PBO costs stamp duty to land tax switch

By Leith van Onselen

The Parliamentary Budget Office (PBO) has costed a theoretical proposal by The Greens to abolish property stamp duties and replace them with a broad-based land tax, finding a short-term cost to Budgets but a more neutral outcome over the longer-term. From The ABC:

Under the proposal put forward by the Greens, the Commonwealth would provide concessional loans to state and territory Governments to assist the transition.

The loans would hit the budget bottom line by $800 million, although states would rely on rising land tax revenue to repay the debt by 2030.
“States would also be required to cover the Commonwealth’s borrowing costs for the proposal, with interest charged annually at a rate equal to the Commonwealth’s cost of borrowing,” the costings said…

Grattan Institute fellow Brendan Coates said stamp duty accounted for $19 billion nationwide each year and any increase in land taxes would have to match that revenue.

“To do that you’re probably talking about a tax on unimproved land value of about $6 for each $1,000 of unimproved land value,” he said.
“Given the median house price in Melbourne is somewhere around $800,000 to $900,000, you’re talking about $2,700 for the average homeowner in Melbourne and in Sydney you would be looking a little north of $3,000″…

Federal Treasurer Scott Morrison would not comment on the proposal, saying the Government would not be drawn on budget speculation…

Labor’s treasury spokesman Andrew Leigh said the proposal had merit, but the Government needed to curb negative gearing and capital gains tax concessions.

“We know that when you look at the drag on the economy from stamp duty its one of the worst taxes Australia has,” he said.
“When you look at land tax it has one of the lowest burdens on the economy of any tax we have.

Switching stamp duties for a broad-based land tax makes impeccable sense.

The Australian Treasury has already shown that stamp duties on real estate are one of the least efficient taxes going around whereas land taxes are the most efficient source of tax available, actually creating positive welfare gains to the domestic population since non-resident home owners are also taxed (see below chart).

ScreenHunter_6774 Mar. 30 10.24

The Henry Tax review came to similar findings. As has the Productivity Commission. Even the Housing Industry Association’s Dr Harley Dale has previously called for the exchange of stamp duty for land tax.

Given that there is a productivity pay-off in switching-out the taxes – some of which would flow to federal government coffers via the broader tax system – it makes sense for the federal government to provide incentive payments to the states to facilitate reform.

Scott Morrison’s housing affordability speech last year pinned the blame for Australia’s housing affordability woes on supply not keeping-up with demand. But part of this problem relates to the mis-match between supply and demand created as older empty nesters occupy most of Australia’s family friendly homes, whereas younger growing families are forced to live in ill-suited units and apartments.

Abolishing stamp duties in favour of a broad-based land tax would obviously remove the penalties currently attached to relocating while incentivising households to move to more appropriate houses or employment. In turn, there are likely to be benefits to congestion and commuting times as the housing stock is utilised more efficiently.

If the federal government genuinely cares about boosting overall productivity and housing outcomes it should put replacing stamp duties with land taxes near the top of its agenda and provide financial incentives to the states to ensure that reform gets done.

In order to facilitate the transition, the government could give home buyers a credit for the stamp duty paid, and then deduct the theoretical land tax that would have applied since the home was purchased.

For example, if someone purchased a home in March 2011 and paid $30,000 in stamp duty, and their annual land tax bill would have been $3,000 per year had the new regime been in effect, then their credit would be $12,000, which can be applied against future year’s bills.

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  1. No brainer eh?

    Let me get this right – making the switch would allow an upfront payment (stamp duty) to be switched to a series of future payments (land tax).

    Sounds a bit like debt doesn’t it?

    Now what does more debt do to property prices again?

    • KeenEyeKenMEMBER

      Removing stamp duty increases prices, but doesn’t necessarily decrease affordability (it’s just the vendor that receives the extra dollars, not the state government).
      Increasing land tax will decrease the price of land, by a similar amount to the increases created by eliminating stamp duty. In net terms, prices wont change too much – in the short-term.
      If prices don’t change, why do it?
      1) Improving labour mobility is the largest benefit – removing one of the main disincentives for empty nesters to move to more appropriate housing. Also, people required to frequently move for work, are not penalised – or penalised from moving closer to work (think reduced congestion on the roads).
      2) Land bankers are penalised for withholding land from market. Those stories we hear of people making $10 million dollars from a block they purchased for 50 bucks back in the 70s is not clever investing – it is the capitalisation of supremely unaffordable land by a single owner. It makes no sense that useless land on the far urban fringes is going for $300k for 400sqm – paid for by the debt slavery of our youth. It’s a manufactured outcome. These land bankers won’t disappear though; they’ll only make $5 million, not $10 million, from the 50 buck investment – they just contribute more to the provision of the rezoning they’re benefiting from.
      The costs associated with stamp duty are enormous – it costs Australian society a good $9-11 billion each and every year. It is a terrifying waste. Get rid of the inefficiencies that I describe above, and the Australian economy gets a substantial free kick – and we all enjoy more affordable housing.

      • KEK – you are assuming buyers are rational and they will incorporate their future land tax liability into their offer price decision.

        They are not rational, and they will not incorporate this liability.

        It is a “no-brainer” that prices will increase.

      • KeenEyeKenMEMBER

        Almost everyone takes into account stamp duty, council rates, and the cost of maintaining/running a house when they purchase. It’s all in the section 32 when you’re buying a house.

