Without giving it a moments thought, the states have already rejected Prime Minister Malcolm Turnbull’s insistence that the states raise more of their own revenue via efficient land taxes, preferably at the same time as they abolish stamp duties. From The AFR:
Several states have rebuffed pressure from the federal government to commit to reforming their tax systems in exchange for a share of income tax…
“While we are open to further tax reform, including looking at stamp duty, we believe that the most effective way of tackling housing affordability is to increase supply,” NSW Treasurer Gladys Berejiklian said.
Victorian Treasurer Tim Pallas dismissed the idea as another of Mr Turnbull’s “thought bubbles”…
South Australian Treasurer Tom Koutsantonis said the proposal was raised in the South Australian State Tax Review process in the lead up to the 2015 state budget but viciously attacked by Liberal Leader Steven Marshall.
The arguments for dumping stamp duties in favour of a broad-based land tax are impeccable on efficiency and equity grounds, and include the following benefits:
- According to the Australian Treasury, Stamp duty creates a cost to the economy of 70¢ for each dollar collected, whereas a broad-based land tax creates a benefit to the economy of $0.10 for each dollar raised.
- Switching tax bases would, therefore, produce a 1.5% increase in GDP, or $24 billion, without directly changing the amount of tax raised.
- Stamp duties discourage people from shifting house, therefore, discouraging labour mobility. They also unfairly penalise those that move frequently, whilst the “locking in” effect discourages an inefficient usage of the housing stock.
- Shifting to a broad-based land tax would promote land supply by raising holding costs and discouraging land banking and vagrancy. Governments would also be encouraged to facilitate infrastructure investment because they would directly capture some of the value uplift.
While the arguments for switching tax bases are strong, there are several key factors holding politicians back.
First, as shown by the RBA, only around 6% of the housing stock is transacted on average in a given year:
This means that in a given year, only a small minority of households pay stamp duty (albeit tens-of-thousands of dollars of dollars). And once they pay it, they automatically become a roadblock to reform (“why should I pay tax twice”, is the common retort).
While having such a small group of taxpayers supporting services for the whole community is ridiculous, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis, it is far easier politically to tax a small group than everyone.
One solution to avoid “double taxation” is to provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.
For example, if someone purchased a home in Adelaide in late 2011 for $500,000, paying stamp duty of $21,000, and their theoretical land tax bill would have been $2,000 for each of the four years since purchasing the home, then their tax credit would be as follows:
- $21,000 minus
- $2,000 (2012);
- $2,000 (2013);
- $2,000 (2014);
- $2,000 (2015).
- $2,000 (2016)
- equals $11,000 tax credit to be carried forward.
The other major concern with land taxes is that they would be levied on retirees that are asset (house) rich but cash poor. The solution to this problem is to allow retirees to accumulate their land tax liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
However, even with such a transitional processes in place, politicians would still face the option of maintaining the status quo and taxing a small number of people each year (easy) versus reforming and taxing almost everyone (hard).
The final reason for the struggle to reform land taxes is that Prime Minister Malcolm Turnbull has again undermined the politics of it through poor policy process. Where are his arguments for the land tax? Where is his research for it? Where is the long and intensive national conversation on it to win over the polity?
At the rate he is going the PM will have permanently salted the earth around all good policy in six months.