Beware of property tax exchange

To borrow from Virgil’s classic poem on the Trojan War, Timeo politicos and dona ferentes. I fear politicians, even those who carry gifts.

Last month’s Commonwealth budget was a broad replication of more than fifteen previous budgets. Unruly spending was served, generously seasoned with trash and an election pork chop. But as bad as the Commonwealth’s debt and deficit levels are, state budgets are in even worse shape.

The New South Wales government is expected to double its debt to $106 billion over the four years to 2025. The Victoria government is only planning a 50% increase to $155 billion. Queensland is forecasting a similar 50% increase to $34 billion. These are on top of the Commonwealth’s projected gross debt of $1.091 billion in 2025. A billion here and a billion there and soon you will be talking real money.

Most disheartening is that this debt is sinking in an environment of rising interest rates necessitating higher servicing costs. But rather than undertake the fundamental work of spending reform, our governments are on a never-ending quest for more revenue.

In the four years to June 2021, total revenue for Commonwealth, state and local governments grew at a compound average rate of 3% per year, while expenditure grew by 8%. There is no fair share of tax that can ever close such a gap.

In response to this fiscal indiscipline, tax reform is regularly proposed. But whereas in the past tax reform aimed to improve the efficiency of the tax system by reducing and distributing the overall tax burden within a neutral or reduced revenue envelope, tax reform today is shorthand for tax increases .

Without irony, our governments want to improve the efficiency of the tax system to fund an increasingly inefficient spending system.

At the state level, property tax reform is the last frontier. The dream of state governments is to exchange a one-time stamp duty for a perpetual property tax. Presented as something from a measure of productivity to a measure of housing affordability, property tax reform is nothing more than a mechanism to levy ever more taxes.

Instead of tackling fraud and waste in NDIS and Medicare (estimated at a combined $14 billion a year), or tackling fraud and waste elsewhere, governments demand that more tax revenue is flowing into the ever-leaking bucket.

Property tax reform was recommended by the 2010 Henry Tax Review. Henry stated that “stamp duties are a very inefficient property tax, while property tax could provide an alternative and more stable source of income for the states”. The efficiency of tax collection and the stability of government revenue seem to take precedence over the general well-being and economic prosperity of Australians.

Proponents of a stamp duty for property tax exchange like to point to the ACT where it was implemented. In 2012, the ACT government launched a 20-year program to “modernize” its tax system. Several taxes have been promised to be abolished, including property transfer duties. It was also promised that the reform “would not increase the overall tax burden on the ACT community”. The current Commonwealth Finance Minister, Katy Gallagher, was the ACT Treasurer at the time.

Outside the halls of government, the test of the policy is what it delivers, not what it promises, and halfway through its plan, the ACT government collects double the amount of property taxes with full revenue from $0.6 billion to $1.2 billion over the ten years to 2021. And despite the commitment to abolish property transfer taxes, stamp duty revenues have increased by 25% no indication that they will ever be eliminated.

Meanwhile, the NSW Government has just introduced its Property Tax (First Home Buyer’s Choice) Bill to Parliament. If passed, this law would give first owners the choice of paying stamp duty upfront or a perpetual property tax. In his second reading speech, New South Wales Treasurer Matt Kean said “this legislation is based on a core value of this government – the freedom to choose”.

A particular focus on values ​​given some recent NSW government policies. Nevertheless, this bill would be a first step towards a “modernization” of the ACT-type property tax system.

In support of property tax reform, many compelling reasons are presented, but with little evidence. A common argument is that stamp duty is a barrier to labor mobility because high switching costs make it expensive for people to move to where the jobs are. Yet a 2020 OECD analysis studied the decline in labor mobility in the United States, a country with perpetual property taxes. The OECD concluded that “the decline in job mobility over time is mainly due to the hiring of non-employees (unemployed)”. Property and property taxes were not mentioned once.

With regard to the efficiency of collection, the property tax is also experiencing difficulties. Property tax is assessed on the unimproved value of land, but most Australians buy homes and not just land. To strike tax notices, an army of evaluators is needed, leaving the notices subject to the judgment and whim of individuals. This would be an invitation to corruption, political interference and a significant increase in judicial valuation disputes. Although mass assessments are currently used for pricing purposes, in a property tax system assessment disputes would likely increase significantly.

If good policy is good policy, then a stamp duty for property tax exchange is both bad policy and bad policy.

According to the New South Wales Treasury, “at present, owner occupiers own approximately 67% of the private housing stock in New South Wales”. The Treasury also estimated that a property tax for exchanging stamp duty “would increase ownership by about 6.6% in the long term”. Besides the shamelessness of such precision in modeling the behavioral impacts of a complex change, it misses the obvious. That 67% of homeowners, increasing to 74% “long-term”, who currently pay no annual property tax would be required to do so. As Sir Humphrey might suggest, a brave move.

The ultimate results of property tax reform on the real estate market are uncertain, but not on income. A stamp duty for exchanging property taxes would make it considerably easier for future governments to raise revenue, as happened in the ACT. And increasing property tax revenue doesn’t just require increasing rates. Governments can quietly inflate land values ​​and revenues by means such as slowing land release, complex development requirements and increasing immigration.

Australians should be wary of politicians offering freebies. After all, we pay the bill.

About Vicki Davis

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