The main function for taxes is as a source of revenue for governments. As stamp duty revenue depends on two main factors – dwelling prices and the volume of transactions occurring in the market – it is an unreliable source of revenue and one of the most volatile sources of taxation for state governments.
When house prices are going up and there are lots of people buying and selling houses, stamp duty revenues increase. When the inverse is happening, stamp duty revenues fall. This is what happened during 2018 and 2019 when state governments were forced to downgrade their budget forecasts due to a declining housing market. NSW was the worst hit state, downgrading its revenue by $10.6 billion over the forward estimates, followed by Victoria which downgraded its revenue forecasts by $5.2 billion.
This sharp drop in revenue underlines the unreliability of stamp duty as a source of revenue. As states have become increasingly reliant on stamp duty, any change in stamp duty revenue often translates to a change in net debt.
So, is there an alternative? There exist other options to stamp duty which are more efficient and will increase welfare. The most commonly discussed alternative is some form of broad-based land tax. This involves taxing the unimproved value of land. It would be more equitable because it taxes everyone that owns land, not just those transacting in the market, and it would provide a more consistent and reliable revenue stream.
A broad-based land tax would not discourage households from moving and would provide an incentive for making use of, and improving, unused land.
However, abolishing stamp duty is politically difficult to accomplish. As with most economic changes there are winners and losers. Winners include households that move a lot and businesses that rely on property transactions such as real estate agents.
Households that have recently moved and paid the full amount of stamp duty will not want to be hit twice by having to pay a new annual tax as well. An ongoing property tax can also be difficult for households such as retirees, who are generally asset-rich but income-poor.