Property Taxes, the second working paper in Grattan’s Budget Repair series, finds that a levy of just $2 for every $1000 of unimproved land value would raise $7 billion a year with an annual charge of $772 on the median-priced Sydney home, $560 on the median-priced Melbourne home, and lower average rates in other cities and the regions.
The first working paper, Fiscal challenges for Australia, found that state budgets are under pressure, with spending in health, education and other areas growing faster than GDP. State revenues are also threatened by the Commonwealth’s decision in last year’s budget to substantially reduce promised funding to the states for hospitals and schools.
Current attention is focussed on the worsening Commonwealth deficit, but states and territories have a looming funding gap, and have provided little insight into how they are going to fill it. A broad-based property levy calculated from the council rates base would be the best revenue measure to fill that gap.
While property taxes can be unpopular because they are highly visible and hard to avoid, they are also efficient and fair, and don’t change incentives to work, save and invest. Unlike capital, property is immobile – it cannot shift offshore to avoid taxes. Over the last 25 years, tax on property and property transactions have been the only significant growth taxes for states, with revenues keeping pace with the economy.
Grattan’s proposal is manageable for property landowners, and protects low-income people. Low-income retirees with high-value houses could defer paying the levy until their house is sold.
The levy could also be used to fund the reduction and eventual abolition of stamp duties, among the most inefficient and inequitable state taxes.
Shifting from stamp duty to a property levy would provide more stable revenues for states and add up to $9 billion in annual GDP.