Council rate hikes could be different across rural, regional and city areas under proposed changes, but it will be up to the NSW government to bring local funding up to speed with the rest of Australia.
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NSW local government leaders have long been calling for an overhaul of the rate pegging system, which sets an annual limit on increased income from ratepayers.
The Independent Pricing and Regulatory Tribunal (IPART) released a draft report on Tuesday, proposing a raft of changes to rate caps, after a 10-month review surveyed thousands of ratepayers and heard from councils around the state.
The report said one potential improvement was using economic forecasts to help calculate the caps, rather than interpreting data from the Australian Bureau of Statistics.
IPART chair Carmel Donnelly says the current model can lead to a two-year lag between when rising costs are measured and when councils can recover price hikes.
"When we had volatility in the economy after going from a very low inflation environment during the COVID lockdown phase to increasing inflation, the methodology was not responsive enough," Ms Donnelly told AAP.
Many councils want rate caps abolished, saying the system is outdated, doesn't consider the diverse needs of different regions and hurts the communities and ratepayers it was designed to protect.
In Western Australia, Queensland, South Australia, Tasmania and the Northern Territory, councils can set their own rates with varying restrictions, while Victoria sets rate caps using consumer price index forecasts.
Ms Donnelly said the review was only able to consider the way rates caps were calculated, but IPART supported the state government establishing a broader independent review.
"During a time where NSW has had drought, bushfires, floods, COVID, supply chain disruption, labour shortages, higher inflation, rising interest rates it would be timely for the government to initiate an independent investigation into the financial model," she said.
Rural and regional councils, which face rising repair costs after floods and fires, have long argued rate caps do not reflect communities' individual needs.
The draft report proposes calculating council costs by three rural, regional and metropolitan categories and possibly looking at certain regions individually.
"Councils are quite diverse; they have different communities, some are growing, some are not," Ms Donnelly said.
"We heard that 'one size fits all' isn't ideal."
Submissions on the draft report close on July 4. IPART will hold a public hearing before its final recommendations are handed to the government.
Australian Associated Press
