There is a dramatic divide between the tax policies of the left bloc and the centre-right bloc for the coming election. National, ACT and New Zealand First are arguing that New Zealanders are being overtaxed whereas Labour, the Green Party and the Te Pati Maori Party are all arguing that more tax revenue is required.
Below is a summary of the published tax policies for the main parties in the New Zealand Election 2023. Note that we have only included the policies of parties who are likely to win seats in parliament based on recent polling.
Labour
Labour has not released a specific tax policy as such and does not have a landing page for their tax policies.
So far Labour’s flagship tax policy is proposing to remove GST off fresh or frozen fruit and vegetables. This proposal has been heavily criticised as being poorly targeted and unlikely to deliver much value to consumers. Unscientific pools by media outlets have suggested that there is not much support for this policy. We return to the discussions on this later.
Labour is also proposing additional support through working for families. This includes increasing the in-work tax credit next year and increasing abatement thresholds over the next three years.
A somewhat surprising announcement was a proposed increase to fuel taxes by 12 cents (plus GST) over the next five years. A corresponding increase would apply to road user charges (RUC) for diesels. There is still no proposal to add taxes/RUCs to electric vehicles (EVs).
Overall, Labour’s tax policies are relatively neutral/subdued this election, or at least so far. However, as this election is shaping up, Labour’s only chance of forming a government would be with the support of the Green Party and Te Pati Maori Party, and the tax polices of those parties are rather extreme. Labour recently ruled out capital gains and wealth taxes, but wealth taxes feature prominently in the policies of their potential coalition partners.
National
National were very late to the party in releasing their tax policy. However, on the 30th of August, they finally released their full tax policy which ended up being far more comprehensive than the early teasers suggested.
National’s policy squarely targets what they are calling the “Squeezed Middle” with its tax policy. Central to the policy is the promise to deliver personal tax cuts for lower and middle earners by “adjusting tax brackets for inflation”. The proposal is to modestly increase the thresholds for the 3 lowest tax brackets affecting income between $14,000 and $78,100. Those earning more than $78,100 would get the benefit of the first $78,100 being taxed at lower rates but income above that would be taxed at existing 33% and 39% rates.
Because the amount of the pension/NZ superannuation is pegged to after-tax incomes, the pension rate automatically increases because of the above tax rate changes. Pensions are of course taxed too, so the tax cuts also apply to the pension payment.
Benefits are also taxed, so in effect, every New Zealander earning more than $14,000 would get some tax cut under the National proposal.
National’s tax policy also includes previously signalled additional measures, including:
- Roll back of 10-year brightline test for residential land to 2 a two-year bright line test (remember it was National that introduced the 2-year test); and
- Reintroducing deductions for interest on residential rental properties. The proposal is to phase in fully-deductibility of interest over 3 years; and
- To cancel the complex GST changes to certain digital services (Airbnb, Uber, Uber Eats). This is the reversal of a rule that is to come into effect 1 April 2024 that applies GST even if the underlying service provider (Uber driver, Airbnb property owner etc) is not required to be GST registered.
- Remove “ute tax”. Details of how and when this will occur have not been announced.
- Remove Auckland regional fuel taxes because the light rail they were introduced to fund has been cancelled.
The policy included a few tax surprises that had not been signalled previously. These include:
- Increasing the threshold for the “Independent Earners Tax Credit” from $48,000 to $70,000. The amount of the IETC remains at $520 per year; and
- Introducing a childcare tax credit for low to middle earning families with preschool children; and
- Increases to certain working for families tax credits and abatement thresholds; and
- Removing the foreign owner ban for properties costing more than $2m, but introducing a foreign buyer tax of 15% for such properties; and
- Removing depreciation on commercial buildings (again); and
- Introducing a tax on overseas online gambling; and
- Introducing a climate dividend (largely copying a previously announced ACT policy).
Most of the proposals seem to commence from 1 July 2024. This is not ideal in the case of personal tax cuts in the middle of a tax year means that “composite tax rates” would be required for the 2024/25 tax year. Composite tax rates can create nasty surprises for people whose income increases after the tax rates decrease.
National has ruled out removing the 39% tax rate in its first term. This was not a surprise, as this was first announced in November 2022.
National don’t seem to have ever publicly commented on the 39% tax rate for trusts that Labour introduced in Budget 2023. Therefore, it must be assumed that the trust tax rate would not be rolled back to 33% immediately under National.