        Some people dont, which is patently stupid, but I’m not sure how that matters?

  2. So far we only have media reports as the PBO analysis of SD => SLT is not yet up on their website.

    Removing this handbrake on mobility and opportunity is obvious. Grattan offers one model of transition, the ACT reforms another.

    Australians make a profit on land tax, as the chart above shows. Change would deliver tens of billions a year in citizen benefits. Do it.

    • David – we’ve talked about this before. What is the immediate priority right now. Not mobility by a long way.

      It’s affordability.

      You yourself agreed that this move would risk amplifying the cycle, and therefore it’s not the best timing for it.

      Don’t we have bigger fish to fry? Don’t we care about unintended consequences?

      • What’s this ‘we’ve talked about this before’ stuff, you patronising pompous ass.

        Mobility is profoundly influenced by affordability. You draw a distinction without difference.

        Whether exchanging of stamp duty for land tax is pro-cyclical or counter depends entirely on implementation. Quite subtle implementation tweaks produce widely different individual outcomes. I am not wedded to a particular model, but do think a shorter timeframe beats snail-paced change.

        In the midst of a property crisis set to drown my country in debt, what matter would you accord a higher priority to?

      • We’ve discussed, and you’ve agreed, that the switch would be better timed when prices are on the way down.

        You’ve conceded that before.

        I’m not going to bother trying to dig up the post – you can if you like, but you said it.

        “Mobility is profoundly influenced by affordability”

        I think you’ve tripped up on your own logic. If affordability (cause) profoundly influences mobility (effect), should we be addressing the cause? That is, affordability?

        Does it work the other way around….. Does mobility profoundly influence affordability? I don’t think so. You can show me the evidence if you have any.

        Rather, we know what influences affordability i.e. leads to ridiculously high prices). It is:
        1. The cost of debt
        2. The availability of debt
        3. The capacity of buyers to buy
        4. Irrational behaviour

        Now …. what do you think replacing stamp duty for land tax will to do these factors. Pump up 3 and 4 I would have thought. And in a round about way … 2 as well.

        We need to have well reasoned, factual, robust debate.

        Not motherhood statements, shallow analysis, and superficial debate……

      • Rather, we know what influences affordability i.e. leads to ridiculously high prices). It is:

        Where is

        5. Artificially restrained supply from land bankers drip-feeding new lots onto the market.

        Seems like a land tax might give them some incentive to make more lots available to reduce their land tax liability.

      • melbourneguy, you call for a ‘well reasoned, factual, robust debate.’ Your contribution to that is confined to lurking in the comments section posing lateral questions and demanding custom answers – classic troll behavior.

        Google my name and you will find me genuinely trying to discuss tax reform with anyone.

        The ‘motherhood statements, shallow analysis, and superficial debate’ are entirely from your end.

  3. GST on sale of property will be easier to administer – in order to calculate and accrue unpaid land tax will necessitate the creation of a whole new department of bookkeepers who do nothing but make arbitrary decisions about the value of land. There’ll be winners and losers out of this as incorrect assumptions are made as to land values and could very easily become politicised.

    • KeenEyeKenMEMBER

      No new departments, they already exist. Each state has a valuer general, for purposes of calculating your council rates.

      The work has already been done.

      (GST on housing would just act like stamp duty, decreasing mobility and forcing people to stay put. Although administratively simple, it is a horrible policy)

      • KeenEyeKenMEMBER

        yeah, an appropriately administered CGT would go a long way in making housing more affordable. It’s one of the main reasons why it’s currently unaffordable.

  4. If you consider the implications for foreign property ownership, land tax allows legitimate owners to contribute to the governments coffers, while illegal ownership will be instantly recognisable and not only can they win a tax bill and a legal nightmare in one go. Properties with now discernible owner can be claimed by the state and either sold or become part of government housing.

    This is a huge win, in my opinion.

    • Tassie TomMEMBER

      +1. This is a huge advantage of a land tax. It would also make Australians less anxious about foreign investment – knowing that they were paying their rent to the government’s pool.

      The tricky bit is – what proportion of their purchase price is for land, and what is for improvements?

      Take Cubbie Station for example – I don’t know what the Chinese bought it for – $300 million? They could well argue (probably correctly) that the land is worth SFA, and 99% of the value is in the water rights and the irrigation and processing infrastructure.

  5. Given how much rental income commercial property owners demand of late, i’d like to see them pay their fair share in the way of a land tax. But somehow, this extra cost should be prevented from being passed on to their tenants.

    • Jim, commercial property owners already pay land tax. In fact, unless I’m mistaken, every state imposes land tax on basically all property except a person’s principal place of residence. So what’s really being talked about here is extending land tax to people’s homes in return for abolishing stamp duty. Commercial properties pay land tax and stamp duty.

      • Oops – meant to reply to this post.

        Extending land tax to PPRs, spreading the tax base thinner, so reducing the overall burden of tax for us handsome property owners..

        But it’s effushunt!

    • Exactly ……

      And as a consequence of the switch, property investors would pay less tax overall….. because the land tax gets spread over a larger base.

      A win for us handsome property investors!!!!!!

      • How is this so if it is introducrd as a tax in place of stamp duty? It would be an added tax to what already exists.
        Also, not all rates are based on site value, some councils use capital improvements, so, upon inspection, the claim doesn’t seem to hold up.