Water tax by the numbers

When policy is based on politics rather than logic it’s difficult to work out the cost, but IrrigtionNZ has done the numbers for the water tax:

Recent attempts to estimate the cost of Labour’s proposed water tax to farmers have demonstrated a basic lack of understanding of how irrigation works, says nonprofit membership body IrrigationNZ.

This issue, which is compounded by a lack of detail from Labour about how the tax would be applied, has resulted in some widely varying estimates. Radio New Zealand’s ‘Fact or Fiction’ series calculated the cost for irrigated farms at $13,800 a year, whereas figures from DairyNZ have estimated a figure of $45,000 a year.

On top of this, yesterday Jacinda Ardern told TVNZ there are 12,000 farms in New Zealand and 2,000 of them have irrigation. In fact according to Statistics NZ and the 2012 Agricultural Census there are 58,071 farms in NZ and 10,500 have consent for irrigation. Irrigation NZ estimates the number of irrigated farms is now at around 11,000.

‘The public will rightly be confused by these very different figures,’ says IrrigationNZ Chief Executive Andrew Curtis. ‘But the lack of detail on how Labour would apply a water tax compounded with the sheer number of variables between farms – for example their size, what they produce, and how dry the region is, makes it hard to estimate with accuracy. While recent coverage has focused on the impact on dairy farms – just over half of our irrigated farms are not used for dairy – but for sheep or beef, arable farming, horticulture or vineyards. These farmers and growers will also pay the tax.”

IrrigationNZ has spent the last decade developing a comprehensive suite of standards, codes of practice, guidelines and knowledge resources on irrigation, and now run over 50 training courses a year nationally. IrrigationNZ’s main focus is providing knowledge and training to help irrigators achieve ‘excellence in irrigation.

‘Our figures, based on the average irrigated farm in Canterbury of 220 hectares, show an actual average cost of $24,000 to $29,000 a year (at 2 cents per 1000 litres). We’ve used Canterbury figures because there is no national average figure available for the size of an irrigated farm – but there is for Canterbury, where 60 per cent of irrigated land is.’

‘When this additional cost is put in context of the profit generated by a family farming business – it will create a significant impact, particularly for sheep and beef, arable and vegetable farmers who have reasonably tight operating margins.”

Mr Curtis adds that there will be larger farms and those farmers operating in drier climates who will be facing significantly higher bills of $40,000 to $50,000 or more.

Will non-irrigated farms pay?

While both Radio New Zealand and DairyNZ calculated water tax costs for non-irrigated farms, it remains unclear whether these farms would be paying the tax as it is unclear whether they would qualify as ‘large commercial users of water’. The only users mentioned by Labour are water bottlers and irrigators.

6% of New Zealand farms are irrigated (around 11,000 farms). Regardless of whether other farms may pay some of the tax costs, the majority of the tax will fall on a small subset of farmers.

Calculating a water tax on irrigated farms – key variables:

Type of farming – from dairy, to sheep, arable, or horticulture (DairyNZ’s figures were for dairy farms)
Size of farm
Amount of rainfall
Actual water use vs consented take
Number of days irrigation water is applied
The cost of the tax.
IrrigationNZ has been surprised by the growing number of irrigation experts in NZ.

‘Academics, economists and organisations that wouldn’t have the knowledge to turn on an irrigator are all offering their expert opinions on the cost of a water tax. Anyone talking about the potential cost of a water tax must have some basic understanding of water use by irrigators and not everyone offering an opinion currently seems to have that,” says Andrew Curtis.

‘We’d be happy to run a special course for the growing list of water tax experts – to help people to brush-up on their irrigation knowledge and assumptions.’

Calculating irrigation water use – the backbround

Before entering into the ‘how much will irrigators pay’ debate some basic knowledge of water use by irrigators is required.

‘The key piece of information is 1 mm of rainfall (noting rainfall is measured in millimetres not millilitres) falling over 1 hectare is equivalent to 10m3 which is equivalent to 10,000 litres). This provides some context around the sensationalist numbers being used by some parties around irrigation water use,’ says Andrew Curtis.

“For example over the Canterbury region (4.5 million hectares) an annual rainfall of just under 1,650mm or 74 trillion litres falls. However, we all know this isn’t distributed evenly and that’s why we need to irrigate – to provide additional rain for a crop to grow during dry periods. Under 500 mm falls at the coast, rising to 1,000 mm in the foothills and well over 2,000 mm in the mountains.”