ACT
ACT’s flagship tax policies are personal tax cuts and a Low and Middle Income Tax Offset. The personal tax cuts would reduce the current personal tax brackets down from five to two. ACT proposes tax rates of 17.5% up to $70,000 and 28% beyond that and these rates and thresholds seem to remain the ACT policy.
While ACT are saying there would only be two thresholds, the proposed Low and Middle Income Tax Offset seems to effectively create another two or three tax brackets, albeit only for those whose total income is between $2,000 and $58,000. The Low and Middle Income Tax Offset is proposed to apply for taxpayers earning between $2,000 and $58,000, with the full credit of $800 being available to those earning between $12,000 and $48,000. Presumably this would replace the existing Independent Earner Tax Credit.
ACT proposes reinstating interest deductions for rental properties.
ACT proposes to completely abolish the bright line test as it sees the test as unnecessary to tax property speculation (the stated aim of the bright line rules). This of course, is correct because pre-existing law (section CB 6) already taxed property speculation.
At the time of announcement, one of the more unusual election promises is that ACT is proposing that approximately $1b per year of tax collected through the ETS scheme will be returned to New Zealand households as a Carbon Tax Refund/Dividend. ACT claims that this system better incentivises New Zealanders to take meaningful steps to reduce emissions. While most households would appreciate and annual payment, I am not convinced that the average punter is going to connect their actions to this payment and change their behaviour because of it. As mentioned above, National are now proposing a similar dividend.
ACT are polling very well at present so if National was to be in a position to form a Government, ACT would feature prominently. There is reasonable alignment in tax policies between the two. Tax cuts are the major difference, with National taking a conservative approach and ACT going big.
Green Party Aotearoa
The Greens propose significant changes to tax brackets. The proposal is for a $10,000 tax-free threshold and moderate tax decreases for those earning between $10,000 and $75,000 but significantly increasing taxes for those earning more than $75,000. A 35% tax rate would apply from $75,000 increasing to 39% from $120,000 and increasing again to 45% from $180,000.
The Greens are also proposing wealth taxes for high-net-worth individuals and trusts and an increase in corporate tax rates to 33%. Both of these proposals would create considerable flight of capital from New Zealand and therefore create significant economic damage to New Zealand and damage our credibility. A recently surfaced treasury report was very critical of the introduction of a wealth taxes, because of the potential flight of capital and high compliance costs, amongst other things. Combining a wealth tax and a 21% increase in corporate tax could reasonably be expected to be devastating to the New Zealand economy.
While the Green Party have been in coalition with Labour several times (either formally or as coalition support partners), they do not have a good track record of having their policies adopted as Government/coalition policies. However, as the 2023 election is shaping, if Labour was in a position to form a Government, then they would be more reliant on the Greens than ever before. Therefore, as extreme and reckless as they are, this time around the Green’s tax policies cannot be fully discounted this time around.
Te Pāti Māori
Te Pāti Māori look likely to win a seat or two in the election, but as a very minor party, they are unlikely to have any influence over Government tax policy if they were included in a coalition. However, there is a lot of similarities between their policies and the Green Party policies.
Te Pāti Māori are proposing to cut GST off all food.
Te Pāti Māori are proposing significant changes to tax brackets. Decreasing taxes for those earning less than $90,000 but significant increases for those earning more than $90,000. TTe Pāti Māori are proposing 39% from $90,000, 42% from $180,000 and 48% from $300,000!
Te Pāti Māori are proposing removing taxes from pensions and benefits.
Te Pāti Māori are proposing to introduce several new taxes – a wealth tax, a foreign companies’ tax, land banking tax and a vacant house tax.
New Zealand First
New Zealand First is shaping up to be a 50:50 prospect to return to parliament. However, the party has the major issue that they have ruled out working with Labour and ACT and Labour have ruled out working with them. Therefore, there is no practical way for New Zealand First to be part of the Government unless one or more of the parties breaks an election promise.
New Zealand First is proposing Indexing tax brackets to inflation and to “provide tax incentives to promote added value”. No detail is provided for either of these policies.
New Zealand is also proposing to remove GST from basic foods, including fresh food, vegetables, meat, dairy, and fish. As discussed below, this is very much at odds with New Zealand’s longstanding tax framework.
In-depth discussion of certain policies
Tax bracket changes
With the exception of Labour, all of parties likely to win seats in the upcoming election are proposing changes to the tax brackets and/or tax rates for individuals.
