Are there other options that would raise the revenue the states need?
by John Daley
Published at The Conversation, Wednesday 22 July
State governments can go a long way towards meeting their budget challenges by raising more revenues from their own tax bases. The states control the most efficient tax base available to any Australian government: property. Well-designed property taxes drag less on the economy for each dollar of revenue raised than any other tax. Unlike capital, property is immobile — it cannot shift offshore to avoid higher taxes. Concerns about the risks of multinational tax avoidance, the increasing mobility of global capital and the increasing value of residential property relative to incomes should make property taxes a priority in any tax reform.
Property Taxes, a new Grattan Institute paper, finds that a modest property levy of just $2 for every $1000 of unimproved land value would raise $7 billion a year for the states and territories. The annual charge on the median-priced home in Sydney would be $772, in Melbourne $560, and lower in other cities and the regions. A broad-based property levy could help plug the gap for schools and hospitals left by the Commonwealth’s decision to cut funding to these areas from 2017-18. Based on historical price trends over the past two decades, revenues from a levy on unimproved land values could double to as much as $14 billion by 2024-25, offsetting much of the projected shortfall from Commonwealth cuts.
Higher property taxes could also be used to fund the reduction and eventual abolition of state stamp duties on property. Stamp duties are among the most inefficient taxes because they discourage people from moving to better jobs, or to housing that suits their needs better. Their revenues are inherently volatile. Shifting from stamp duty to a broad-based property tax would provide a more stable tax base, spread the tax burden more fairly, and add up to $9 billion annually to GDP. The ACT is already phasing out stamp duty over 20 years, and replacing the revenues with higher municipal rates. Other states and territories could follow suit.
Alternatively, states could fix their existing land taxes, which are paid on around half of Australia’s land by value due to exemptions for owner occupied housing and agricultural land, and minimum thresholds below which no land tax is payable. These state land taxes raise $6.4 billion a year. Broadening their base to include owner occupied housing could raise about $5 billion in extra revenues. Reducing the tax-free thresholds would raise even more.
State payroll taxes are reasonably efficient taxes that raise $21.4 billion a year for state governments, and could raise more. However, thresholds and exemptions limit how much they raise, and distort economic decisions by discouraging companies from growing larger.
Victorian Premier Daniel Andrews has proposed increasing the Medicare levy on income tax to fund extra spending on health services. However, this would increase the gap between how much states spend and how much they collect in tax. Almost half of state revenues come from Commonwealth grants, much more than in other federations such as Canada, Germany and the US. Reducing this mismatch between revenue and expenditure would reduce the blame-game in which the states and Commonwealth blame each for policy failures rather than taking responsibility for the money they spend.