How to keep the lid on Dominic Perrottet’s ‘forever tax’
If the Perrottet government really cares to lead in reforming property tax, this is how to do it: tender out annual tax flows from sold properties for a set number of years.
This is also crucial to understanding the dangers to your financial future from the proposal, which I could sum up fairly crisply as Perrottet effectively stating in that guileless fashion he has: “I’m from the government and I have a new tax to help you.”
No, it’s actually a new tax proposed by a dangerous combination of “clever” financial and property sector main-chancers and not-so-clever bureaucrats and sold to a rather youthful treasurer with somewhat more energy than experience.
That said, and having said it, you might think I’d be running right away from it rather than trying to actually make it work more effectively.
But it can be made into a real protected reform, by building in critical limitations which were not contained in Perrottet’s so-called “Consultation Paper”.
First and absolutely fundamentally, the new annual property tax would only apply to a property after it had been sold.
It would substitute for existing stamp duty paid at the point of sale.
Instead of paying, say, $60,000 stamp duty upfront, you might be committing to paying $3500 a year – and rising, every year, inexorably – forever.
The paper suggested an annual tax of $500 plus 0.5 per cent of the unimproved land value for an owner-occupied purchaser.
As proposed by Perrottet, the buyer would be able to choose: the upfront stamp duty payment or the annual tax.
But if the latter is chosen, that is locked in on the property forever.
To stress again, if an existing owner does not sell their property they would not be liable for this annual property tax.
It only gets triggered after sale and instead of the upfront lump-sum stamp duty.
Now clearly, the optimum way to introduce this reform, if reform indeed it is, is all at once at a point in time.
Say, for example, from July 1, 2023.
From that date, stamp duty on property transactions would be abolished.
From that date all properties that are sold in NSW – and, to stress again, only those properties that are sold – would attract instead this annual property tax.
The government can’t do that, because it would immediately lose the $11bn-plus that it gets each year from property stamp duty, replacing it only with, say, $600m-$800m a year in the new property tax.
However, the $11bn is a once-off inflow while the $600-800m will go forever and rise every year in line with rising property values.
Hence we got the compromise proposal – a classic, inept Treasury fiscal camel.
The number of property sales each year that could switch to the annual property tax would be limited. Most buyers would still pay stamp duty (and not subsequently be paying the annual tax).
The “reform” would take almost literally forever.
The proposal isn’t even a “Clayton’s” reform – more like a “fake Clayton’s” reform.
It’s supposed to be about economic efficiency; if you want to achieve such claimed efficiency, you have to switch totally and in one hit.
So that, from that July 1, 2023 date, all properties sold in NSW would no longer attract stamp duty but be subject to the annual property tax.
My proposal was about how to make such a real switchover work – if it really was desirable reform.
But I would do so only with safeguards to minimise what I stated would irresistibly happen: ever-rising property values would turn the new and forever annual tax into a tax harvester for government.
My proposal is that the government tender to the market the right to receive the annual property tax flows from all properties sold in NSW in a financial year, for a set number of years into the future, after which the revenues flow to the state.
The winning bidder pays the state the $11bn that would have been paid in stamp duty that year and receives in return the $600m-$700m, and inexorably rising, annual revenues. The bidding is on the “number of years”.
The winner bidder could either fund it all in-house or securitise it and sell shares to investors generally. It would be a very attractive security. It would not add to NSW state debt, but would be effectively government-guaranteed, if indirectly, by a tax revenue stream.
Now, Perrottet claimed – under Treasury deception – that his proposal would be revenue-neutral.
It would not be, it could not be, given the nature of the two different taxes. At some point there would be a crossover, when even the properly discounted annual property tax revenue flows from a property, every property, would exceed what would have been the one-off stamp duty.
The property tax is a forever tax and would be paid off current, ever-rising, land values each year. The comparative implied future annual revenue stream of a once-off stamp duty is capitalised in a single payment based on an earlier, lower, land value.
I would suggest, I would demand, a cap on annual tax increases at the lower of, say, 2 per cent and a real-world metric such as the CPI.
My object would be to reverse what happens with bracket creep and income tax, where the real tax take creeps inexorably higher and governments “generously”, occasionally, return some of the “creep” in so-called tax cuts.
That’s maybe. And now, maybe never – given the huge and permanent federal budget deficit.
My proposal would aim for the property tax to lag rising values/incomes, so that a government would have to propose any tax increase.
Finally, there’s this abiding misconception that the states welshed on a promise to abolish property stamp duty under the Howard-Costello GST reform.
No they didn’t; there was not enough money in the GST to replace them.
What was proposed – and mostly delivered – was the abolition of very minor (relatively) stamp duties on the property transaction documents.
Let me spell out precisely what Dominic Perrottet proposed for property tax when he was NSW treasurer and my proposal to actually make it work that I outlined last week, given the confusion and misconceptions that surfaced in the comments.