NSW budget 2015: It’s time to get rid of stamp duty
Published by The Sydney Morning Herald, Tuesday 23 June
It’s nice work if you can get it, being NSW Treasurer. On Tuesday Gladys Berejiklian announced a forecast underlying surplus of $700 million for 2015-16, $300 million more than was forecast just six months ago. But is the NSW government making the most of its luck?
Premier Mike Baird and Berejiklian say the result reflects prudent economic management over the past five years. Certainly spending growth has been more moderate than under the previous government. And the result defies softer economic growth and commodity prices, which drag on payroll tax collections and royalty payments. But by far the biggest contributor to the success has been the property boom.
Sydney house prices rose by almost 13 per cent in the past year and by 16 per cent in the previous year. As a result, government revenues from stamp duties on residential properties have grown by an astounding 25 per cent a year since 2012-13.
Stamp duties now account for more than 28 per cent of the NSW government’s tax revenues.
Yet while the windfall gain in stamp duty is great for the bottom line, it is bad for the economy and for the budget over the longer term.
Stamp duties are a tax on housing transactions. They deter people from buying and selling property, and therefore can prevent them moving closer to jobs or upsizing and downsizing homes as their needs change. The Commonwealth Treasury nominates stamp duty as Australia’s least efficient tax. Its cost to the economy and jobs is large.
Stamp duties are also unfair. One family could pay more tax than another with similar income and assets, simply because it moves house more often. This particularly penalises young people, who tend to be more mobile.
And despite the current windfall, relying on stamp duties causes serious budget management headaches for state governments. Stamp duties are highly volatile. In NSW, every 1 per cent decline in house sales reduces stamp duty revenues by more than $60 million. Growth in stamp duty revenues will inevitably decline again as the Sydney property market slows. The decline will either be orderly, as forecast in the budget papers, or a sharp correction.
A broad-based property levy is a far better way for state governments to collect revenues. Unlike the existing land tax, which does not apply to owner-occupier housing, a good land tax contains few exclusions. It could be delivered as a property levy imposed via the council rates base. Like all broad-based land taxes it would have almost no impact on the economy. People with low incomes and no wealth would pay nothing. And it would make housing more affordable by reducing property prices.
A broad based property levy of 0.1 per cent ($785 a year on a median $785,000 home) could raise about $2.5 billion a year in NSW, enough to cut stamp duties by more than more 30 per cent.
But despite almost unanimous support among economists for a land tax-stamp duty “swap”, state governments fear the proposal. The ACT is doing it but with a 20-year phase-in. The South Australian government recently floated it but was quickly shut down by an opposition scare campaign about a “tax on the family home”. The NSW government, although acutely exposed to stamp duty fluctuations, has not put it on the table.
A big reason for the reluctance is that land taxes cause considerable angst among voters. Stamp duties raise many times more revenue, yet bureaucrats report getting more complaints about land taxes. Perhaps people simply don’t notice stamp duties as much: the bill is relatively modest in the context of the price of a new house. But the impost is large – Sydney home buyers who buy a median $785,000 home will pay more than $30,000, or almost 4 per cent of the purchase price.
As with any revenue neutral tax change, reducing stamp duties and replacing the revenue with an annual property levy will create winners and losers. People planning to stay in their house for many decades might pay more. But those who buy and sell regularly – more likely to be young people with changing work and family needs – will almost certainly be better off.
Getting reform will require a calm debate. If voters can look past the scare campaigns they will realise that many of them, and certainly the NSW economy, would be better off than under the current outdated regime. Tax reform is always easier in good times. For a popular Premier and a Treasurer that has just delivered a good news budget, it would be a good way to manage their luck.