The research note explores options for councils to receive a portion of tax revenue from new housing developments, addressing New Zealand's persistent housing shortage.

The paper examines three options for providing financial incentives to local councils in New Zealand to enable more housing development:

1. Payments based on estimated GST on new residential builds.

2. Payments for residential consents above historical averages.

3. Payments are based on estimated GST rates.

The analysis evaluates these options against criteria including incentive strength, funding boost for councils, distribution effects, predictability, and potential for inflating payments.

Key findings:

• Option 1 provides a substantial funding boost but moderate incentives for housing development.

• Option 2 offers strong incentives but with more volatile funding.

• Option 3 is not recommended due to weak incentives and potential negative consequences.

The paper recommends proceeding with Option 1 or 2, or a combination thereof. It suggests refining these options to ensure robust data, strong incentives, and minimised risks of gaming the system. Additional considerations include extending payments to non-residential buildings and tailoring payments for councils participating in city and regional deals.

The paper emphasises that new revenue sources should complement, not substitute for, fiscal responsibility in local government. It recommends that the government refine the preferred options; keep these options separate from city and regional deal arrangements that can be structured around their existence; and not proceed with payments based on estimated GST on rates.

In return, local government must demonstrate commitment to fiscal responsibility and efficient provision of local infrastructure and services. Participation in city and regional deals and the use of ratepayer referenda for major projects or large spending increases would help.

Overall, this approach aims to better align the financial interests of councils with national housing supply goals, potentially creating a virtuous cycle of growth and development.