“Stamp duty is the worst tax that any government can have,” says Dominic Perrottet, recently quoted in the ABC.
But after talking up stamp duty reform for the past two years, the then NSW Treasurer, now Premier, Dominic Perrottet’s grand plans ended less with a bang and more with a whimper.
The government will allow first home buyers to opt to pay land tax rather than stamp duty. But it falls well short of the kind of reform many were hoping for.
In this podcast, Kat Clay and Brendan Coates discuss why stamp duty is such a bad tax and why a land tax would be better, why the NSW government’s efforts to replace one with the other fell short, and what other states should learn from the experience.
Where to for stamp duty reform now
Kat Clay: Stamp duty is the worst tax that any government can have, says Dominic Perrottet, recently quoted in the ABC. But after talking up stamp duty reform for the past two years, the then NSW Treasurer now Premier, Dominic Perrottet’s grand plans ended less with a bang and more with a whimper. The government will allow first homebuyers to opt to pay land tax rather than stamp duty, but it falls well short of the kind of reform many were hoping for.
Today we’re going to ask why stamp duty is such a bad tax and why a land tax would be better. Why the New South Wales government’s efforts to replace one with the other fell short. And what should the other states learn from this experience? I’m Kat Clay. And with me is Brendan Coates, who loves talking about housing policy so much that he’s come back on the podcast for a second week.
Welcome Brendan.
Brendan Coates: I hate to break it to you, Kat, and to your listeners, but this is actually going to be a podcast about tax, not housing. So maybe we’ll see a few people drop off now.
Kat Clay: I don’t know, the more I work at Grattan, the more interested I become in tax, which is a very nerdy thing to say. Anyone who’s bought a property has been whacked with the additional tax on top of already high house prices in the form of stamp duty.
I mean, how much do Australians pay in stamp duty?
Brendan Coates: Well, it does vary from state to state, Kat, but as a general rule of thumb, a lot of Australians, particularly if they’re buying sort of the median house in, in a lot of jurisdictions are paying something like 4 percent in Victoria or like 5 percent of the property price in stamp duty.
So that means say in Sydney, if you’re buying a million-dollar house. Which is incidentally now below the median property value. Uh, you’d be paying about 40, 000. Which is roughly half of the typical full-time wage in Australia. So, it’s a really substantial impost.
Kat Clay: So why is it such a bad tax?
Brendan Coates: Well, stamp duties basically impede people from moving house.
So having to pay stamp duty on the purchase of a property deters families from moving to, you know, a house or a location that better suits their needs to take a new job. Uh, it also acts as an effective tax on divorce because if you need to sell your house when you settle, um, you know, set up your affairs, the house is the number one asset that people tend to have.
And so, you tend to need to sell it. And then when people need to buy again, you’re naturally, um, forcing people to pay a stick. A lot of standards. So basically, anytime people’s circumstances change, and you’d want them to move. Stamp duty makes it really hard for them to be able to move and stamp duty is really costly, you know, because it has risen over time and therefore it stops people from, you know, getting a house that suits their needs.
It stops people from upgrading a house if they’ve got a family that’s growing that they now need, um, you know, extra bedrooms for kids. And it can stop people from downsizing as well, although I think that’s less of an issue than the others. The benefits of dropping stamp duty are very large. So, the New South Wales treasury in some of the work it did in, in thinking about a stamp duty land tax swap estimated that the boost to Australian’s living standards or to New South Wales residents, living standards would be about 1.
7%. If you replace stamp duty with the land tax in the long term. So, it’s worth about 10 billion in New South Wales alone. I think we’ve previously estimated the benefits has been close to 20 billion nationally. Um, so you get a big economic boost if you could replace one stamp duty with something else.
And you’d also get a better allocation of the housing stock. Because at the moment people, knowing that they’re going to have to pay stamp duty again if they move, choose to buy a larger house up front, really stretch to get that bigger house. So that the house can accommodate them when they have kids, even if the house that they need at that point in time, they don’t need that many bedrooms.
So, it leads to a misallocation of the housing stock that ultimately makes for a given level of supply, housing more expensive than it needs to be.
Kat Clay: So, no one likes paying stamp duty, but what’s the alternative here, Brendan? Why is land tax most commonly proposed as a replacement for stamp duty?
Brendan Coates: Well, in the same way as stamp duty is our most costly economic tax.
It’s probably the worst tax in the Federation. Land tax is the best tax in the Federation. So, land taxes, which are payable each year, based on the total value of the lands that someone owns, you know, they tend not to distort people’s decisions if they apply broadly across all forms of land. And so, because it doesn’t distort people’s Um, decisions.
It doesn’t generate big economic costs because the tax applies irrespective of what you do with the land. And that’s kind of a secret to make it for it being so efficient. It’s also tended to be in the long term a growing tax base because land values have risen enormously in Australia over the course of the last two or three decades.
