Stamp duty has to go

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By Leith van Onselen

The AFR’s Robert Carling has posted an article today arguing to reform stamp duties:

…the states’ reliance on this source of revenue [stamp duties] is unhealthy and highlights the need to rethink how states are funded.

The beginnings of the Sydney boom helped push the NSW budget to an unexpected operating surplus in 2012-13.

…The huge increase in the weight of stamp duty on real estate transactions over time is a concern, not only because of the burden it places on buyers and sellers of homes, but also because stamp duty is widely recognised as one of the most distorting taxes. At the margin, it locks people into inappropriate housing and discourages mobility…

For these reasons, various government-initiated tax reviews, including the Henry review, have recommended replacing stamp duty with broader and less distorting taxes, including land tax…

States are right to say they need growing revenue bases, but property stamp duty is one that fails other criteria for sound revenue raising. Stamp duty reform is needed by re-examining how states are funded overall.

Carling’s arguments against stamp duty hit the nail on the head.

The volatility of stamp duty receipts – which rise and fall with the housing market – can reap havoc on state government finances, making budget forecasting and planning especially difficult (see next chart).

ScreenHunter_306 Nov. 19 07.45

Aside from their inherent volatility, reforming stamp duties also has a lot of merit on efficiency and equity grounds.

Stamp duty is a highly inefficient tax that discourages housing turnover by unnecessarily penalising people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes. Such disincentives inevitably lead to an inefficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms. Stamp duties also hinder labour mobility since they discourage workers from relocating closer to employment.

Stamp duties are also highly inequitable. As shown in the next RBA chart, between 4% to 8% of the housing stock is transacted annually. As such, we have a bizarre situation where a small minority of the population are paying taxes that support services for the whole community – all for the privilege of moving to a home that better suits their needs.

A fairer way of sharing the tax burden would be to abolish stamp duties and extend land taxes currently applied on investment properties to one’s principal place of residence. As shown by the next chart, land tax receipts have proven to be a remarkably stable source of revenue when compared against stamp duties, since they are not affected by transaction volumes.

ScreenHunter_307 Nov. 19 08.01

As argued previously, broad-based land value taxes (LVT) would also assist in the provision of new housing via two channels. First, an LVT 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 LVT 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 LVT would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.

As with any change to the tax system, there are transitional issues that would need to be worked through in shifting from stamp duties to a broad-based LVT.

One concern is that those who recently purchased a property (and paid stamp duty) would be double-taxed via an LVT. A logical solution is to credit all landowners with the amount of stamp duty paid and then deduct the hypothetical land tax they would have paid since the date of purchase.

Another concern is that asset rich, cash poor, retirees could be left with LVT bills they cannot pay, requiring them to sell their homes. A logical solution is to allow these people to accumulate their LVT liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first).

Last year, the ACT Government announced the bold (and sensible) plan to transition out of stamp duty over 20 years, replacing it with a broad-based land tax levied via an increase in property rates. Reforming stamp duty was also a recommendation of the Henry Tax Review, which characterised stamp duty as an inefficient tax, and recommended replacing it with broad-based LVT levied on all properties.

The options are there, and it is in the state and territory governments’ financial interest to pursue reform and change the tax mix.

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Comments

  1. “Stamp duty is a highly inefficient tax that discourages housing turnover”

    Without stamp duty, the amount of investors/speculators in the market would increase to the extent that FHBs and genuine buy to live in people would be even more crowded out.

    More so in the current rising market, they’d just buy then try to flick as soon as it settles. At least stamp duty serves as a deterrent to doing this.

    • Nope CGT is the deterrent to that. Stamp duty isn’t the only thing that needs to be fixed, obviously more changes need to be made in concert.

    • Wrong, you have no idea how many people are sitting on property that is not being used to its highest and best use.

      Land tax is calculated on the properties highest and best use, a land tax would not necessarily ‘force’ but would be a good stick to get people to sell their properties if they are just sitting on them to speculate for higher prices.

      If you don’t want to develop the land then pay the price. Land tax would reduce the amount of land speculators and help in reducing prices.

      • Agree. Land Tax would make people re-think, every time they have to pay it, ‘do I really need that property sitting there and causing me a tax bill’.

        I would go even further and argue for an additional ‘vacant property tax’.

        The easiest way to administer it would be to charge it on all properties other than primary residence, vacant or not. You could then offset the ‘vacancy tax’ on any further income tax you have to pay on income from the property.

        That would create the dynamic of ‘I have to pay tax on this property either way, therefore I might as well get some income from it by renting it out’.

