The Andrews government is capping local governments rate rises to CPI after fifteen years of six per cent rises in a low inflation environment.

Minister for Local Government Natalie Hutchins’ Fair Go Rates System, administered by the Essential Services Commission, will crack the whip over naughty spendthrift councils.

The ESC has released its draft report on the proposed framework and invited written submissions.

Nested among the myriad complaints councils hurt ratepayers – never mind their spending and investment boost land prices – Prosper offered its views.

We want councils to use Site Value, rates based entirely on the market value of land, rather than Net Annual Value, based on rents, or Capital Improved Value, the market value of land and buildings.

The differences between these rating bases may appear minor. In practice, both NAV and CIV discourage construction by taxing improvements. All properties improved above the municipal average pay more and underdeveloped ones pay less. In fact, there is no natural limit to the percentage penalty on highly improved properties.

NAV and CIV encourage land vagrancy – deliberately leaving lots vacant or with buildings in ruinous condition. They free-ride on nearby civic and private improvements, even hoping to coax up-zoning of vacant land by frustrated councils trying to prompt it into use. Both are deeply regressive in nature as their severity increases exponentially as the degree of improvement rises above the average level for the city.

Site Value rating has none of these vices. It does not penalise any class of property. It charges a rate based on the market value of the land without regard to whether it is improved or not. Any perceived penalty is only relative as compared with the charge under NAV or CIV, which in effect subsidise under-developed properties. The rate penalty borne by the least improved property is limited by the market price of vacant land.

Taxing land and un-taxing buildings provides a big boost to construction, as the South Melbourne study cited in Prosper’s submission shows. It is pro-growth and pro-activity – two qualities we are sorely in need of.

Site Value rating is a pure land tax. It exhibits exactly the virtues federal Treasury is determined to pursue in its tax reform agenda:

Land taxes paid by foreign and domestic landowners are only redistributed to the domestic households, providing a benefit to Australian households and generating a negative marginal excess burden for a broad-based land tax.

Treasury calculates broad-based exemption-free land tax costs citizens only 90c for each dollar raised. This tax is profoundly different to every other base available – yet we ignore it.

The Victorian government, the Essential Services Commission and minister Hutchins are probably puzzled by Prosper urging change to the rating base when their stated agenda is rate-capping.

We say, there is a higher goal within the government’s reach than merely pulling councils into line. Genuine reform please, Minister Hutchins.