I honestly did not expect to see it happen in my lifetime.
This week’s bold move by NSW Treasurer Dominic Perrottet to initiate the abolition of stamp duty in NSW and replace it with a broad-based land tax is as historic a tax reform as they come.
Not since Howard and Costello’s goods and services tax or Keating’s fringe benefit and capital gains taxes have we seen the likes.
Perrottet is now truly deserving of that most rare of accolades for a politician: visionary.
Of course, he’s not the first state treasurer to have attempted the switch – the ACT government is now roughly halfway through its 20-year plan to abolish stamp duty. And Perrottet’s plan is not without its design foibles, which we’ll get to.
But, as Treasurer of Australia’s most populous state, Perrottet’s move turns the tide on state tax reform and we must hope and expect other states will follow suit.
Is it a good policy? Yes. Why? Because taxes on transactions are the most inefficient of all taxes – long identified as such by reviews from Ken Henry to the most recent review by former Telstra boss David Thodey.
Basically, you stop stuff from happening. In the case of a tax on property transactions – which stamp duty is – you stop as many property sales from occurring as would otherwise occur.
Why is that bad?
Because you end up with an inefficient allocation of the existing housing stock.
Come again? Basically, you encourage people to live in houses that don’t suit them or to obsessively renovate them until they do suit.
Removing this disincentive to move will, over time, and if implemented in full, result in a radical reshaping of the way we live. Crucially, we’re about to get more mobile.
Need an extra bedroom for your expanding family? Move. No sweat. Need to downsize to a smaller backyard and fewer bedrooms? Move.
Over time, this will effectively add to the supply of housing and help to ease price pressures.
Although it’s important to not get too carried away. Economist Saul Eslake concludes that: “In the long run, I think there’ll be little change to home values. They may well go up at a slower rate over the long term. But it ought to be a one-time change.”
But in bonus good news, the tax switch should also encourage lower joblessness, as people are freer to move to available jobs.
It may also – it must be said – prove a bit of a boon for the real estate industry, which thrives on transaction volumes, along with other industries that benefit from property advertising, like, er hem, newspapers.
Most importantly, the reform offers first home buyers a fighting chance at getting into the market earlier than otherwise. Of course, that could be offset if it is met with a surge in home values, as buyers simply use their newly available funds to outbid each other.
But Saul Eslake thinks that is unlikely, given low migration and low investor appetite in the market.
Ultimately, the short-term price impact will depend on how the reform is structured and the timeline for its introduction. The NSW plan is open to consultation with the community until March next year.
Indeed, Eslake says the timing could not be better: “This is an unparalleled chance to do something about the decline in home ownership,” he says.
Overall Eslake is impressed: “This is really showing political cajones. I don’t know about ‘visionary’. But I would call it brave.”
But he cautions the chosen transition path in NSW could prove suboptimal.
As things stand, new buyers will be given a choice: pay upfront for stamp duty, or opt to pay the ongoing annual property tax. Everyone else will be untouched by the new annual tax until they decide to sell.
As a result, many recent home buyers, having recently forked out significant sums for stamp duty, may choose to sit tight on their properties for a long period, to avoid paying the new annual land tax, blunting the efficiency gains. This could have been avoided by offering recent buyers a rebate off the annual tax, Eslake says.
Additionally, many new buyers may still opt to pay stamp duty – not the ongoing property tax – if they anticipate being in their homes a long time, stretching the reform timeline out significantly.
By offering buyers a choice, Perrottet’s plan is clearly calculated to cause as little political pain as possible.
Perrottet also faces a short-term revenue shortfall, as more of the state’s property revenue is delivered in annual dribs and drabs, rather than a big upfront whack from buyers.
In this respect, Eslake says the timing is also perfect: “If you have to borrow to cover the revenue shortfall, this is a good time because interest rates are low.”
Ultimately, Perrottet’s shift away from stamp duty towards an annual property tax, if successful, will create one of the most efficient and stable sources of revenue ever enjoyed by an Australian government.
He must dearly hope other state governments move to do the same. Because, if not, the current system for distributing the GST will penalise NSW for having discovered a new and better way to fund itself. Perverse incentives indeed.
So Bravo, Dom. And over to you down in Melbourne, Tim Pallas.
It’s time to get aboard the property tax reform train.
There will never be another opportunity like this.
Source: Thanks smh.com