Tell him he’s dreaming: Perrottet’s stamp duty reform fails cost-benefit

By Jesse Hermans, Policy Director at Prosper Australia, an NGO focussed on tax reform.

The Thodey Review’s draft report is right to place land tax at the centre of its vision for state tax reform.

Replacing stamp duty with what the Review called “the states’ best tax lever” has the potential, if enacted sensibly, to support budget recovery without impeding economic growth.

But how this switch is implemented is important.

We commend the NSW Treasurer for taking on the formidable political challenge of tax reform. However, the apparently pain-free transitional approach floated will lose too much revenue and
offer little efficiency advantage over the status quo. Furthermore, it will take 50 years to realise its potential.

The Treasurer suggests letting new buyers ‘opt in’ to land tax, and exempting all current owners by ‘grandfathering’ the changes.

The optional tax, of course, implies a tax cut. Investors, developers and speculators holding property for short periods will opt in to land tax to reduce their overall tax bill. Buyers expecting longer tenure
will opt out and pay no more tax than at present. There will be a net loss of revenue – the principle of adverse selection at work.

Our modelling suggests that for every $1 lost from buyers opting out of land tax, an average $0.67 will be recovered in stamp duty. We estimate that roughly half of buyers will opt out, so this policy will cost one tax dollar in six – more than $1 billion per annum in NSW.

Higher land tax rates cannot recoup this loss without driving more buyers out. And the opt in model leaves the central problems with stamp duty unresolved. High-turnover transactions – evidently little
discouraged at present – get tax cuts, while the inequity and inefficiency of stamp duty in relation to long-held properties remains unaddressed.

The proposal to grandfather tax-free status for existing owners feels intuitively fairer, since it preserves the tax bargain understood upon purchase. Why should those who have ‘pre-paid’ stamp duty also now ‘pay as you go’ with land tax, just like new buyers not subject to duty?

The problem here is that full grandfathering entails a massive and unavoidable loss of tax revenue over a transition period lasting generations. To maintain state spending will therefore require a
permanent increase in state debt.

Stamp duty is paid upfront by buyers, but states have always spent it like a PAYG revenue source. None has been put aside to pay for exemptions as we switch to a recurrent tax; there is no ‘sinking
fund’ to run down. The tax switch might be neutral from the perspective of the average buyer, but from the perspective of the public balance sheet it is not.

Tax revenue securitisation can provide cashflow but not alter the debt impact. Fancy debt is still debt.

In 20 years, with a typical 5% per annum turnover, full grandfathering in NSW will see only two-thirds of properties paying land tax – and perhaps only half that if buyers are allowed to opt out.

This exemption will cost NSW $75 billion (more than 60% of potential land tax revenue) over that period. By contrast, the ACT is transitioning to stamp duty over 20 years, without losing revenue.

A better approach is the Prosper model, which would limit exemptions to the most recent buyers and could be enacted by means such as a partial refund of stamp duty, paid for via a sunsetting
temporary rate.

Perrottet’s no-losers model to tax reform ought to raise eyebrows, as both ‘opt-in’ and ‘grandfathering’ run counter to the aims of the reform. The Review’s final report must call out this wishful thinking, and propose transition options consistent with economic reality.

By the time the entire transition is complete, NSW will have blown 20% of GSP on concessions to landowners who, according to the Thodey Review, have already benefited from “a once-in-a-generation land price windfall”. The equity this buys – a preservation of existing tax privileges above all else – is one we simply cannot afford.

The full Prosper report can be downloaded here.

Comments

  1. Prosper is in danger of making the perfect the enemy of the good.

    This is a very hard challenge and we should bite off that which we can chew.

    • ashentegraMEMBER

      Profoundly disagree, turncoat. Hermans has nailed the issue – players will game the option and many of the benefits of a universal land tax will be lost.

      A better transitional arrangement is to offset stamp duty paid by crediting holders with a theoretical land tax since purchase.

      The benefits of land tax are profound: it stimulates economic activity, particularly construction and cannot be avoided or passed on.

      The elderly and financially embarrassed can simply defer payment (plus interest) until sale.

      Farsighted Victoria revalues all land annually. This makes the state’s land tax a very powerful automatic stabiliser, rising with exuberant prices and retreating in times of difficulty – like now.

