NSW Fire Service Levy – an alternate view

An article appeared in last Sunday’s Telegraph from a official with the Australian Workers Union criticising the NSW Premier and Government for considering the removal of fire services levies in that state. A number of readers sent me a link to the article asking me to respond. I have done so but before I set out what I wrote I reproduce the article:
Why I think Barry’s  pants are on fire
Insurance companies will benefit handsomely from the O’Farrell government’s plan to impose a fire levy on NSW householders, writes Paul Howes. 

REMEMBER the last state election campaign? The one where Barry O’Farrell and Mike Baird told us all about the big new tax they were going to introduce on households so the government could afford to remove a current levy on insurance companies? 

You must know the one I’m talking about – the $300 annual levy to fund our firefighting service?
Perhaps I have developed early-onset amnesia, but I simply cannot recall any discussion of a fire tax.
Yet surely something as substantial as this would have been discussed before the election. Right? Of course it wasn’t.
I have no doubt I was among thousands who were stunned on Monday morning to hear Jim Casey from the Fire Brigade Employees Union debating the Treasurer on radio about this $300 levy. If you haven’t caught up with this issue and, let’s face it, the state government has hardly been forthcoming, here are the basics.

At the moment, about three-quarters of the funding for Fire and Rescue NSW comes from a levy on insurance companies, with the remainder split between the state government and local councils.

Why does the system levy insurance companies? Because they directly benefit from a well-resourced and highly responsive fire brigade.
Every time firefighters stop a building burning down, insurers save a bucketload because they don’t have to pay out a claim. It is truly a “user pays” system.

But the government is about to scrap the levy on insurance companies and apply a new tax on households. In two weeks, public submissions close on a NSW government discussion paper that recommends a property-based levy as “the best alternative”.

The discussion paper calls for a new tax on landowners of $1.07 for every $1000 of land value. The median land value in Sydney is about $280,000, so if your property is median value, you’ll face a new annual bill of at least $300 a year.

We are about to see a colossal cost shift from insurance companies to households. Insurers stand to gain a whopping $700 million a year.
When I heard about this new tax I decided to do a little bit of research on the history of how we fund fire protection. It turns out that the insurance companies actually established fire brigades precisely because they delivered them such massive cost savings.

In the early days, the insurance brigades would arrive at a burning home and only battle the blaze if the house had an insurance plaque.
By 1884, there was a mixture of insurance brigades and volunteer brigades, but the system was unwieldy, and so the Metropolitan Fire Brigade was created. But for decades the insurance companies continued to run salvage brigades alongside the professional firefighting services, to prevent as much property damage as possible.

What all this shows is that the insurers clearly have a vested interest in a properly run fire service.

Yet now, with a sympathetic government installed in Macquarie St, they are trying to wriggle off the hook for funding the very service they established and continue to benefit handsomely from.

The O’Farrell government’s argument is that the present system means those who are insured subsidise those who are uninsured, therefore a property levy is fairer.

However, to hold true this argument depends on a single mighty assumption: that the insurance companies plan to pass their $700 million windfall on to policy-holders. Anyone keen to take that bet?

Mike Baird is a smart guy. He was previously an investment banker. He knows that insurance companies have a legal obligation to their shareholders, not their customers. They will find any way they can to pocket that $700 million. Surely he understands this? And that means a strange pattern is starting to form.

Because, while this O’Farrell government has been losing a diverse range of friends at a rapid rate, it has made some lifelong mates in one area: the insurance industry.

The fire tax is actually the second time this year that insurance companies have scored handsomely from changes to NSW legislation. Until June, NSW workers were covered if they got injured on the way to and from work. They were also covered for heart attacks and strokes suffered at work and had ongoing coverage for medical costs.

That has been removed by the O’Farrell government – and it is much harder to prove employer negligence for workplace injuries. It’s worth finding out who does the lobbying for the insurance industry, because they have been spectacularly successful under this state government. First, deep cuts to workers’ compensation, now a $700 million cost shift to NSW families.

When it comes to accusations of using government to redistribute wealth, it is traditionally the Australian Labor Party that stands accused. Yet Barry O’Farrell is now shaping as the greatest wealth re-distributor since Gough Whitlam.

The difference, of course, is that he’s shifting the money to those who need it the least.