And so historically, it’s been one of the few really good growth taxes that state governments have access to. You know, we introduced the GST in part to give states that growing tax base. And it’s actually turned out not to grow as quickly because of the exemptions. GST and in the world of multinational tax avoidance, land taxes are really effective because you can’t move the land.
We know where it is. It’s not going anywhere. And so, you really can’t avoid paying land taxes to the state revenue office each year. So, land tax is not the only thing you could replace stamp duty with, but we tend to think of it as the natural counterpart because it’s also a tax on property. You’re replacing one tax on property with another that minimizes any house price impacts.
You could also replace stamp duty with the GST. You could still replace stamp duty with federal income tax. They tend to be kind of more difficult sales. I think replacing stamp duty with land tax is the number one opportunity. It’s just really hard because Land taxes are really salient, you know, the reason we don’t have more of them is because you get a bill every quarter every year for a grand.
This is what happens with council rates today, which is a land tax in effect, and it’s a visible reminder of what you’ve got to pay. Whereas stamp duty, you pay it once when you, as part of an enormous transaction where you’re buying a house for a lot of money. And once you’ve bought that house, you tend not to think about the fact that you paid a walking track of stamp duty on it a couple of years ago.
Kat Clay: So Brendan, I mean, the nerd in me is thinking about all the ways that I could possibly move my land around either with a TARDIS or house moving castle, but if this is such a good idea, and I mean land tax, not a TARDIS, why haven’t more states done it already?
Brendan Coates: I think that’s our first year Ghibli reference on the podcast, and I’m a big fan of that.
Um, my boys do love, they love those stories. So, if you think about why haven’t states done it, it’s because the transition’s really hard. So, we’ve talked about the salience factor with stamp duty as to why people put up with it, even though it’s very costly to their lives. The other part of it is you’ve got to transition from stamp duty to land tax.
There’s a couple of political problems you’ve got to solve. Uh, you’ve got to solve the fact that people who recently paid stamp duty will become very cranky if you make them pay land tax. You’ve also got people who paid stamp duty yonks ago, who have now basically not been contributing. by the property tax system to the, to the revenue base to pay for schools and hospitals and everything else that states provide for years.
And you’ve got to bring them back into the net and you know, they’re not going to like that in a lot of cases. You’ve also got issues around, you know, asset rich, um, income, poor households, and, you know, thinking of pensioners or older Australians that own their own home, but don’t have relatively modest incomes while you solve all of those problems often involves giving some concessions, some giveaways.
And the challenge is that then you’ve got to also keep state revenues growing or running so that you can keep the schools open, the hospitals running. And the more you give us giveaways as concessions, you know, concessions to recent purchases, so they don’t pay twice, then the harder it is to also make the book stack up to make the budget balance, uh, during that transition period.
And so that’s why the only jurisdiction that has done this so far is the ACT. So, the ACT is halfway through, 10 years into, what is supposed to be a 20-year reform program. To replace stamp duty with a land tax by gradually phasing down the stamp duty over 20 years and gradually raising the land tax rate over 20 years so that one compensates for the other, they keep the revenues on the way through their revenues have actually grown because while the stamp duty rates have fallen.
Profit prices in Australia since 2012 have exploded. And so, they’re actually still collecting a lot of money in stamp duty. They’re just collecting a lot less than they would have if the original stamp duty regime had remained in place. Uh, and they’re obviously collecting a lot more land tax on the way through.
But, you know, the ACT, it can tend to be a bit more of a one-party state. It does tend to return Labor governments much more often, you know, in, in the recent federal election. David Pocock. Took the Liberal Senate seat in the ACT, which sort of tells you where the political preferences of Canberrans have tended to lie.
And that transition, that gradual transition is probably, you know, it is easy to do, particularly over a 20-year period. In a jurisdiction where, you know, one government is likely to be in power for longer.
Kat Clay: So, New South Wales has been flagging stamp duty reform for the past two years. What were they proposing and what did they deliver in this week’s New South Wales state budget?
Brendan Coates: So, what they proposed and what they’ve delivered are kind of chalk and cheese. And you know, that to, to be, to be upfront, um, to anyone listening from New South Wales that’s involved in that effort, it’s a lot of, quite a bit of it is not New South Wales fault. Some of it potentially is. What they’ve been proposing, Dominic Perrottet started flagging his treasurer two years ago that he wanted to replace stamp duty with a land tax, and he was championing this idea of an opt in model, which is to overcome a lot of those political problems we talked about before, you would just give people a choice.
