Normally, tax fights die the moment the ink dries. This one didn’t. Labour’s ban on interest deductions – bureaucratese for the “landlord tax” – became a proxy war for the capital gains tax (CGT) Labour wanted but feared to name.
The victory was even more remarkable for the fact the ban on interest deductions is such an unusual tax change. Unlike a CGT, which is a normal, internationally accepted tax, the interest deductions ban falls under the “cruel and unusual punishment” section of the tax code.
Advice from when Labour implemented the change in 2021 showed Treasury tolerated the change (mainly because it substituted for the lack of CGT), IRD loathed it and Ministry of Housing and Urban Development officials warned it would choke new housing supply.
Even David Parker, the Revenue Minister in charge of the tax when it was implemented, later said the policy perhaps “went a bit far”, saying if the policy were to be reinstated, only up to 50% of interest costs should be banned.
The tax had not been fully rolled out when the coalition repealed it. At the time of the repeal, IRD reiterated that it wanted the tax gone, Treasury changed its tune and offered very tepid support to remove the ban, but place a cap on deductions to manage the fiscal cost.
The point is that restoring full deductibility – the landlord tax cut – is hardly an unconscionable policy (it may even be good policy), but Labour’s Opposition machine has quite successfully convinced much of the public that it is.
How times change. The mere whisper of a CGT once buried Labour leaders: Phil Goff, David Cunliffe – nearly Dame Jacinda Ardern herself. Lest we forget, it was Ardern’s decision to overrule Andrew Little’s policy of seeking a mandate for any recommendations from the Tax Working Group in the 2020 election before implementing them that put a stop to her inexorable polling rise in 2017. The problem was so acute she was forced into a quick reversal of direction to steady the ship.
So you can see why Chris Hipkins and the Labour hierarchy are somewhat tax-phobic. The polling for CGTs isn’t always bad (it’s not often good either). The electoral record is somewhat different. That said, the political mood appears to have shifted. The unpopularity of the Government’s interest deductibility changes hints at a changing of the political temperature. Property investment isn’t the sacred cow it used to be – it may in fact be a sacred cow overdue for slaughter.
One of the surprising things this week has been the flat-footed response to the tax from the Government. They’ve known since the end of 2023 that Hipkins was considering putting a CGT back on the table, they’ve known since Labour’s conference in November last year that a CGT was likely, and they’ve known since September that a property-only CGT was likely, thanks to reports in the Herald.
This policy should have been quite unsurprising – and the Opposition should have been ready to eviscerate it.
And yet, despite all that, we’ve heard very little from them.
Finance Minister Nicola Willis warned about the tax’s effects on the economy. An interesting attack, but one that is hard to substantiate, given the tax’s limited scope and revenue potential. She noted that people who bought a new house but didn’t want to sell their old house would be captured by the tax… certainly an issue for people who cannot sell their current homes thanks to the nationwide housing crash, but not one that’s likely to resonate with a broad swathe of voters.
Compliance costs for landlords are certainly a problem, but not one that’s likely to shift the capricious needle of public opinion in the Nats’ favour.
The Prime Minister was asked about the tax on his Asian tour. Literally his first words in response were: “Look, I just say to you … ”
The rest probably doesn’t matter. Voters sick of his pre-programmed responses had turned off.
The best anti-tax argument from the coalition came from Building and Construction Minister Chris Penk, who noted some Defence Force personnel, who only owned one home, could be hit by the tax if they needed to move out during an overseas posting (Ministry of Foreign Affairs and Trade diplomats face the same dilemma).
It’s a big issue, particularly as Labour’s decision to start the “gains” clock in 2027 in the midst of a property downturn means there will be some people who will incur a large paper “gain” and therefore tax liability despite the fact that they have sold their property for much less than they bought it for.
Labour knows it’s a big issue, too – the party had to change the law in 2023 when families who needed to move out of their family homes in the aftermath of Cyclone Gabrielle inadvertently became property speculators under the new (since changed) bright-line test rules.
A capital gains tax that takes the current two-year bright-line test and stretches it into perpetuity will create similar problems.
To fix the issue, Labour is taking advice from the papers of the Cullen Tax Working Group.
