The new PM has an opportunity for major tax reform - Grattan Institute

The pace of economic reform is slowing in Australia and, with it, the prospects for faster growth in Australians’ living standards. The 1980s and 1990s were “golden years” of policy reform. But in recent years, governments have increasingly failed to implement reforms that have been recommended for decades.

Major tax reforms are increasingly weaponised in Australian politics. Which is why it’s so remarkable that the NSW government is offering incoming federal Treasurer Jim Chalmers something money alone can’t normally buy: genuine tax reform, but without the usual political headaches.

For more than two years, Premier Dominic Perrottet has advocated swapping stamp duties for a broad-based property tax. It’s a reform with lots of benefits, yet only one Australian government – the ACT – has made the move to date. In all the other states and territories, effective rates of stamp duty have risen sharply in the past two decades.

The economic case for a stamp duty/land tax swap is watertight: having to pay stamp duty on the purchase of a property deters families from moving to the house or location that better suits their needs. In contrast, land taxes paid each year, much like council rates, don’t distort people’s decisions. In economic parlance, land tax is a much more efficient tax, so the mooted swap would improve average living standards.

So why haven’t state treasurers been rushing to do this? Because the politics of the transition are hard. State governments that no longer collected stamp duty revenues would struggle to keep their schools and hospitals open – unless they replaced that revenue stream with another, such as property taxes.

But property taxes are often unpopular precisely because they are highly visible – they are payable each year – and difficult to avoid. In contrast, stamp duties, although a huge impost, account for only a small fraction of the purchase price of a property. And people who have recently paid a big stamp duty bill would understandably feel aggrieved if the rules changed and they received a land tax bill soon after.

To manage the politics, Perrottet has proposed an opt-in model: when people bought a home, they could choose between it being a land-tax property or a stamp-duty property. But once properties were caught in the land tax net, they would stay there.

That would solve the key political problem: no one would be forced to pay land tax unless they opted in.

But the more painless the government made the transition for the buyers, the bigger the long-term budget cost. That revenue hit to the state budget is estimated at about $2.5 billion a year, and could last for years. And by collecting less overall in property taxes during the transition, NSW would be punished by the complex formula used to carve up the $80 billion in GST revenue between the states.

NSW Treasurer Matt Kean has made clear the state will struggle to cover that shortfall on its own. The federal government should commit to filling part of the revenue hole, including any adverse impact of reform on NSW’s share of the GST. It should make the same offer to any other state or territory that takes the plunge on a stamp duty/land tax swap.

There’s plenty of precedent for the federal government helping to pay for economic reform. Under the National Competition Policy, the Commonwealth paid the states almost $6 billion over 10 years in exchange for much-needed regulatory and competition reform. The Productivity Commission later concluded it boosted Australians’ incomes by 2.5 per cent.

Reforming state taxes offers a similarly large payoff. NSW Treasury expects GDP would rise by 1.7 per cent, or $10 billion a year, in the long term. That could translate into an extra $2.5 billion in federal tax revenue each year, more than covering the short-term budgetary cost of any upfront incentive payments.

Removing stamp duty would lead to better use of the existing housing stock, which could result in rents and house prices falling by up to 6 per cent in the long term.

History shows state governments are rarely interested in wholesale tax reform. The NSW government won’t be able to keep stamp duty reform on the table for much longer, especially with the state budget being handed down later this month and a state election early next year. This rare opportunity for a prosperity-boosting reform could be lost if the new federal government doesn’t come to the table soon.

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Danielle Wood – CEO