Last week, Treasury Secretary, Dr Martin Parkinson made a convincing case for why state stamp duties should be abolished:
Treasury boss Martin Parkinson has backed a move to wind back or abolish real estate stamp duties saying they make it hard for workers to move west and north to take advantage of the mining boom.
Asked at an Australian Industry Group forum which taxes were the biggest drag on productivity, he nominated state taxes on housing which he said inhibit economic adjustments, “whether they be individual workers moving from the Illawarra to Queensland or Western Australia to work in the mining sector, or whether a firm is trying to restructure its business”.
“We need to encourage change, not to stand it in its way. That’s why I make specific reference to state governments,” he told the conference.
NSW made $3.9 billion from real estate stamp duties in the year to June, around one third of the national total. Abolishing the could be paid for by increasing the goods and services tax by a quarter, from its current rate of 10 per cent to 12.5 per cent.
The Henry tax review reported that “ideally there is no place for stamp duty in a modern tax system”. It found they discourage property turnover turnover and penalise property improvements…
“The only positive feature of stamp duty – its relative simplicity – has long since ceased to justify its continued use in the face of the costs it imposes on Australian society,” the review said, recommending they be replaced by a broad land tax.
Professor Neil Warren who reviewed state taxes for the Independent Pricing and Regulatory Tribunal in 2008 told the Herald it was universally acknowledged among the states that stamp duties should go, but said the transition was difficult.
“What about someone who has just bought a house. Does she have to also pay the replacement tax? If so she is taxed twice. If the replacement tax is on land it should be the unimproved value so as not to reinstate one of the faults of stamp duties.”
Certainly, Australia’s state and local governments have for the past decade rode on the back of skyrocketing property prices. The revenues received have funded all kinds of expenditure – from public servants’ salaries to health care, schools and infrastructure. The below RP Data chart shows the extent of State and Local Government reliance on property taxes:
Victoria is the highest taxing state, with the amount of tax payable on a median priced Melbourne dwelling amounting to around $22,000, or nearly 5% of the median purchase price:
Purchase taxes and fees on a median priced Melbourne dwelling currently consume around a third of one year’s median household disposable income (calculated from the most recent ABS Household Income Survey and extrapolated by wages growth):
This means that an ordinary Melbourne family is currently required to sacrifice around 17 weeks of pay for the privilege of purchasing a home:
So let’s summarise some of the key arguments against stamp duties:
- They are highly inefficient, causing a mismatch between the demand for and supply of particular types of housing. This occurs because stamp duties discourage empty nesters from moving from their large family homes into more appropriate accommodation (e.g. townhouses, units and apartments). In turn, these family-friendly homes are unavailable to young families.
- Stamp duties are highly inequitable, unfairly penalising households for moving into accommodation that better suits their needs. For example, why should young families be penalised tens of thousands of dollars for the privilege of moving from an apartment into a family home? By the same token, why should empty nesters be penalised for moving from their family homes into a unit?
- By significantly increasing the costs of moving, stamp duties reduce worker mobility and potentially exacerbate labour surpluses/shortgages in different parts of the country. For example, a typical household relocating from Melbourne to Perth to work in the mining industry would forgo around 14 weeks of pay just to cover the purchase taxes and fees on a median priced Perth home.
Do you notice how I have not discussed first home buyer housing affordability above? This is because the costs of stamp duties have more to do with the efficiency and equity of the tax system and less to do with housing affordability, since there are schemes that at least partially reimburse the costs of stamp duties to first home buyers, and the costs of stamp duties are typically shared by both the buyer and seller.
With the state governments receiving around $12.5 billion per year in revenue from stamp duties, abolishing stamp duties would be particularly difficult. Two potential options are to replace stamp duties with one or a combination of the following:
- Increasing the rate of GST; and/or
- Implementing a broad-based land lax on the owner-occupied home.
Increasing the rate of GST would be relatively simple and efficient. However, since the GST was introduced in 2000, all major political parties have vowed that they would never support an increase in its rate.
This leaves implementing a broad-based land tax. Cameron Murray articulated nicely the arguments for land taxes in an article on his old blog:
First, they discourage speculation. They provide a disincentive for land ownership without immediate prospects of productive use. This idea relates closely to the current (and let’s be honest, old and ongoing) debate about housing affordability and housing supply. A land tax would hinder the ability for developers to ‘land bank’ – artificially stifling supply of new dwellings. It will increase competitiveness of supply in the land market. This is one reason even the proponents of a housing shortage should embrace this tax.
Indeed, they may even encourage planning changes by governments (maybe through pressure on local governments by the federal government) to allow greater density to increase their tax base.
Second, a land tax has the effect of encouraging efficient use of land and investment in buildings. Those wishing to increase density in the cities to reduce urban sprawl should also see benefits here. Owners of land in urban areas would have more incentive for subdivision, and increasing density, to avoid this tax. In fact the economic success of Hong Kong, Taiwan and Singapore has been attributed to high land taxes – a path that Korea is keen to follow.
Third, they are a difficult tax to avoid, and administratively simple (indeed small land taxes are currently enforced in all States for owners with land holdings above a threshold value). Land ownership is well documented, and tax evaders could have their land compulsorily acquired.
Unfortunately, harnessing public support for broad-based land taxes would be difficult for a number of reasons. First, as also noted by Cameron Murray, land taxes would fall disproportionately on wealthier members of society, since they have the largest landholdings. They are likely to lobby hard against such a tax and popularise the argument that land taxes will add costs that will crush land ownership aspirations. Developers with large land holdings are likely to make similar ructions.
Second, the general public is less likely to support a tax that is required to be paid regularly by everyone than a larger tax paid irregularly by small minority. With only around 5% of the nation’s homes turning over each year, stamp duties only effect a small proportion of the population annually. And once a homeowner has paid their stamp duty bill, they are less likely to support changes that would require them to pay tax again.
What are your thoughts? Would you like to see stamp duties abolished? And if so, what form of taxation should take its place?