      A properly constructed land tax has negative deadweight costs – a truly remarkable quality that government ought embrace with a bear hug. This comes about as foreign landholders must pay the tax while the revenues are spent wholly on Australians.

      Conscientous objectors to taxation can simply rent as its incidence falls entirely on the landholder.

      • Does land ever go down? I checked our land value statements for NSW….nope, didn’t go down in 9 years.

        • Just wait until people are saddled with property that they cant sell for half what the valuer general claims its worth. the political pressure will help bring it back a bit…

          The problem with Stamp duty is it requires perpetual turnover of property to generate revenue, so when property stops selling revenue dries up even if prices dont drop. The Government has a huge incentive to maintain sales volumes.

          The problem with Land tax is that it is solely dependant on an assessed value of the property… if property prices drop so does revenue…..The government has a huge incentive to maintain prices…..

          • unimproved land valuation

            because a LVT under the scenario you describe could NEVER have its integrity fiddled with

            chortle

          • Fabian AlderseyMEMBER

            I wasn’t paying too close attention to the previous land tax bill we got, but from memory I think there’s a “land value” component and “multiplier” component, where the “multiplier” component can be set to wherever it needs to be set for the government to get their revenue. So government revenue doesn’t collapse or boom depending on land prices, but there are still distinctions between suburbs which go up in value relative to suburbs which don’t.

      • Prosper’s model is better in theory but they don’t need to deal with the politics of it all.

        The reality is, at a micro level there will be winners and losers. The losers will get vocal making the whole thing politically tricky. The ALP could step up here and say that they will support the change.

      • What about the ACT?

        Land tax applies to ACT properties that are not your principal place of residence.

        the tax reform was implemented by Treasurer and Chief Minister Andrew Barr less than six months before the ACT went to an election.

        • ACT land tax system is slowly moving to PPOR as well… it should eventually replace rates and stamp duty, unless the liberals get in and then they will stop the whole thing, leaving a needlessly complicated semi land tax system in place because they cant unwind it, and rates, and stamp duty….

          The number of commercial property owners I have chatted to who are complaining they pay heaps of land tax… and it keeps going up.. but when you look at it the rises are because the property valuation has gone up, not the land tax rate. I even know one who sold his unit in Fyshwick due to land taxes, replaced it with one across the border in Queenbeyan and now complains about how he doesn’t get as high rental return and has to pay high rates.. Happy to have the services provided via those fund though…

  2. bolstroodMEMBER

    Me thinks treasurer Perretott will not be in the job much longer.
    Icare wil be the cause of. his demise.

    • happy valleyMEMBER

      Pretty boy, no doubt had tickets on himself to replace Gladys Gladwrap as Premier, one way or another?

      May have to wait a bit longer. Doubt he will be dumped as Treasurer? Like with all pollies, it’s just a wait game to have your stuff-up forgotten.

  3. Why not simply ban offset accounts and redraw facilities 5 years from today. Anyone who refinances to access equity will trigger a capital gains event as well as a quasi transfer for stamp duty purposes.

    This way if you go for the opt in model a lot more people will have a trigger event to switch to land tax.

    This will penalise speculators owning multiple properties and using their property for debt recycling and return residential property back to its core purpose of providing roofs over peoples heads.

    Id also like to see within 10 years lending rules only accounting for a single person income not couples which means women won’t be forced to work as a mortgage can be serviced by a single income. This will further restrict prices from rising above inflation.

  4. The proposed land tax and current local government rating systems, both favor owners of high-rise apartments over house/townhouse owners. Considering we are getting swamped by overly-high poorly-built towers, that enjoy full facilities of an area with little contribution already, why make it worse. Maybe vacancy tax or increase/implement foreign ownership levy or an amenity levy. Foreign owners of crumbling high-rise apartments are unlikely to contribute to their ‘maintenance’ or demolition costs if negative equity exists – at least with stamp duty they pay something.

    • Or base the rate not on just land value. Base it on the improved capital value of the dwelling. High Rise harry would kill that off.

  5. I thought when he said when people pay stamp duty it meant they dont pay land tax it already exempted those that already bought…

    • I think it should just grandfather those who have paid land tax for a reasonable period (probably roughly equivalent to their land tax paid), then start paying land tax.