The NSW Government should abolish stamp duties and replace them with a broad-based property tax. This could leave residents $4-5 billion a year better off, while also helping to improve housing affordability.
In this submission to the NSW Productivity Commission’s Kickstarting the Productivity Conversation Discussion Paper, Household Finances Program Director and Associate Jonathan Nolan argue that the NSW Government has one of the least efficient tax bases of any state or territory, largely due to its high historical reliance on stamp duties. But replacing stamp duties with general property taxes would produce a big economic payoff. Shifting from stamp duties to a broad-based property tax could leave NSW up to $5 billion a year better off, while also improving housing affordability.
Stamp duties are among the most inefficient and inequitable taxes available to the states and territories. In contrast, property taxes – which are levied on the value of property holdings – are the most efficient taxes available to the states and territories. If they are designed well and applied broadly, they do little to change people’s incentives to work, save and invest.
Despite the obvious benefits, only one Australian government – the ACT – has made the move from stamp duties to a broad-based property tax. Property taxes are often unpopular precisely because they are highly visible and difficult to avoid. But the right design for a property tax to replace stamp duty can help overcome the political difficulties.
A low-rate, broad-based land tax in NSW using the council rates base could raise $9 billion a year through an annual levy of just $5 for every $1000 of unimproved land value – enough to fund the abolition of stamp duties. Alternatively, replacing stamp duties with a progressive property levy calculated separately for each individual land plot – as the ACT has done – could minimise the windfall gains to larger home-owners from the swap.
Transitioning gradually to a broad-based property tax like the ACT has done would provide a stable revenue stream while allowing home-owners to adjust. Allowing some home-owners to defer payment until they sell their house would also ensure asset-rich but income-poor households could stay in their homes. And NSW should also investigate the viability providing a tax credit for home-owners who recently paid stamp duty to facilitate a more rapid transition to a property tax than that adopted in the ACT.