Among economists, the abolition of stamp duty has long held near-universal appeal as the biggest tax reform available to state governments.
Economists hate stamp duty because a big, one-off tax payable upon the purchase of a property can be prohibitive. It deters workers from moving to be closer to better-paying jobs, slowing economic growth, and stops families from changing homes when they no longer suit their needs.
But many economists also dislike stamp duty simply because it’s unfair. It punishes younger households that move around more, while rewarding older residents that tend to stay put in one home for decades.
Stamp duty even acts as a de facto tax on divorce. When the family home is sold to allow assets to be split, the separating couple each need to pay stamp duty if they purchase again. It’s a big reason why more than half of divorced women who lose their home haven’t bought again even a decade later.
Now both major parties in NSW politics appear to agree, with the NSW Labor Opposition this week pledging to abolish stamp duty altogether for first home buyers purchasing properties worth up to $800,000 — effectively expanding the current exemption for homes worth up to $650,000. Those purchasing a first home worth up to $1 million will also be offered a discount.
The NSW government has already legislated to offer first home buyers the option of paying an annual land tax rather than stamp duty if they buy a property worth up to $1.5 million. Buyers who opt for the land tax will pay an annual levy of $400 and a 0.3 per cent tax on the value of their land.
So does this mean that stamp duty may soon be a thing of the past, at least in NSW?
Not so fast.
While committing to phase out stamp duty for first home buyers, neither of the two major parties is promising to make it easier for existing homeowners to move and avoid paying stamp duty a second time, which is the main rationale for reform in the first place. Addressing that disincentive is key to capturing what NSW Treasury estimates to be a $10-billion-a-year economic dividend from stamp duty reform in the long term.
Instead, both major parties’ policies amount to little more than first home buyers’ grants by another name. They may make it easier for first-time buyers to save a deposit, but history shows they also push up prices. What the government gives with one hand, the housing market will partly take back with the other.
While Sydney house prices are now falling at their fastest rate in decades – and are expected to fall 15-20 per cent in total – those falls would simply return prices to where they were before the pandemic when housing was still far from affordable.
So why aren’t our major parties moving quickly to end stamp duty for everyone?
In short, because stamp duty is critical to helping state governments pay the bills in the here and now. The NSW government expects to collect $10 billion in stamp duty this financial year. Those revenues pay to keep our hospitals running and schools open.
If we were to get rid of stamp duty altogether, we’d have to replace it with something else. And while there’s agreement from both major parties that stamp duty should go, there is no agreement about what should replace it.
Economists want stamp duty replaced with a broad-based land tax that’s levied each year based on the value of the land that people own. In economic parlance, land tax is the most efficient tax available to states because it doesn’t distort people’s decisions. Whereas homeowners can avoid paying stamp duty again by refusing to move house, land can’t be moved and land tax can’t be avoided.
While the NSW government was initially open to allowing all home buyers to choose between paying stamp duty or a land tax, NSW Labor has opposed even the government’s more modest plans, arguing that the replacement land tax is a “forever tax”. In other words, NSW Labor is opposed to the very tax that most economists want to see replace stamp duty.
Setting aside the fact there is already a forever tax on the family home – all homeowners already pay council rates every year – Labor’s position means stamp duty isn’t going anywhere. Other options, such as raising the GST to cover the cost of abolishing stamp duty, appear even less likely.
Everyone now seems to agree that stamp duty should go. But until we agree what tax should replace it, stamp duty won’t be going anywhere.
Brendan Coates is Economic Policy Program Director at the Grattan Institute.
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