      • @hixtar

        I understand land tax and agree this needs to be implemented however by getting of stamp duty as well, it would encourage people to buy and flick especially in a rising market.

        Even with stamp duty, i know of some instances where investors have tried to flick without even changing the coat of paint. Check out 40 Camden Street, Newtown – it sold for 860k in july, and was flicked for 903k in Oct. With Stamp Duty, this person lost money. If stamp duty were not in existence, i could not imagine the number of investors who would try to buy and flick thus crowding out live in buyers.

      • Thanks Chino, although as you say flipping houses is only attractive in a rising market.

        Abolishing stamp duty and implementing a broad based LVT is a supply side reform that would put downward pressure on house prices. I don’t think it’s likely you would see buying and flipping in those circumstances.

    • @Chino

      “Without stamp duty, the amount of investors/speculators in the market would increase to the extent that FHBs and genuine buy to live in people would be even more crowded out.”

      IMO, short term speculators would provide liquidity and would make buying (and selling) at a fair price easier, not harder.

  2. Given Australia’s vertical fiscal imbalance, and the consequent stranglehold the Federal Government has on finances, what incentive have the States to change?

    If they went to all the trouble to reform their tax systems to get more revenue, there is absolutely no guarantee that the Feds will not just cut State grants for example.

    The reform that is needed, is to vastly reduce the degree of vertical fiscal imbalance in this country. If that is not undertaken, the states could do a lot of hard political and administrative work and find that they are no better off at the end of it. There are very few individuals or institutions that willingly undertake that sort of hard work while under the risk of having the benefit of that work taken from them. There are few Mother Theresas in politics.

    So, what is being said is that reform is needed. Perhaps the AFR could tell us something we didn’t already know? What is required specifically as a first step is reform of vertical fiscal imbalance. (Something I have pointed out several times before).

    Without that particular reform, I reckon reform within the system is unlikely.

    Obviously no concept of change management at the AFR.

    • Although vertical imbalances are as important as stamp duty reform, I dont think the Commonwealth needs to come to the table on this one.

      Stamp duties and land taxes are solely the domain of the states and territories (although NT doesnt have a land tax). They are completely within their own rights to begin reforming – without any need for Commonwealth interference.

      Their political convictions are hamstrung by irrational and emotive people like NMT (comment below). People will cry bloody murder at these reforms, despite it costing their very own communities untold billions every year. Frustrating stuff.

      ACT should be applauded for having the bollocks to give it a crack.

      • Ken, I agree to the extent that the Commonwealth should not need to be involved. However, were I a State politician, I would ask myself, what guarantee do I have that the Commonwealth would not just reduce State grants were I to increase State revenue?

        This sort of tax reform would be a big deal at State level, most likely involving some sort of pain for whomever might be the losers and therefore for the politicians involved. So were I a State politician, I would want to be guaranteed that if I had to undergo political pain, then I would get some lasting gain out of it. Without the Feds being at the table and agreeing not to undercut any new land tax, there would be no such guarantee.

        Without such a guarantee, there would be higher political imperatives.

  3. Yeah you’re totally right, lets bring back SERFDOM and place taxes on property that you already own. Just because Stamp duty does not work doesn’t mean I should have to surrender my liberty to allow a state government even more license to piss my money away.

    • And there you have it. The knee-jerk, bogan response that encapsulates perfectly why this very sensible reform won’t happen.

    • With the introduction of a land tax it would remove multiple other taxes.

      I bet your an old boomer with leveraged residential real estate earning net yields of 2%-3%…

      • Why would that matter? Just up the rent.

        You know, great big new hughmungus tax and all that excuse.

        Having said that, if you are really serious about getting a land tax implemented (and it seems to be a good idea), then name calling ain’t gonna win your opponents over. Creating some natural class of opponents where none need exist doesn’t seem to be the optimum way of achieving the change you want.

      • @emess 12.38, rents are linked to wages, not landowner aspirations. If landowners could unilaterally raise rents they would already have done so, hence land tax falls entirely on the owner. (if a land tax allows cuts to wage-related taxes, then that’s a different matter)

        On insulting other commentators, it is an amusing conceit that an avatar can take offence, no matter what the provocation. You can abandon that theme immediately.

    • I agree with you. Any land not within 10km of government infrastructure should be available to be privately owned with no land tax on it. Do you own such land?

    • NMT: droll trollery.

      “surrender my liberty to allow a state government even more license to piss my money away.”

      This happens every time you buy a loaf of bread, and I know which purchase is more closely aligned to ‘liberty’.

      Stick to the facts, darling. Stamp Duty is profoundly regressive, volatile and pro-cyclical (no, that’s not a good thing). It traps citizens in and out of housing. Land tax is a much better base, with minute admin costs. It is impossible to avoid or pass on.