So, when people buy a home, they would be able to choose between paying land tax or stamp duty. But then the catch should be that once someone has, when they purchase this home, has opted for land tax, Then forevermore that pro that property is subject to land tax rather than stamp duty, even when it’s sold in the future by having opt in, you prevent a lot of the political problems that would emerge from, you know, people who recently paid stamp duty and are worried they’re gonna have to pay land tax again, but you’re also exempting all those people that paid stamp duty 30 30 years ago and would otherwise come into the land tax man.
Um, they’re that they don’t, they’re grandfathered through and so that’s what they were proposing. The idea was that they would do this over a 30- or 40-year period. And then at some point you probably have to bite the bullet people who haven’t opted for land tax. So, the stamp duty at some point, you probably just got to say, okay.
From now on the land tax is coming and you know, you’re paying it regardless of whether, you know, you previously opted for stamp duty or not. That model was something he put on the table. The key sort of challenge with it, uh, is that you give a lot of revenue away in the transition. During the transition, you’re giving up stamp duty.
So, think of a 1, 000, 000 property, 40 grand that then goes and pays schools and hospitals that year. And then the next year someone else buys and you get another 40 grand. Instead, you’re getting the potentially the equivalent of 40, 000, but each year you’re probably getting 2, 000 as pay as a flow of property tax payments.
And that just means there’s a big budget shortfall in the short term, but also the idea of having an opt in means that people will choose what’s best for them. So, if you expect to hold the property for a short period, you’ll choose land tax. If you expect to hold the property for a long period, you choose stamp duty.
Like there’s some break-even period. I think it’s like 15 years. And so even in the long term, they were expecting that they would. Lose roughly 20 percent of the revenue of what they got in stamp duty, which would get 20 percent less even in the long run in, in, in the brave new world post transition. So, the revenue shortfall was really big instead of that very broad reform, um, that would have done a lot to help replace stamp duty and remove this impulse that prevents people from, you know, switching homes.
They instead are only doing it for first time buyers.
Kat Clay: Brendan, I mean, what really struck me reading about this was the narrowness of the targeting of this measure. I mean, it’s targeted at first homebuyers only and under 1. 5 million, which is, you know, chump change in the Sydney property market. What’s your take on this?
Brendan Coates: Well, it’s a long way from the original plan, which would have covered every, almost everyone. So, it would have been 80 percent of homes. And would have also critically included people that had already owned a home before. Because all the economic costs of stamp duty are about making sure, are about preventing people from buying a second home from trading up again once they bought their first home.
So that’s why people don’t buy again to get a house that better suits their needs if they’ve got kids. move for a job, lots of different circumstances. And so, let’s stand is bad because it discourages those second moves. But the proposal that’s been put out this week from the from the government, the Southwest government, the budget doesn’t do anything to actually unlock those gains.
Um, to unlock the real economic gains. It’s really a measure to improve access to home ownership. It’s a home, first time buyer, owner’s sort of proposal because it’s really allowing first time buyers to overcome the deposit hurdle. Because if you don’t have to pay 4, 5 percent in stamp duty, uh, 40 grand on a million-dollar house, that probably shaves a bit over two years off the time taken to save a deposit.
It probably also raises property prices just a little bit. But the other reason I think it’s, it’s um, it’s a real shame that they’ve gone where they have. Is it the first time by a policy once someone opts for land tax, if they then sell the house, it’s not in the land tax net permanently, it resets and the new buyer can either choose stamp duty or land tax.
So instead of it being the first step on the road to broader stamp duty reform. The premiers kind of take us into a cul de sac and we’re kind of stuck there without anywhere to go.
Kat Clay: An apt housing metaphor there. Now Brendan, you’ve mentioned the revenue is one of the issues, um, and perhaps why this tax doesn’t go further here.
Are there any other issues here that’s the reason for why it’s kind of been watered down so much?
Brendan Coates: Why they’ve ended up where they have is because, you know, to a fair degree because the New South Wales government can’t adopt this model. In all honesty, without federal support, the revenue shortfall that comes from doing the opt in model is just so large.
Now, the opt in model makes the rest of the politics really easy, but it leaves you with this big revenue shortfall. Perrottet has been really clear for the last few years in signalling, basically playing with the federal government to help them do this reform, which I think is something that’s worth doing if you were the federal government, because the federal government collects, if the economy grows by 10 billion in New South Wales, The federal government collects five and every six tax dollars in Australia.
So, they would collect roughly 2. 5 billion additional revenue each year. The state doesn’t actually get any of that additional fiscal dividend. So, they can’t use that to compensate for the revenue shortfall in the short term. What should have happened was the federal government should have come to the table and offered to help cover the shortfall in the short term, whether it be via.