With the exception of the 39% rate that was introduced in 2021, the current tax brackets have remained unchanged since 2011. While the tax rates have not moved, the average earnings have increased from approximately $49,000 to $69,000 since 2011. This has caused “bracket creep”, meaning that average rate of tax people have been paying has increased over time even though the tax rates have not changed. Under current rates, the average tax rate on income of $49,000 is 15.7%; at income of $69,000 the average rate increases to 20%. In other words, inflation has caused a 27% increase in the average tax rate that the average earner has paid.
The proposals of all parties would reduce the tax rates apply to the earnings for someone earning the average wage. However, with current wage growth, the proposed Greens policy of a 35% tax from $75,000 would probably hit the average earner by the time that applied.
At present, New Zealand’s tax rates are pretty much middle of the pack for comparable countries. Although, care needs to be taken in directly comparing the tax rates of New Zealand against other countries because New Zealand does not allow deduction for employees and New Zealand does not have allowances for dependents etc. Therefore, a direct comparison of rates is comparing apples with oranges.
I’d suggest that the Green Party and Te Pati Maori proposals for significant tax increases from relatively low-income levels could have devastating consequences for the economy. New Zealand businesses and the public service alike are already struggling to recruit and retain skilled workers. With tax rates of 35%+ from relatively low levels, the main beneficiary of these policies would be Australia as a significant loss of skilled and semi-skilled workers to Australia could be expected in the unlikely event that these policies were adopted.
Something that seems lost on the Green Party and Te Pati Maori party is the difference between average or effective tax rates and marginal rate. Marginal rate is that rate that the next dollar earned is taxed at, and this is typically what drives behaviours and decisions. Therefore, even if earners were actually better off under the Greens or Te Pati Maori tax rates, they would not feel like it because they would be looking at what tax rate would apply to any additional income they earned.
GST exemptions for food
New Zealand’s GST system is highly regarded worldwide for its “purity”. So far, the New Zealand GST system has been off limits for cheap politicking. Therefore, the proposals of Labour, New Zealand First, and Te Pati Maori are a major departure from the New Zealand norm.
There are some major issues with the proposals to exempt certain foods from GST. These include:
- International experience that only 30% of the benefit of exempting certain foods from GST is passed on to consumers, so it is effectively a tax cut for supermarkets.
- GST is hugely important for the tax system, once you start carving out items to buy votes, you are opening pandora’s box and voters will start expecting further concessions. This just means tax needs to be raised elsewhere.
- Narrow exemptions create border issues that create an inefficient use of limited resources. Overseas revenue and customs agencies regularly need to go to court to classify certain items.
- Exemptions open the door for abuse. It is not hard to foresee smaller retailers putting non-exempt goods through their tills as fruit and vegetables and pocketing the GST.
These proposals are terrible policy, and so far, the response from the electorate has not been particularly positive, so they do not seem to be particularly good politics either.
If any changes were made, then arguably broader is better. In other words, the Te Pati Maori proposal to exempt all food is vastly better than the Labour policy to only exempt fresh and frozen fruit and vegetables. However, you would expect that there would be serious concerns raised around exempting the likes of junk food.
Wealth tax
Some recent unscientific polls have suggested that there is a fair amount of public support for wealth taxes. It is understandable that middle- and low-income earners who are doing it tough see some appeal in a tax that only applies to the very wealthy. However, there’s a bit more to it than that.
It transpires that Labour had investigated introducing a wealth tax as part of Budget 2023 and as such sought advice from Treasury. Treasury ultimately suggested that the tax not proceed. One of the main reasons for that conclusion was that it could expected to harm investment into New Zealand. Wealth and wealthy people are mobile. Treasury estimated that for every 1% of wealth tax, 5% of those affected would leave New Zealand taking their wealth and business interests with them. Although, with New Zealand having an extremely mobile population (and no capital gains tax), there is a risk that New Zealand would experience a far even greater impact that that.
In a recent interview, Prime Minister Hipkins confirmed that his decision to rule out a wealth tax was based on the advice around risks. He said:
“We looked at a wealth tax. It was very clear that a wealth tax actually contained huge economic risk for New Zealand,” Hipkins said.
“Wealth is ultimately very mobile. If a whole lot of the people who would have been subject to the wealth tax removed that wealth from New Zealand, actually our economy would have been in far worse shape.
“I looked at the evidence, I got the advice, and I made the call that a wealth tax wasn’t going to be the right way forward for New Zealand.”