This raises an important area where this CGT is different to those of yore. This isn’t a policy cooked up by an under-resourced and error-prone party policy unit. In large part, it’s a reheated Ozempic version of the Cullen group’s CGT, which was drafted by some of the brightest tax minds in the country, assisted by a large and well-resourced ($2.4 million) secretariat.
Tax Working Group chairman Sir Michael Cullen detailing his proposed CGT. Photo / Mark Mitchell
Another strong attack was that this mini-CGT was the thin end of the wedge and that after the election, Hipkins would be forced by the Greens, Te Pāti Māori and even his own caucus into implementing a broader tax – even a wealth tax.
Unhelpfully for Hipkins, this argument was made most forcefully by Labour itself, which leaked details of the tax to RNZ ahead of time. The leaker’s motive is unknown, but one possibility is that it was malicious.
Some Labour members are also unhappy. Former Labour member Laszlo Szollosi-Cira posted his unhappiness to Substack, saying that the yearlong debate among the party membership focused on the choice between a wealth tax and a comprehensive capital gains tax. In his account, the minimalist CGT that was eventually announced was never debated among members, leading to a sense that Labour’s internal debate this year was little more than a charade. He said members were far more supportive of the comprehensive CGT.
This reignites a longstanding issue for Hipkins’ leadership, stretching back to his decision to kill the 2023 wealth tax: some members feel shut out of policy deliberation.
All this plays quite helpfully into the fears fanned by National and Act, that a mini-CGT is a Trojan horse for a much more comprehensive CGT or even a wealth tax, which the Greens would force during coalition talks.
Hipkins seemed unprepared for this obvious line of attack when asked about it on Tuesday. He was soggy when asked to delineate what taxes would and wouldn’t be on the table in post-election coalition talks, giving the unhelpful impression the Greens could strong-arm him into implementing the wealth tax they, and a great many Labour members (and MPs), desire.
The Government is keen to suggest Greens co-leader Chlöe Swarbrick and her party will force a wealth tax on Labour. Photo / Mark Mitchell
Perhaps realising his error, he hardened his position when speaking at a Council of Trade Unions conference on Wednesday.
“Labour will vote in favour of the policy that we are campaigning on and we will not go beyond that … I have made it very clear that our policy is as far as we go,” he said.
He didn’t quite utter the magic words “rule out” but those remarks are about as close to it as you can get.
Which brings us back to interest deductibility.
This is the tax policy where Labour’s position continues to be fuzzy.
The fuzziness is real because Labour hasn’t decided whether to campaign on bringing the old rules back. There’s a political argument for doing so – it’s a tax policy in the Green manifesto that both parties could agree on.
There are policy arguments for going the other way – the 2021 advice Labour received raised legitimate concerns about the cooling effect a ban would have on new housing supply, even with a newbuild exemption. With residential investment forecasts being revised ever downwards, slamming investors with a second tax might be a bridge too far.
The second issue is that denied interest deductions would probably need to be offset against revenue from the CGT.
In 2021, officials investigated a full interest deduction ban, but deemed it a terrible idea, or banning interest deductions but allowing them to be offset against tax liabilities from the extended bright-line test, which was allowed. Labour could go down this route, but doing so would torpedo the revenue forecasts from the CGT policy for little obvious revenue upside – and revenue is really the only reason for introducing such a weird tax.
Then you need to think about the property market. While there doesn’t appear to be any desire for the runaway house price inflation of the last decade, it would be wrong to extrapolate this into a desire to exacerbate the current crash. Yes, nine people in 10 won’t pay a CGT, but two in three Kiwis own their own home, and a great many of them are sick of seeing its value plummet.
For all the curly questions facing Hipkins, after this week the stakes seem highest for Luxon.
Killing CGTs are part of the job description for National Party leaders. Sir John Key did it without breaking a sweat – and Sir Bill English out-polled Ardern’s Labour by nearly eight points in 2017. Luxon will need to demonstrate to members, donors and his caucus that he has what it takes to kill this one.
The next few polls will be crucial. If he cannot demonstrate that he, too, can turn a CGT into Labour kryptonite, the next leader interred in the CGT graveyard, alongside Phil Goff and David Cunliffe, may just be him.