste and depletion – to promote sustainable economic activity – is to ‘internalise the externality’, that is to ensure in some way (for there are many ways of doing this) the resources involved in market decisions are charged at a market price which reflects social value.
XXVII. Economists think that the internalisation is a major means of promoting sustainability. It is only if internalisation is not possible that non-market regulation becomes necessary.
XXVIII.As I have already indicated, this notion was central to the reforms of the 1980s, and it was integral to the thinking which led to the Resource Management Act. (See my ‘Is the RMA Sustainable?: the Politics of the Coase Theorem’ (Planning Quarterly, June 1998, p.5-8, http://www.eastonbh.ac.nz/?p=124.)
XXIX. This suggests that any costs (or resource usages) which are generated by the marine sector but for which they do not pay should be included in the COC. These costs would include the Regional Council’s administration costs of the sector, and the sector’s share of the uncharged costs incurred by the infrastructure. This would internalise what is currently external costs to the sector.
XXX. Of course, as far as possible each business should be directly charge for any Council service.
XXXI. Combined with the earlier point about reducing tax avoidance by locational choice, the conclusion is that businesses operating off shore should face equivalent resource charges to businesses operating on shore, except that where rates apply to the latter the COC should apply to the offshore businesses.
Distortion from Taxation
XXXII. Insofar as levies (or taxes) are not internalising an externality, but are for the purposes of raising revenue for a social objective, there is the danger that they may distort commercial behaviour. Not only may that lead to relocation for the purposes of tax avoidance, but the taxes may cause what economists call a ‘deadweight loss’. Deadweight losses occur when consumers pay more for some products (those which bear the additional or higher taxes) than they would if there was no taxes, purchase less of those goods and services than is optimal, and have a resulting reduction in consumer surplus.
XXXIII.This analysis in the previous paragraph comes from orthodox economics and an explanation would take many pages. What is important here is the analysis leads to the economic prescription that a tax regime should keep tax rates (and therefore levies) as low as is practical. Where the primary purpose of the tax is revenue raising (for other social objectives – or, in this case, to cover the contribution of an inadequately taxed sector) it should be levied on as wide a tax base as possible in order to keep the tax rates as low as possible, thereby reducing the distortions from taxation.
XXXIV.Exempting some businesses from the tax base – which is the effect of not levying offshore activities – narrows the tax base, increases the tax rates on those who bear the burden and increases the distortions. This was a major reason for the change in the public revenue framework introduced in the 1980s with its choice of wide tax bases with a minim of exemptions.
Wellbeing Considerations of a Resource Rental
XXXV.We look here at three wellbeing issues relevant to the questions which face the Court.
XXXVI.A loss of efficiency means that the resources being used in production are producing less useful output than is possible were there a better taxation (or levy) regime. The resulting reduction in consumption levels represents a loss of aggregate welfare.
XXXVII.If some businesses (or persons) do not carry the same burden of public costs as others (after allowing for differing circumstances) then those who are carrying the higher burden are being treated unfairly relative to others. For instance in the current circumstances it would seem unfair that other ratepayers should be carrying the costs to the Regional Council which are incurred by those who are not levied a land rate because they operate offshore.
XXXVIII.Not only is such a situation inequitable but it is likely to be unstable, since those who are over-taxed will demand changes which reduce their excess burden. There being no principle to determine the tax burden (a fair sharing of the burden is such a principle) there is a tendency for the political process to shift the incidence of taxation around according to political might.
XXXIX.If the market mechanisms is not working well then the outcomes will be less sustainable in terms of the impact on natural resources and on the social, economic, and cultural wellbeing and the health and safety of people and communities.
Supporting a Particular Industry
XL. It is useful here to reflect on the argument that a particular business sector should be financially privileged in the interests of the (regional) economy. For instance, there may be a view that the Marlborough region might benefit (in the long run) by providing some sort of financial assistance to the maritime farming issue. (This example here is entirely illustrative. I am not sure what the case might be and no doubt other sectors might want to make parallel cases for regional assistance.)
XLI. Before the 1980s this assistance was often delivered through tax exemptions. (A zero COC would be such an exemption.) From the 1980s two fundamental changes to the tax framework were made relevant to this case. The first was that such assistance should be rare since the public authorities were not very good at identifying genuine cases for the assistance, and where they were thought any assistance necessary it should be on a broad across-sector(s) basis so that selective decisions by the public authorities should be minimised.
XLII. But second, and pertinent to this case, there was the concern that so widespread were the various assistance activities by the early 1980s no-one knew their net effect. Moreover they were so complex there was inadequate parliamentary supervision of them. Thus was introduced the practice of minimising tax exemptions (and other covert forms of assistance such as import controls) and instead giving public assistance by way of a grant which would appear explicitly in the expenditure that parliament voted to the administrating department. This meant it would be directly evident to the parliamentary representatives (and to everyone, since the votes are publicly published). This may be one of the reasons why these days there is less selective industry assistance.
XLIII. The conclusion from this analysis and other public practices is that if the Marlborough Regional Council decided that it was in the public interest to support maritime farming (or whatever other industry) any support should be by an explicit grant evident in its published accounts rather than by a tax exemption which would not be evident. That would mean an appropriate COC should still be imposed for the proper reasons set out in this affidavit.
XLIV. This economic analysis provides an answer to Judge Jackson’s question of whether efficiency and wellbeing might be improved or not if a charging regime were introduced.
XLV. Orthodox economic analysis, as it is currently understood, says decisively that ‘yes they will be improvements in efficiency and welfare, providing the charging regime is appropriate.’
XLVI. The above analysis indicates some of its features; it may be useful to set them out as a means of summarising the argument in this paper.
XLVII. An appropriate Coastal Occupancy Charge would be analogous to the land rates on shore-based businesses. In aggregate it should raise revenue at a similar level to those onshore businesses in similar circumstances. Where a service is provided to the onshore business by the Regional council on the basis of payments of rates, and it is not provided to the offshore business the equivalent revenue level for the COC would be appropriately discounted. It also follows that the COC may vary according to the particular business activity if it can be shown there are variations in their use of Council Services.
XLVIII.Ideally the COC should be at a low rate on a broad tax base. Some proposed schemes have the effect of discounting the tax base for such public benefits that the maritime activity provides. That seems to be consistent with the principles set out in the previous paragraph; especially if the same practice was in principle offered to land base businesses. (However, for various reasons it is easier to internalise benefits from land based activities.) Any discount should be on a site by site basis and not across the whole industry (unless it was demonstrated that the public benefit was industry wide).
XLIX. In summary, the aim of the COC should not to be to penalise offshore businesses, but to ensure they pay a fair share of the revenue the Regional Council needs. The resulting outcome will be more efficient, more equitable and the economic, social and environmental system will be more sustainable.