Following the ACT land tax approach boosts growth and state budgets
Published by the Australian Financial Review, Wednesday 19 October
Yet the ACT Labor government is now five years into a 20-year plan to replace stamp duties with broad-based property taxes straight out of an economics textbook. Its fifth straight election win on Saturday demonstrates that the political cost of property tax reform may be overstated.
Stamp duties levied on the transfer of property are among the most inefficient taxes. They discourage people from moving to better jobs, or to housing that better suits their needs.
By contrast, property taxes such as land taxes and council rates levied on the value of property holdings are the most efficient taxes the states can impose. Designed well and broadly applied, they don’t hurt incentives to work, save and invest. The Grattan Institute’s 2015 paper, Property Taxes, shows that a national shift from stamp duties to a broad-based property tax would add up to $9 billion annually to gross domestic product.
Stamp duty silliness
Stamp duties are unfair. One family could pay more tax than another with similar income and assets, simply because it moves house more often. Stamp duties especially penalise young people, who tend to be more mobile.
Stamp duty revenues are also volatile. They depend on both property prices and turnover. The slowing of property sales – as is forecast for the residential apartment market in our major capital cities – could punch a big hole in state budgets. Broad-based property taxes deliver more stable revenues because they are not affected by turnover.
Yet despite a compelling case, state governments have been reluctant to embrace property tax reform. Property taxes scare voters. The South Australian government floated swapping stamp duties for a broad-based land tax last year but backed down when the opposition ran a scare campaign against a “tax on the family home”.
The relatively small land taxes we do have generate more complaints but much less revenue than stamp duties. Stamp duties are less front of mind, because people pay them when they are flush with cash from selling their home before purchasing a new one, or borrowing for a new mortgage.
ACT breaks free
So it’s no surprise that state politicians are reluctant to take the political risk. That’s why the ACT election result is so important.
In 2012 the ACT government began phasing out stamp duty over 20 years, and replacing it with higher municipal rates. As a result, annual general property rates on a family home on land worth $500,000 have increased from roughly $2200 a year in 2012 to $3000 just four years later. At the same time, the stamp duty on a home worth $500,000 has fallen by more than five times that amount: from $18,050 to $13,460.
The ACT Liberal opposition campaigned to freeze general rates increases, thereby halting the government’s swap of stamp duty for rates. But the Liberals suffered a 2.6 per cent swing against them, while the vote for the incumbents remained steady. The result shows that the community can be persuaded that general property taxes are better than stamp duties for raising revenues.
The ACT government was smart about its reform. Rather than jacking up existing land taxes, which exclude more than half of all land by value, especially owner-occupied housing, it is funding the abolition of stamp duties through a property levy imposed via the council rates base. The states could do the same.
How much would it cost?
Our report, Property Taxes, shows that a nationwide property levy of just $2 for every $1000 of capital improved land value included in the council rates base could raise $16 billion a year for the states and territories, enough to fund abolition of stamp duties in the long run. The annual charge on the median-priced Sydney home would be $2060 and in Melbourne $1680, with lower average rates in other cities and the regions.
Importantly, this levy would not exempt owner-occupied housing or agricultural land, and the levy would apply from the first dollar of property value with no minimum threshold.
A property levy would pose difficulties for asset-rich but income-poor people, especially retirees who have limited incomes but own their own home. Retirees should be able to choose to stay in their homes. Yet exempting or providing concessions to asset-rich, cash-poor landowners would be unfair to younger taxpayers.
Instead, state governments should allow asset rich, income-poor households to defer paying the levy until they sell their property. Deferral arrangements are already available for seniors paying council rates in South Australia, Western Australia and the ACT.
The Commonwealth should consider providing incentive payments to the states to undertake this reform, since its revenues will ultimately benefit from the increased economic growth that the reforms encourage.
Using property taxes to boost economic growth while increasing the resilience of state budgets has long been seen as smart policy. The weekend’s ACT election shows that it can also be smart politics.