The Productivity Commission has released its Draft Report into Geographic Labour Mobility, which identifies Australia’s high stamp duties as a key impediment and recommends a shift towards more efficient revenue sources, such as broad-based land taxes:
The most common impediments to geographic labour mobility raised by stakeholders are insufficient housing supply and a lack of affordable housing. Housing affordability is of particular importance in communities experiencing an influx of population, where demand for housing has outstripped supply, and where substantial increases in both rents and house prices have been experienced. This can have important implications for the community, as low-to-middle income earners may no longer be able to afford local housing. It has also been identified as a problem in Australia’s larger cities, where some workers are unable to live close to areas of employment growth.
A number of existing government policies, such as taxation and land-use planning, could be contributing to distorted housing costs, which impact on rental and purchase decisions and can impede mobility. Two areas that have been frequently raised in this study are also areas that the Commission has examined in previous work:
Inefficient land-use planning processes and the delayed release of land for residential development can limit housing availability.
Conveyancing duty (stamp duty) imposes additional costs on property transactions and leads to a lower level of property exchanges than would occur in the absence of the tax. Governments at all levels have committed to addressing housing supply and affordability issues. Despite this, stakeholders have consistently argued that government policies have not been successful in facilitating efficiency in the housing market…
Households surveys also suggest that legal and administrative costs (together with other transitional costs) play a significant role in making people more reluctant to move. A 2007-08 survey by the ABS (2009a) found that 26 per cent of households considered themselves unlikely to move in the 12 months following the survey because of the unaffordability of the costs associated with moving.
More recently, Kelly, Weidmann and Walsh (2011) surveyed 700 residents in Sydney and Melbourne about their housing preferences. Of those that had not recently moved and were not happy with their current home, 23 per cent said the reason that they did not move was that ‘the hassle and cost of finding and moving into a new house is prohibitive’. A further 10 per cent of participants said that ‘it would not make financial sense, because of government charges (e.g. stamp duty) or tax arrangements’.
Evidence from surveys and study participants is strengthened further by the findings of recent academic research on the effects of stamp duty on housing turnover. Using data on Australian house sales between 1993 and 2005, Davidoff and Leigh (2013) found that a 10 per cent increase in stamp duty lowers housing turnover by 3 per cent in the first year and 6 per cent over a three-year period…
DRAFT RECOMMENDATION 12.1
Where this has not already occurred, 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.
It is heartening to see the Productivity Commission questioning stamp duties, which are highly distorting and an inequitable source of tax revenue.
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As argued previously, stamp duties unfairly penalise 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. And as noted by the Commission, stamp duties also hinder labour mobility since they discourage workers from relocating closer to employment.
Further, as shown recently by the RBA, only around 6% of the housing stock is transacted on average in a given year:
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As a result, Australia finds itself in the crazy situation whereby a small minority of households are paying tens-of-thousands of dollars of taxes that support services for the whole community, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis.
As suggested by the Productivity Commission, a less distorting 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.
However, this would do more than just improve labour mobility. Rather, a broad-based land tax would also assist in the provision of new housing via two channels. First, by helping to 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. In the process, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, a broad-based land tax would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
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Let’s hope that Australia’s state governments at least consider the Productivity Commission’s recommendations, rather than once again assigning them to the waste basket.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
