Property Council talks its book on tax reform

By Leith van Onselen

The Property Council of Australia (PCA) stepped-up its lobbying on tax reform yesterday, calling on the Government to abolish stamp duties in favour of an increase in the GST. Here’s what the PCA’s chief executive, Ken Morrison, said in a radio interview yesterday with The ABC’s Business editor Peter Ryan:

KEN MORRISON: Well it’s simply just out of control. We’ve seen nearly 800 per cent increases in stamp duty on a family home over just over 20 years.

That’s well out of kilter with CPI or anything that house price growths has done.

You know, stamp duty is a tax for which you get nothing back.

I mean people know that you need to pay you income taxes and company taxes but stamp duty you’re paying an enormous slug of money at a time when you’re extremely stretched.

And for most people you’re putting it directly on your mortgage and paying interest on that stamp duty as well.

PETER RYAN: There’s a huge national debate over the affordability of entry level housing prices, especially in Sydney and Melbourne, and stamp duty of course is a very big weight there.

KEN MORRISON: Look it’s bad for affordability; it’s terrible for the economy. Treasury’s own modelling shows that for every extra dollar of stamp duty raised it has a 73 per cent impact on the Australian economy.

So this is the worst of taxes. It’s a tax which is spiralling out of control; it’s a tax which harms affordability; and a tax which is also very bad for the economy.

PETER RYAN: You say stamp duty has to go but it would leave a massive revenue hole for states and territories, so what would they replace it with?

KEN MORRISON: Obviously it would need replacement revenue. State governments have got important work to do and they need revenue to do that work with. So we need a new deal to provide that revenue.

GST would seem to be the most logical source. It’s a well accepted tax. It performs well and it has a much lower impact on the economy than these quite distortive stamp duties.

PETER RYAN: Now stamp duty is one of those taxes that states and territories have been relying on for a very long time and they’re not going to be giving it up easily.

KEN MORRISON: Well if they had replacement revenue I think there’s a lot of advantages to moving away from stamp duty.

If you’re a state treasurer stamp duty is also a rollercoaster tax. It’s great on the way up but terrifying on the way down.

You know, it’s not just the price movements in the property market which impact stamp duty revenues; it’s also the volumes of sales.

So when markets tighten up and you have a volume of sales which significantly tightens so stamp duty’s can drop 60 per cent in any given year.

So that’s a bad revenue source for state governments to base their budgets on.

When it comes to stamp duty, the PCA is 100% correct. It is one of the most inefficient and damaging taxes going around, with Treasury’s discussion paper on tax showing it created a large marginal excess burden:

Conveyancing stamp duties… have a high excess burden because they discourage the exchange of residential and business properties…

Stamp duties are some of the most inefficient taxes levied in Australia… they are levied selectively on activities or products and are taxed on the total transaction value, rather than the ‘value added’ component. Such transaction taxes are more likely to discourage turnover of taxed goods, as taxpayers attempt to reduce or avoid paying the tax…

Because revenue growth is driven by property prices and numbers of transactions, stamp duties on conveyances are a highly volatile tax, with revenue collected from stamp duties on conveyances fluctuating by over 50 per cent in previous years. Stamp duties on conveyances add to the costs of buying and selling property and can discourage businesses from undertaking productivity enhancing purchases of existing land and capital. The outcome can be retention of land for relatively unproductive purposes…

Stamp duties also impact on consumers by increasing the cost of buying and selling houses. As house prices increase over time, unadjusted progressive tax rates also increase the tax burden associated with stamp duty. For example, the burden of stamp duty on a median-priced house in Melbourne has almost doubled over the past 20 years — from 2.67 per cent of the sale price in 1988 to 5.16 per cent in 2011.

This clearly adds to transaction costs and contributes to Australia’s high (by international standards) costs of moving. These costs can discourage householders from moving to housing that best suits their needs and can be an important barrier to labour mobility. A number of reviews have found that, by dampening the number of house sales, stamp duties can also add to commuting times.183 Stamp duty can also be inequitable — those who move more frequently face higher costs than those who move less frequently, even if their circumstances are otherwise similar…

However, while the PCA’s arguments on stamp duty are valid, it conveniently failed to endorse shifting the tax base to a broad-based land tax, which is amongst the most efficient and equitable taxes going around, actually creating positive efficiencies. Again, here’s the Australian Treasury’s view:

Modelling also suggests that broad-based land taxes, such as municipal rates, have a low economic cost (Chart 2.9). This is because land is immobile (unlike other capital) and cannot be moved or varied to avoid tax. The model applies this assumption to both domestic and foreign ownership of land. Land taxes paid by foreign and domestic landowners are only redistributed to the domestic households, providing a benefit to Australian households and generating a negative marginal excess burden for a broad-based land tax shown in the chart.

The Productivity Commission agrees:

Past Commission inquiries have recommended replacing stamp duties with a more efficient form of taxation, such as a broad based land tax, as this will improve flexibility and efficiency in the housing market (PC 2013b). A more flexible housing market will also support geographic labour mobility, allowing more workers to move to areas with better employment opportunities…

RECOMMENDATION 12.2
State and Territory Governments should remove or significantly reduce housing related stamp duties, and increase reliance on more efficient taxes, such as broad based land taxes.

So, based on efficiency grounds, a shift from stamp duties to broad-based land taxes is a ‘no brainer’ and would confer significant benefits for the economy and welfare.

As argued previously, there are also broader reasons to endorse the implementation of land value taxes in place of stamp duties.

First, a broad-based land tax would help make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased land tax receipts. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs.

Second, an broad-based land values tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.

This is not to say that the GST should also be broadened/increased, but rather that it should be traded-off against reduced taxes on incomes, which are also inefficient and are becoming increasingly inequitable because of bracket creep.

Chris Richardson from Deloitte Access Economics agrees:

Look, there are great arguments for doing away with stamp duty at the state level, there are excellent arguments for widening the GST.

I’m not sure that the two go together.

The more logical thing to get rid of a bad property tax would be to replace it with a good property tax.

That’s what you’re seeing in the ACT.

For example, if they’re raising the equivalent of council rates, at the state level you could potentially do it through some type of land tax.

In summary, stamp duties are a horrible tax, and efficiency considerations demand that they be replaced by a broad-based land tax.

Just don’t expect a vested interest like the PCA to argue the case.

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