For the 500,000 ha of irrigation in Canterbury (based on a seasonal allocation of 550 mm which is explained below) this means the maximum use for irrigation is 4.5 trillion litres or 6% of the annual rainfall.

“It is important to realise irrigators must hold a consent to take water for irrigation, and this contains a seasonal allocation expressed as a volume in m3. This volume is the maximum amount of water an irrigator is allowed to take and based on 80% application efficiency (the agreed industry standard) and 90% supply reliability,” says Mr Curtis.

Councils use a water allocation tool, such as Irricalc (http://irrigationnz.co.nz/practical-resources/irrigation-development/water-allocation-calculator/) to calculate a farms seasonal irrigation allocation requirements. These tools are based on a daily time step water balance model that uses the local climate and the farms soil water holding properties.

“However, when we case study an individual farm we always base it on the seasonal volume written on their consent – as this is the most likely method through which a water tax charge will be calculated,” says Mr Curtis.

David Clark gives the impact the tax will have on his cropping farm:

 

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Let’s not tax this

Labour backed down on introducing a capital gains tax without putting it to the electorate in 2020, but they’re still planning plenty of other taxes.

Captain called wrong

Jacinda Ardern made a captain’s call on the possibility of introducing a capital gains tax without putting it to voters.

Just a couple of weeks ago deputy Kelvin Davis was rebuked for saying it would be put to voters.

Yesterday it was her finance spokesman Grant Robertson who fronted the media to say that was no longer the case.

The captain called wrong.

It shows her inexperience.

It shows the party isn’t ready for government.

It shows their leader isn’t ready to be Prime Minister.

Experience and judgement matter and this episode shows she lacks both.

 

 

 

More tax and bigger budget hole

Labour has been frightened into saying it won’t implement any recommendations of its tax working group until after the 2020 election.

But a Labour led government would still add the water,  regional fuel and visitor taxes; reverse the income tax cuts that every party but Labour voted for; and bring farming into the ETS.

*Apart from water tax, regional fuel tax, income tax, farming into ETS, visitor tax #fineprint https://t.co/fhLer12EmK

— Steven Joyce (@stevenljoyce) September 13, 2017

And if they don’t introduce new taxes their Budget will have a bigger hole.

A Taxpayers’ Union media release points out:

The Taxpayers’ Union says Labour can’t have it all ways, pointing out that Labour’s manifesto is costed at $23 billion over the next Parliamentary term, second only to New Zealand First.

“Labour have done the right thing in committing to put any capital gains or land tax to the vote,” says Jordan Williams, the group’s Executive Director. “But without new revenue, and having promised new spending of $13,287 per New Zealand household, Labour need to explain what spending they’ll cut in order for Grant Robertson to keep to the Party’s debt targets.”

“Two plus two doesn’t equal five.  Labour can’t credibly promise to hike spending, keep to their debt limits, but also say they won’t hike taxes.  It just doesn’t add up.” . . 

The only way to spend more without taking more in tax is to increase debt.

Labour’s fiscal plan shows it would reduce debt more slowly than National would.

The plan also had a hole, unless you believe a Labour-led government would run zero Budgets.

Ruling out a Land and Capital Gains Tax in the next term is the right thing to do but it will make the hole in Labour’s budget bigger.

 

How much more do you want to pay for food?

We don’t know all the details but we do know that a Labour-Green government would impose new taxes on farming:

Green Party and Labour Party policymakers want to hit dairy farmers with a trifecta of environmental taxes that could cost an average of $18,000 per year for each farm, and for those farmers that draw water for irrigation the cost would be in excess of $63,000 per year, says DairyNZ chief executive Dr Tim Mackle.

“But unlike winning the trifecta at the horse races, there’s nothing for New Zealand’s dairy farmers to celebrate,” says Dr Mackle.  “Our economists calculate that the proposed carbon tax would add an average of $6,850 to each farm’s costs, the nitrogen pollution tax would add $11,232 per farm – and then there’s Labour’s proposed water use tax which would add a further $45,000 average for farms irrigating.”   He notes that of New Zealand’s 12,000 dairy herds, 2,000 use irrigation.