      Deadweight losses cost Australia over $70 billion a year (KPMG Econotec). This is money squirted up against the wall by poor taxes. (though not the incidence of taxation, which is where NMT is trying to take the discussion).

      Tax reform is the single most useful thing government can do to improve the quality of our lives. We need to discuss this soberly, and not be distracted by switching the focus to our anger on spending.

    • If you think you really own your land then take a look at those that were in the way of the east/west tunnel in Melbourne. Or try not paying your council rates.

      • You own your land but governments have the right to acquire it on “just terms” – see the Land Acquisition (Just Terms) Compensation Act in NSW. Other states have similar acts.

        This principle in enshrined in the Australian Constitution (Section 51(xxxi)) providing that the Commonwealth has the power to make laws with respect to “the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws.”

  4. With undoing the damage caused in 1941 and returning direct taxation powers to the states, we’re on a hiding to nothing here.

    As pointed out above, there is nothing stopping the commonwealth taking the biscuit in future.

    Tax competition between states is a good thing.

    • I agree with this comment. Imagine that the Feds reduced their take of corporations tax to 20% and the states baseline is 10%. No difference to the economy at first, but watch how competition would potentially drive either of 2 outcomes.

      1) lower taxes to attract investment and activity or
      2) higher taxes to fund better infrastucture or investment in health and education.
      Businesses and individuals would move and make the business of government more efficient.

      A place like Tasmania might choose to drop income tax to a flat rate of 30% to attract a funds management industry. Watch financial types sit up and take notice of that. With internet and teleconferencing etc you could move a few industries around.

      It would also need to be combined with a stamp duty reform. Some people who might have moved to WA to work in the mining industry have been deterred by the stamp duty bill to up and move.

  5. mine-otour in a china shop

    This tax policy shift makes sense. Change will only occur though when the arse falls out of the housing market, and unstable revenue transaction flows fall further.

    Whilst the idea to transition the tax by allowing for a tax credit for recent buyers is sound, this may not be feasible given the probable rapid fall in tax revenue and a widening deficit.

    Some people will have to pay twice and there will be no choice. Short term pain for longer term gain.

    Ireland bit this policy shock but only having gone through the addiction to revenue phase, the denial phase, the this is never implementable politically phase, the house market shock phase and then finally the no other option phase.

  6. A possible painless approach to phasing out stamp duty is as follows.

    1. Allow the buyer to elect to move the property permanently from the stamp duty regime to a LVT approach. Once moved to a LVT system it cannot move back. They don’t have to but some/many will be attracted by being able to avoid the stamp duty slug.

    2. As this may cause a short term revenue issue for the state govt if a significant number of buyers elect to move to LVT the state government could securitise part of the LVT stream for the affected properties for sufficient years so that the security sells for the stamp duty forgone.

    In short

    State govts face no financing issue from the transition

    Buyers get to choose if they want to avoid stamp duty.

    Adjust as required as we learn from experience.

    A nice slow gradual and voluntary transition will avoid the hysteria that generally prevents most sensible policy.

  7. If a FHB grant is a boost to vendors because it increases the amount they can pay, why wouldn’t stamp duty abolition not have exactly the same impact?

  8. Shifting from stamp duty to land tax has opposition from both sides of politics.

    We’re familiar with right-wing opposition from the people who would pay the land tax but there is also left-wing/communist opposition with the viewpoint that “any tax is a good tax” regardless of the dead-weight loss to the economy.

    So flack for this reform comes from both sides.

  9. LVT is levied on the value of the land alone (similar to the way in which council rates are assessed) correct? Would there not be merit in replacing Stamp Duties with a property tax levied on the value of the land and the improvements thereon? My thinking is that this would encourage empty nester owner/occupiers (currently partially discouraged from selling because ofthe need to acquire anew property and pay another round of stamp duty) to consider whether they need their 5 bedroom mansion or whether a smaller home would suit their needs better and at the same time (all things being equal) result in a lower property tax. This woud have the advantage of freeing up these larger homes for younger, larger families.

    • An interesting point, although I think it’s the size of the land that’s more relevant than the size of the house on it. It’s just as important to encourage someone to move on from a small house on a large (under-utilised) lot as it is to encourage them to move on from a large house on the same sized lot. This will allow a new owner to extend or replace the house to better utilise the land.

      • “It’s just as important to encourage someone to move on from a small house on a large (under-utilised) lot as it is to encourage them to move on from a large house on the same sized lot.”

        That’s right. Tax on building value discourages building. Pretty difficult to discourage building land :-).