State property tax reform: balancing economic principle and political realism

by Brendan Coates

Presented at the University of Adelaide “Federal Relations and Tax Reform” workshop, Monday 28 August

Nearly all economists advocate introducing a general property tax in place of stamp duty. Such a switch would offer a more stable revenues stream and a chance to boost economic growth, yet few Australian governments have attempted to reform state property taxes. To date, only the ACT Government has made the move. And effective rates of stamp duty have risen sharply in all states in the past two decades.

The right design for a property tax to replace stamp duty can help overcome the politics. In this presentation, Australian Perspectives Fellow Brendan Coates shows how governments can balance policy principle with political realism to make real progress on property tax reform.

Any effective transition from stamp duty to a property tax must overcome three hurdles: (1) the need to maintain a stable source of tax revenue; (2) perceptions of unfair treatment among those who have recently paid stamp duty; and (3) concerns regarding the impact of a recurrent property tax on asset-rich, income-poor households, especially seniors.

Proposals to grandfather existing homeowners from any recurrent property tax until the property is next sold minimise the impost on asset-rich, income-poor households and neutralise perceptions of unfairness among those who have recently paid stamp duty. However, both options pose significant threats to state budgets because the state foregoes stamp duties received up front in favor of a much smaller recurrent property tax paid each year. Such a shortfall could be financed, but would still show up as a large deterioration in states’ headline budget balances.

In contrast, a gradual transition to a broad-based property tax such as that adopted in the ACT would provide a stable revenue stream while delaying the full impost on those who recently paid stamp duty. State governments should allow asset-rich, income-poor households to stay in their homes, by allowing them to defer paying the levy until they sell their property.

The Commonwealth Government should consider providing incentive payments to the states to make this reform, since its revenues will ultimately benefit from the increased economic growth that the reform encourages.