“The tax trifecta would severely reduce dairy farm profitability, and possibly require additional borrowing for some farmers to meet expenditure.  It would impact the success of our rural economy, and put at stake the livelihood of our rural communities.” 

It would also inevitably lead to an increase in the cost of food, and that’s without a land and capital gains tax.

Dr Mackle says if a political party had asked him what the dairy sector wanted from Government, he would have said an economy-wide plan outlining the emission reduction expectations for each sector over the longer term.

“Targeting farmers this severely and swiftly does little to incentivise mitigation, and ignores the hard work farmers have been voluntarily doing themselves to lessen emissions.

“Dairy farmers have been operating in a climate of uncertainty with no indication of when they would be faced with a charge for agricultural emissions. Despite this, we have put the Dairy Action for Climate Change plan in place so that all farmers now know what they can be doing right now to reduce their carbon emissions.”

He says the Greens’ leader James Shaw welcomed the climate change plan when it was announced in June.

“He’s well aware of the work currently underway. However, what might be a surprise to him is that we support the concept of a climate commission, and the idea of clear carbon budgets so the dairy sector can plan for the future.”

Dr Mackle adds that the Dairy Action for Climate Change plan is in partnership with Fonterra, and has the support of the Ministry for the Environment and the Ministry of Primary Industries.

“It dovetails with the work of the Biological Emissions Reference Group (BERG), a joint sector and Government reference group. BERG’s purpose is to build robust and agreed evidence on what farmers – that’s dairy, beef, sheep and deer – and the horticultural sector can do to reduce emissions, and to assess the costs and opportunities of doing so. BERG’s final report is due later on this year, and will be vital in informing future policy development on agricultural emissions.”

He says New Zealand is acknowledged as a world-leader for efficiently producing milk on a greenhouse gas per unit of milk basis, as reported by the United Nation’s Food and Agriculture Organisation.

“And we’re committed to doing even better, but it must be understood by everyone, including the Government of the day, that climate change is too complicated for each sector to attempt to address on its own.

“Rather than strongly taxing dairy, we want strong Government direction to get all sectors – rural and urban – to work together through an economy-wide plan to reduce New Zealand’s greenhouse gas emissions over the longer term.”

Brendan Moyle writing at Sciblogs has calculated the cost if agriculture is forced into the ETS:

. . . Some back-of-the-envelope calculations show putting agriculture into the ETS isn’t straightforward. Supposing the price of carbon is say, $16 per tonne, and 1 kg of beef protein takes the FAO average (see below) of 342kg of CO2 emissions.  If a beef cattle yields 200-250 kg of meat (about 1/6th of which is protein), then that’s about 40kg of protein. That’s associated with about 13-14 tonnes of CO2. So that’s an additional cost of about $200 per beef steer. Any way you play with these numbers, the cost of sheep, beef and dairy farming in NZ is going to rise dramatically. . . 

If the cost of farming increases dramatically profitability drops and the price of food will increase.

If emissions drop here it will be because herd numbers drop. Out competitors in other countries will take up the slack and global emissions will increase because they aren’t nearly as efficient as we are.

Until science comes up with ways to reduce emissions, forcing agriculture into the ETS is just tax for tax’s sake.

It will hit farmers and the New Zealand economy without improving the environment.

Rather than leading to environmental improvement it will lead to an increase in emissions in other countries whose governments are sensible enough to leave agriculture out of their emissions targets.

Let’s not tax this

Vision based on science and experience

David Clark writes:

I also have a Vision…
…of where NZ is going to be taken.

When I was a young fella growing up, all I wanted to do was go farming, just like my Dad, my grandfather before him and my great grandfather who had jumped ship in Thames as an orphan in the early 1870’s. I knew that there was something very special about being able to farm the land and grow food.

Then along came the 1980s and the brutal recession brought on by the changes made the Lange Labour Government. As a teenager I still vividly remember watching Television News coverage of a farmer by the name of Dan Dufty being escorted off his North Waikato farm like so many other families were at the time. I remember the tears running down his face and the anguish in his voice.

I remember worrying about whether that would happen to us, things where pretty tight on our family’s small South Auckland Town Supply dairy farm during this time.

When I left school I was very fortunate to be employed by a family at Orere on their large Sheep and Cattle farm. They demonstrated to me that there was a future in farming if you worked hard and this set me on my course.