Paul Howes is the national secretary of the AWU
I offered an alternative view not from someone who sells insurance but someone who tries to pick up the pieces, more often than not seeing first hand the effects of no insurance or gross under-insurance. The letter I submitted, which I hope is published and explains a different story reads:I refer to the article by Mr Paul Howes titled “Why I think Barry’s pants are on fire” and the arguments put forward as to why the New South Wales Government is wrong in removing the fire service levy from insurance. There are a great many reasons as to why the change is the correct one and shows great statesmanship and good economic sense which will benefit the vast majority of those in New South Wales. 

As long ago as 1681 the great English philosopher and most influential of Enlightenment thinkers of his day, John Locke, said that “Government has no other end but the preservation of property”. I believe that the role of modern government also includes the preservation of life and safeguarding and growth of the economy. 

 

The first point to understand is that every community and a sound economy requires efficient, highly trained and well-funded emergency services, including but not limited to, the fire services. All of us who live or own property in New South Wales benefit from the fire services and we all should contribute fairly to the cost of funding the service, not just those who are prudent enough and risk averse enough to insure.
To suggest that insurers gain some benefit by funding fire services is incorrect. Insurance premiums are calculated on the probability and expected severity of a loss. If your premises is located close to a permanently staffed fire station, the premium is lower than if the same home or other building is located in an area where there is no such service. In other words, the benefit of the fire service is passed on to the Insured. To suggest that insurers benefit by being an unpaid tax collector is nonsense. The tax itself and the cost to collect it just adds to the cost of insurance. 

 

I point out that about 16% of the call outs for a fire service are for grass fires, others are for rubbish fires and yet others for car accidents. How does this help those who insure their property?

During the terrible Victorian bush fires, the fire services correctly focused on saving lives rather than property. We do not see calls for life insurance to fund the brigade and there was no refund to the insurance industry or to those who paid their insurance for the 10,000 plus buildings destroyed.Equally important to a developed economy is the need to have all home owners and business owners fully insured. This protects people’s life work, and in the case of businesses, their future income stream, the mortgage over their home and their major investment,and the livelihood of their employees. The insurance industry witnessed, not only in the Victorian bush fires, but also in relation to the Brisbane and Newcastle floods, the devastating effects of not being fully or correctly insured. It creates a cycle of poverty that can become multi-generational. When people are not insured, it places a burden on government, and society in general which all of us have to pay for out of our taxes. 

 

Back in the 1960’s the fire service levy was a standard 15% of insurance premiums. Over time the budgets for the fire services around Australia grew at a much faster rate than the cost of insurance and to meet these costs the Fire Service Levy has had to increase. In addition to the cost of running the fire service, GST has been introduced and this is imposed, not only on the insurance premium, but also on the fire service levy. On top of this there is also a state government stamp duty.  So that is three taxes imposed on insurance premiums: Fire Service Levy, GST and stamp duty.. 

 

Out of the premium, insurers have to pay wages, rents, and of course insurance claims: not just fire, but burglary, impact, storm damage, etc. When you see the level being collected and paid over as fire service levy and other taxes it simply does not add up.  I set out below, the tax imposed on business and home owners in New South Wales. 


 

 

 

Basic economics dictates that if you substantially increase the cost of any good or service, people buy less. In the case of insurance, this translates to more uninsured and under-insured home owners and businesses. On the one hand it means more people buy less insurance and so premiums have to rise for those who insure, and it is a never-ending increasing spiral. On the other hand it means more business failures, bank repossessions, good people put out of work after their employers fails, more marriage breakdowns and in the worst cases, more suicides.I speak not as someone who sells insurance but someone who goes and tries to resuscitate businesses after the fire truck has driven away, a task made much more difficult by the current high level of taxes on insurance in New South Wales. 

 

I therefore applaud Premier O’Farrell and Mike Baird for their initiative to remove the heavy burden of funding the lion’s share of the fire services from those who insure and by making the cost of the fire service and the tax open and transparent. This approach, already taken by Queensland, South Australia, Western Australia and Victoria, is in line with good government worldwide. The reality is that those who insure will be paying less, and they will be the real winners, not the insurers who pass on the tax. Those who do not insure will now be contributing to a service which they have the benefit of and with much lower premiums they may now start to insure and protect the assets they own. 

 

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