Forget about the science being settled. On replacing property transfer duties – generally known as stamp duties – with annual property taxes, the economics is settled. The percentage of economists who agree with the case for this switch is in the high 90s. I am among the few who have doubts.
But I was correct a few weeks ago when I concluded that it ain’t going to happen in NSW any time soon – or anywhere else in Australia, for that matter. It’s just too expensive, the effects are too uncertain, including on housing affordability, and the politics are potentially toxic.
It’s worth briefly retracing the background. There has long been support among economists for the abolition of stamp duties, to be replaced by an annual property tax based on unimproved land values. This was raised in the Henry tax review in 2010, which included the recommendation that “ideally, there would be no role for any stamp duties … in a modern Australian tax system … (T)he removal of stamp duty should be achieved through a switch to more efficient taxes, such as those levied on broad consumption or land bases”.
Very little came of this recommendation. The ACT government implemented a very lengthy transition of reducing stamp duties while significantly increasing annual rates on properties, the net effect of which has been to increase property taxes overall. The South Australian government removed stamp duties on commercial properties but has made no further changes since then. The appointment of Dominic Perrottet as NSW treasurer in 2017 breathed new life into the issue. The NSW government commissioned the Thodey review of federal financial relations to consider this and other issues.
The final report recommended that “as a more equitable and efficient approach to taxation, the NSW government should replace transfer duty (stamp duty) with a broadbased land tax”. The report went on to state that “in consultation with other state governments, the NSW government should seek assurances from the commonwealth that it will not be disadvantaged with a lower GST share as a result of undertaking major productivity-enhancing tax reforms such as replacing transfer duty with a broadbased land tax”. Unsurprisingly, many economists became quite excited, particularly as it was the largest state that might finally implement the long-recommended tax switch. The fact Dominic Perrottet outlined an actual plan meant their excitement index rose even further.
Unsurprisingly perhaps, the plan was not quite what they had hoped for; indeed, it was a plan with no definite start date. In what looked like a dog’s breakfast, buyers of properties could opt to pay stamp duty or incur annual property taxes. Those buying the most expensive properties – a cut-off of $3m was one figure floated – would have no choice but to pay stamp duty. The property tax would involve a fixed component – $400 per year and a set percentage of the unimproved value of the property. Once a property had been subject to property tax there would be no turning back. Perrottet even mentioned a 50-year transition period.
Even so, many economists hung in, as did those vested interests that gain from more property sales, most notably real estate agents and property developers. The NSW Treasury even claimed the change “would inject more than $11bn into the NSW economy in the first four years and lift NSW gross state product by 1.7 per cent over the long term”.
Fast-forward to now and the reforming treasurer has become Premier. He seems to have gone cold on the (partial) abolition of stamp duties, claiming such a move would not guarantee improved housing affordability. This lack of enthusiasm is shared by newly installed state Treasurer Matt Kean. While claiming “stamp duty is an inherently terrible tax”, Perrottet now thinks the tax switch probably needs to be done at the national level.
Another solution would be for the commonwealth to provide substantial financial assistance to the state to facilitate the switch, an action that potentially involves co-ownership of both the political upsides and downsides. The potential “bill shock”, for example, of stamp duty-exempt homeowners receiving their annual property tax notices is a consideration.
At this stage, it would appear the abolition of stamp duties in NSW is a long way off. The fact stamp duty is the largest, or second-largest, own-source of revenue for the state is also an important factor. In this year’s state budget, expected revenue from stamp duty was estimated at $11.5bn for this financial year, up from $9.4bn in 2020-21. This sum is nearly a third of all general government revenue. In the following financial year, the forecast revenue is still $11bn. The very large figure for this financial year already looks like an under-estimate, with stamp duty revenue for the first quarter around $3.3bn. Even the most reformist treasurer would find this kind of revenue stream difficult to forgo.
To be sure, there is the downside of stamp duty revenue being volatile, a fact that can create problems for any government. But there are some obvious ways in which this issue can be dealt with, including the creation of a trust account, separate from consolidated revenue, and then drawing down regular annuities.
As to whether removing stamp duties would actually reduce house prices, the issue is in fact complicated. Just because the buyer technically pays the duty doesn’t mean the incidence actually falls on the buyer. One scenario is that a buyer is prepared to pay a certain price plus stamp duty for a property. Absent the stamp duty, the buyer may still be prepared to pay the same or a slightly lower gross price. Rationally, the buyer should discount the purchase price by the net present value of the flow of future property tax imposts. But, in a competitive market, other forces can play out, including the expectation of some buyers of short tenure in the house.
The fact house prices have soared across Australia in the past 18 months or so in the context of stable stamp duty arrangements suggests, at a minimum, there are other factors driving house prices and undermining housing affordability. Economists may just have to keep their wishlist about the abolition of stamp duty and its replacement with property taxes (or even a souped-up GST) in the top drawer for even longer.
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