I wanted to get ahead and found that by starting a small contracting business, initially as a fencer, with a lot of determination, late nights and early starts I would be on a path to make my own way. There was no O.Es, no leering up. In 1994 my parents and I each sold up our assets in Clevedon and set off for the South Island to take up arable and stock farming in Mid Canterbury.

We started contracting out of necessity to help us fund the development of irrigation on the then dryland farm and in 2010 sold that Contracting run to then fund the installation of Centre Pivot Irrigators that were much more water efficient and resulted in less leaching than the earlier machines.

My wife Jayne and I farm here with our three young sons and my parents still live here on farm. This is our Turangawaewae.

But I sit here, thirty years on from that farmer being dragged off his farm and I wonder, no, I fear we are heading back to those very grim days. In my view we are standing in 1984.

Since I wrote my last article, I have seen overwhelmingly positive feedback who buy into the idea that poor water quality has many causes, urban, rural and industrial. Those many causes have many solutions best worked through on a catchment by catchment, community by community basis.

But sadly I have also seen the hatred and vitriol, and I’ve paid a lot of attention to the policies being proposed or hinted at by Labour and the Greens. I have come to the view that these policies, not in isolation, as a compounding effect will likely result in the biggest drop in agricultural economic confidence since the ‘80s.

A Water Tax levied on irrigation, primarily on the East Coast of the South Island to fund a payment of Koha to Iwi and then pay for waterway restoration across the Nation is inequitable and will be ineffective. There is no correlation between areas of poor water quality and areas of intensive irrigation; in fact quite the reverse applies. The tax will exempt all other farming systems and all urban and industrial takes from municipal supply even though it is very clear that poor water quality is also caused by other activities.

The Greens Nitrogen Tax intends to levy Dairy Farmers initially and other farming types soon after for Nitrate discharge even though other land forms leak Nitrogen, as does the DoC estate, Plantation Forestry and of course the discharges of treated and untreated human effluent and storm water, all of which will be untaxed. The cost of compliance with an Audit Quality Overseer assessment required on every farm, every year would be enormous. The suggestion that funding be used in part to coach farmers on Organics is nonsense.

Overseer was never designed to be used to levy tax and it is not reliable – up to 30% margin of error.

I fully understand that the agricultural sector must work to address water quality issues and I believe that we are already making very good progress with riparian fencing and plantings, upgrading of older irrigators to precision application of water, more targeted fertiliser usage and a major rebuild of farm effluent systems in the last 15 years. We have reduced our calculated Nitrogen loss here by 25% in the last six years. Progress is being made, largely voluntarily, however nationally and certainly in Canterbury, Regional Plans have been introduced to put significant onus on land owners to demonstrate a measurable reduction in agricultural externalities.

Farming under the Canterbury Land and Water Regional Plan will, is, delivering results for the environment, but it is expensive to make the changes required in our faming systems, taxing more money out of our business will slow the progress that we can make on farm due to cashflow restriction.

An inclusion of all agricultural emissions into an ETS will see us as farmers compete in the International Marketplace with another layer of cost as we compete against produce that is largely directly or indirectly subsidised and will see farmers struggling to compete with the same overseas product in our domestic market. An ETS on Agriculture in NZ will simply move food growing to a less efficient producer elsewhere in the world.

I hear people regularly saying we all must pay our dues to fight climate change, but I note that International Air Travel is excluded from the Kyoto Protocol because of the damage it would do to global tourism. Research and Development is the way to reduce livestock emissions, not Tax.

A Land Tax with an annualised charge levied over the value of an asset is just simply a new tax, not based on productivity or profit, just a tax and in my view a tax of envy. Farms have high asset values and low profitability, the affordability of an annualised charge will further undermine farming, especially in the sheep and beef sectors.

A Capital Gains Tax and its’ necessary partners, Death and Gift Duties will threaten the very core of New Zealand Agriculture, but not only Agriculture, but intergenerational ownership of all types of businesses across New Zealand and will result in more land and productive assets being lost to long-term corporate and offshore ownership.

Many families struggle to meet the cash flow and capital raising requirements of family succession at the time of the intergenerational transaction, which is done at or near to market values. The new generation of farmer invests their own capital and relies on either internal family or external borrowings to then buy out non-farming siblings; help expand the business to accommodate multiple siblings and provide money to buy a house for parents or otherwise fund their care and welfare.

