Is New Zealand on a ‘Slippery Slope’ With Tax Policy?

According to the “slippery slope” framework, tax compliance, and for that matter, tax policy development, is best facilitated by an approach that is founded on taxpayers’ trust in the tax authority, rather than extensive use of power. In this regard, the Generic Tax Policy Process (GTPP) has been held up as an example of best practice when it comes to consultative and transparency tax policy development by commentators inside and outside of New Zealand. Yet, as I argued in a recent Australian Tax Forum article, the New Zealand government’s growing appetite to set aside the full use of the GTPP is damaging the level of trust that is held by taxpayers (and tax practitioners) in the process.

The GTPP and the COVID-19 pandemic

The GTPP was first introduced in 1994 by way of a Cabinet directive following a review of New Zealand’s Inland Revenue. In a briefing note for the then incoming Minister of Revenue, Inland Revenue (2011, at 4, emphasis added) describes the GTPP as follows:

Since 1994, tax policy has been developed in accordance with the Generic Tax Policy Process (GTPP). This is a very open and interactive process which helps ensure that tax policy changes are well thought through. A good tax policy process is an essential ingredient for a good tax system. We believe that the GTPP is a good process which is valued by the private sector. You should be aware that the consultation that takes place under the GTPP will add to the time it takes to develop tax policy but this helps towards good and stable policies being developed.

Since its introduction, the only notable change to the GTPP was announced in August 2019, to allow for greater instances of urgency to circumvent the full process, along with a closer alignment of tax with social policy.

With the onset of the COVID-19 pandemic, the New Zealand government (like many others), sought to move swiftly to react, setting aside in most instances the usual checks and balances in developing and enacting law. While some of the moves may be justified on the basis of genuine urgency, the New Zealand government (having secured an outright single party majority at the 2020 General Election), gained an insatiable appetite to take urgency with the vast majority of tax policy proposals, frequently bypassing even select committee consideration of draft legislation. Examples include the re-introduction of a top personal income tax rate of 39 per cent in 2020, the changes to residential property taxation in 2021 and the Cost of Living Payments in 2022.

An increasingly common mechanism is to introduce legislation by way of a supplementary order paper (SOP) after the select committee stage so that there cannot be any consultation. Major changes would be announced by ministers and often enacted by Parliament within days. During this time, to its credit, Inland Revenue strived to remain as consultative as it practically could.

Even after the ‘end’ of the restrictive pandemic period, the New Zealand government continues to show a reluctance to consistently act in a fully consultative manner at the policy stage. This situation has arisen largely due to the lack of legislative backing to the GTPP, meaning that it can be ‘set aside’ at any time with no formalities required.

The resulting legislation has frequently been both significant in its impact and controversial in nature, leading in many instances to ‘unintended consequences’ that have necessitated remedial action. The resulting legislation has also made compliance by taxpayers in some instances more challenging. The high level of trust that was held in the policy process until mid-2020, which had taken many years to be established, has eroded at an alarming rate.

This is not the first instance in which the GTPP has been put aside. Earlier instances include in 1999-2000 when the 39 per cent rate for individuals was first introduced (the top marginal tax rate last exceeded 33 per cent prior to 1985 and this was the first increase in around 15 years), and in 2010, when the Look Through Company (LTC) tax regime was introduced via a SOP post-select committee.

The almost ‘perfect storm’ arose through the demands of a pandemic, a single party government (even under a mixed-member proportional representation system), exemplified by a view that the New Zealand government ‘knows best’ and need not consult with the wider public or even tax practitioners and professional bodies. In effect, this has seen an erosion of an important democratic right, namely for citizens to be able to participate in tax policy development (either directly or via trusted organisations such as professional accounting bodies).

What of the future for the GTPP in New Zealand?

In an earlier publication, I recommended the establishment of a Crown entity, the New Zealand Taxation Review Commission (NZTRC), to provide a degree of separation and independence in tax policy development and review. Furthermore, in a forthcoming paper, I recommend that the following steps are needed to enable the GTPP to be effective:

1. The GTPP be acknowledged publicly by the government as best practice for developing tax policy and that it commits to following its own guidance as set out in the 2019 Inland Revenue issues paper. Accompanying this there should be a complete explanation of why the GTPP has been set aside (and thereby failing to utilise best practice), desirably accompanied by an apology;
2. That all future tax policy initiatives be worked through the GTPP in their entirety, unless justified by the exceptions set out in the 2019 Inland Revenue issues paper accompanied by sufficient explanation ;
3. That the only policy or legislative issues that are introduced by way of a supplementary order paper after the select committee be remedial and minor in nature, such as correcting mistakes. Any significant legislative issues will be added to a bill before the select committee phase in order to allow for public submissions and wider scrutiny;
4. Any significant policy proposals be held back until the next available opportunity to release a discussion document or issues paper in order to allow for the policy issues to be subject to public consultation. This will necessitate more careful planning by the government in setting its policy and legislative agenda;
5. The Tax Policy Work Program (TPWP) is updated on a 12-month rolling basis no matter what issues are facing the country, with any reasons for additions, change or departure fully disclosed with supporting reasoning;
6. That the GTPP be set out in a draft bill that itself works through the parliamentary consultation process so that it has the force of legislative backing (the issue of whether it be entrenched and requiring a 75 per cent majority for change or to be set aside should be open to discussion). This would require Parliament to formally pass an amendment to set the GTPP legislation aside, which would need supporting reasoning for the decision that is subject to debate within Parliament. The benefits of legislative enactment can be seen through the operation of the Public Sector Act 2020.

Whether any of these recommendations will occur, and for that matter whether the GTPP will be fully restored, remains unknown.

 

Journal articles

Adrian Sawyer, “Tax Policy Without Consultation: Is New Zealand on a ‘Slippery Slope’?”, (2022) 37(4) Australian Tax Forum, 481-514.

Adrian Sawyer, “Navigating Challenging Times: A New Zealand Perspective”, (2023), 29(3) New Zealand Journal of Taxation Law and Policy, forthcoming.