Just, you know, using the proceeds of bracket creep or, you know, some extra debt or whatnot, it would have been worth it given the size of the economic gain. Now, in the absence of that support, you know, they were left with nowhere to go. And in fact, we’ve actually ended up, you know, with what you think of as the worst of both worlds, because having signalled this for the last two years.
and now not done it, the opposition leader, Chris Minns in New South Wales has then declared his opposition to quote unquote attacks on every single-family home forever. And so instead of having sort of bipartisanship for an economic reform, we’re in a position where the opposition is committing to oppose a policy the government hasn’t even committed to enacting.
It’s a worse place to be than if the reform had never been on the table in the first place, which is quite an achievement collectively for politicians in New South Wales. compared to where we thought we might have been a few weeks ago. But like, that’s the rub when you’re trying to do these kinds of reforms.
The temptation for the opposition is always to oppose. And so, they’re essentially running a scare campaign around the proposal that the New South Wales government has not even enacted, which would be great if they did enact. But isn’t, doesn’t look like it’s on the table because there’s not that federal support forthcoming.
Kat Clay: So, we’ve got a form of land tax in the ACT and that’s being phased in. We’ve got the watered-down version in New South Wales. What about the other states if they’re going to try and implement a transition from stamp duty to land tax?
Brendan Coates: I think if you’re another state, you should be very careful about adopting the New South Wales model.
It does make the other parts of the politics easier, but that revenue shortfall is just really big, and it lasts quite a long time. You know, if I was another state treasurer or premier that’s thinking about going down this path, I would probably look more at the ACT. That’s a model that’s worked obviously in a pretty unique political circumstance, but it’s a, it’s a reform that’s um, now halfway through.
I would adopt that model of gradually phasing down stamp duty, gradually raising the land tax. Perhaps try to do it over 10 years rather than 20 because 10, no government in any state or jurisdiction other than the ACT’s have got a chance of being in power for 20 years. That’d give them sufficient revenue to run the show during that period.
Also, I think in a world where borrowing costs are going up so sharply, uh, we talked on the podcast last week about interest rates. You know, the cost of debt financing, the reform as a state for the state, just like wearing the cost and using borrowing to cover the shortfall becomes harder when interest rates are high.
But then if the federal government, which should Jim Chalmers should still offer any state government, if that’s willing to do a stamp duty reform, they should essentially have a facility that says we will help you cover the shortfall. You’d have to put some guardrails around it to make sure the state didn’t just put the whole cost onto the feds of doing the reform, the budgetary costs, but you could basically have that facility and, and instead of seeking all the states together to try to get standard year reform up and commit to it together, this is, this is a political economy problem.
It’s going to one state at a time is potentially the window will open and could do it, but you basically offer substantial federal support for any state that’s willing to do it. And that would mean any state that was willing to take up that support, they could offer things like credits to recent purchases in exchange for, you know, having a shorter period of transitioning from stamp duty to land tax for maybe 10 or 5 years.
I think that’s the way forward. If I was the federal government, it is sort of the tax reform that money alone can’t normally buy. The state would be doing a lot of the work. You would essentially be replacing stamp duty with a land tax. And then potentially a little bit of federal income tax. Standard is such a costly tax that that is a deal that is worth taking for any state.
And any federal government in the long term, and that’s hopefully where we’ll get to over the course of the next few years. But given where things stand in New South Wales right now, it’s probably going to be a while before we see it in New South Wales again.
Kat Clay: I mean, Brendan, just plain devil’s advocate here.
I mean, you’re saying that the federal government should fund the shortfall in the land tax situation. But I mean, you know. The budget’s not looking great. There’s a lot of other things to be paying for. The state premiers are clamouring for health funding. I mean, is this down the list of priorities here?
Maybe we should shelve it for the time being.
Brendan Coates: No, I don’t think that’s true. And you know, at the risk of, um, you know, um, creating a fight within Grattan as to who gets the federal government money with between myself and Peter Braden as the, the health program director and Geordie running schools.
Jordana Hunter. This is a productivity enhancing reform. You get a big economic payoff in the long run from doing this. And so, you know, it’s not going to happen without the feds come into the table. We did this in the 1990s, you know, with what we were the old national competition policy reforms. The Commonwealth paid the states to do things that were in the national interest, where the federal government then reaps an economic and budgetary dividend because the PC estimated the Productivity Commission estimated that those reforms left the economy roughly 2 per cent bigger than otherwise, the same story applies here.
So, it is really a long-term investment. You know, we should be very obviously sort of cognizant of the fiscal position for the federal government. It’s a long-term challenge. Giving more money to the states for health. Yes. That will make it harder to close the deficit at the federal level. But this is something that is genuinely in the national interest and would in the long term generate the kind of revenues.
At a state and federal level, you’re going to need to run better health services, better aged care services. And it’s frankly, if you don’t get productivity growing faster, all those challenges are just going to be so much harder. Those budget challenges are going to be so much harder to solve.
Kat Clay: Thank you so much, Brendan.
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