If Government put their hand out for a Capital Gains Tax on the lifetime growth in the value of the asset, then that cash removed by way of a tax would be the very cash that was so badly needed to complete the intergeneration handover. I certainly understand the extreme difficulties caused by Death Duties in years gone by in New Zealand. They were abolished for very good reason.

Capital Gains Tax and Death Duties will make continued family ownership of the farms and businesses, on which New Zealand is built, extremely difficult.

In Argentina death and gift duties stall farms sales. People hold onto land and lease it rather than selling.

In Australia, CTG stalls farm succession and sales.

In my view the most significant policy of this election is Labour’s Employment Relations Policy which hands total control of workplace pay, conditions and terms across all sectors and all skills and puts the Unions in a centre role of negotiation and “Remove the ability for employers to deduct pay from workers taking low level protest action during an industrial dispute” . I would argue that most New Zealanders have a relationship with their employer built on mutual trust and respect and I don’t believe that most Kiwis wish to return to the ‘70s and ‘80s were the Ferries went on strike at the start of the school holidays, the works went out just as the lambs came on in January or Unions went out in sympathy for a workplace scrap going on at the other end of the country.

In my opinion, this election has got nothing whatsoever to do with the House Prices or Swimming in rivers, this election and the campaign of Labour is a desperate attempt by the Trade Unions to seize control of the New Zealand workplace.

At present we are living with an asset bubble, certainly in house prices in the upper North Island and arguably in farmland, this is no different to most Western economies that have binged on cheap and plentiful credit generated by the madness of Quantitative Easing. Arguably it is not the Government’s fault that we have “traded up” our family home, put a boat or overseas holiday or new car “on the house”, or generally lived beyond our means and racked up massive private sector debt secured against the family home.

We are enjoying interest rates well below the recent long run average and a credible statistical correction could easily see cost of borrowing lift from 5% to 8-9%, I’m not convinced that many home owners would not find their financial situation severely compromised by a near doubling of interest rates, nor do I think many farming businesses could stand such a shock.

I fully support the need for our society to have a robust and compassionate Social Welfare system to provide an outstretched helping hand to our fellow man as they go through a vulnerable time, but this must be a based on the principle of a hand up, not a hand out, and for us to be able to provide that compassion, we need to have a robust and stable economy in the first instance.

It is a culmination of all of these policies, not just one in isolation that I believe has the very real potential to create a collapse in economic confidence not seen in New Zealand since the 1980s.

The brutal and stark reality is that even with our business, which is very sound and holds only a very modest level of debt, there is simply not the money to pay these taxes and increased costs. The cumulative total of these taxes will far outweigh the taxable profit of our farm and will leave us cash flow negative and therefore un-bankable.

I don’t know where the Labour Party think the cash will come from, I can assure you it is not under the pillow in a cake tin.

I can very accurately tell you where the money for these taxes and charges will come from. These costs will come straight out of the till of the businesses in our local town that supply us with goods and services. I fear for the future of those business and the families employed by them, I really do. The ‘80s was very tough for service industries as well.

Land and CTG taxes will hit businesses big and small including health professionals like doctors and physiotherapists, shops, hair dressers, and trades people.

Will the people who think these new taxes are a good idea also think paying more for the goods and services these businesses provide is a good idea?

We have already suspended all none urgent expenditure pending the election outcome.

I and many other New Zealand farmers today are proud to have grown the grain for your cereal or toast; multiplied the seeds that were planted by other farmers to grow your vegetables and spuds; raised your tender meat; clipped wool for your warm clothes; produced the milk for your coffee and supported a multitude of local businesses along the way.

The words that resonate with me are those of retired US Secretary of Agriculture Tom Vilsack…

“Every one of us that’s not a farmer, is not a farmer because we have farmers. We delegate the responsibility of feeding our families to a relatively small percentage of this country… so the rest of us can be lawyers or doctors… or all the other occupations because we never have to think – Do I actually have to grow the food for my family? No, I go to the grocery store and buy it.”

I am proud to be a farmer, doing what’s right, we are not in the ‘80s, please don’t let us go back…

If you support what I have said, please stand together with me and I would really appreciate you sharing this post.

This vision is built on experience, science and facts not political theory.

A lurch to the left under a Labour-led government would undo much of the good that National’s careful economic management has achieved.