The fastest way to add $5 billion to Victoria’s economy? Axe stamp duty

Victorians are forking out more on stamp duty than any other state in the nation, but new modelling shows how the tax is now costing the state almost $5 billion a year in lost economic activity.

However, the state government is adamant it will not be reforming stamp duty as part of a push to make housing more affordable, with the budget now about 50 per cent more reliant on the revenue the tax raises than it was 20 years ago.

Finding an affordable place to buy or rent has never been harder.Credit: Joe Armao

Economic modelling by the Grattan Institute shows that an average of 55¢ is leached away in lost economic activity for every $1 in stamp duty collected – with $4.8 billion down the drain last financial year, rising to $5.2 billion by 2026-27.

Stamp duty has been widely criticised as Australia’s least efficient tax because it discourages people from doing things that help drive the economy, such as moving house or seeking new job opportunities, among other things.

The modelling, provided exclusively to The Age, highlights the extent to which stamp duty – which has also been blamed for exacerbating the state’s housing affordability crisis – is now acting as a handbrake on the state economy.

Grattan economic policy program director Brendan Coates said Victoria had one of Australia’s least efficient tax bases.

He estimated the economy would be $5.3 billion better off next financial year if stamp duty were to be replaced with an annual land tax, similar to council rates.

Coates said the average stamp duty payable on the median-priced home in Victoria had nearly tripled in the past 15 years.

“The economic case for a swap from stamp duty to land tax swap is watertight: having to pay stamp duty on the purchase of a property deters families from moving to the house or location that better suits their needs,” Coates said.

“In contrast, land taxes paid each year, much like council rates, don’t distort people’s decisions.”

The proportion of Melbourne home buyers paying the top rate of stamp duty has increased from 6 per cent to 33 per cent since 2008, according to private analytics company PropTrack. It says that is largely because the property price thresholds for the tax have not been adjusted to keep pace with soaring house prices, leaving more home buyers facing the top rate.

Economic research organisation e61 recently released a report showing Melburnians face the biggest stamp duty impost in the nation. The average home buyer is forced to shell out the equivalent of about six months of take-home income for a typical home – up from about two times at the turn of the millennium.

“This cost has covertly doubled since the 2000s,” the report said. “There is no specific policy change to blame, just housing prices out-pacing income as well as stamp duty bracket creep.

“State government budgets have benefited from the growing tax revenue.”

In Victoria, the benefits to the budget of this bracket creep have been enormous. Analysis by The Age of Department of Treasury and Finance data shows that stamp duty raised a record 34 per cent of total taxes in 2021-22, before tapering off to about 27 per cent last financial year as the property market softened.

According to Treasury’s predictions, this financial year stamp duty will account for about 21 per cent of total taxes.

That represents a huge increase in stamp duty dependency in recent decades. In the late 1990s, for example, stamp duty accounted for just 11 per cent of total taxes, before rising above 20 per cent in the early 2000s.

As reported in The Age, the Department of Treasury and Finance last year examined various options to modernise the tax system to ensure it remains “adequate” to meet looming spending on services and infrastructure, including an “opt-in” plan allowing home buyers to pay an ongoing annual land tax bill to avoid the upfront revenue hit.

The idea was similar to the system that operated in NSW briefly last year under the former Perrottet government – before it was scrapped by the incoming Labor administration. Under that system, first home buyers had the option of paying an annual property tax bill for dwellings worth up to $1.5 million, saving them from an upfront stamp duty bill of up to $66,000, which could be used for a deposit.

Premier Jacinta Allan this week indicated the government had no plans to switch from stamp duty to land taxes, despite recommendations from Infrastructure Victoria and economists, saying the idea “is not before the government through this budget process”.

A spokeswoman for the government said: “The Allan Labor government’s support is also helping thousands of first home buyers across the state secure their home with stamp duty exemptions and discounts, and First Home Owner Grants.”

Independent economist Chris Richardson said taxing a single big property transaction rather than the ongoing consumption of housing was economically foolish. He said most importantly, it was preventing people from moving house.

“It’s always been a bad tax, it’s just a bigger, bad tax than it used to be,” Richardson said. “Stamp duty is a big, red stop sign in front of people being where they want to be.”

The reliance on stamp duty as a key revenue source has also prompted concerns within the Treasury department that it has left Victoria increasingly vulnerable to fluctuations in the housing market, with cyclical market downturns leading to the loss of billions of dollars of revenue.

According to Treasury’s latest predictions, the government will collect an annual average of $8.4 billion in stamp duty over the next four years, down about 19 per cent from the record 2021-22 stamp duty haul.

“The federal government should commit to filling part of the revenue hole, including any adverse impact of reform on Victoria’s share of the GST,” Coates said.