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{{propApi.successMessage}} {{region}} Change locationStamp it out
Households and aspiring homeowners have enough to contend with in our current economic climate without unnecessary tax burdens. Now’s the time to stamp out stamp duty.
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Angela Lillicrap
Economist
The level of cooperation between state and federal governments has been unparalleled during this health crisis, not to mention the level of bipartisan support. As talk moves from the pandemic to economic recovery, the cooperation that has pushed us forward so far needs to continue.
The Australian Government stated that everything is on the table and that they are looking for ways to boost Australia’s economic growth in both the short- and long-term. Welfare and productivity boosting reforms that have long been advocated for, but are too politically difficult to accomplish (which includes stamp duty), have the potential to finally be undertaken.
Stamp duty is one of the most inefficient taxes in Australia. Modelling done by the Treasury found that it costs the economy about 70 cents for every $1 of revenue raised from stamp duty on property. GST on the other hand, costs the economy 18 cents because it is a more efficient tax and is harder to avoid.
Stamp duty distorts the market since it affects the decision-making process. It is a barrier for people entering the housing market and it discourages people from moving house. This can hurt the wellbeing of Australians as some homeowners may choose not to move to a new suburb or city for employment opportunities due to costs, and as a result may not earn as much as they could. On the other side of the equation, firms may not be able to hire the best staff for jobs which reduces productivity.
Another disadvantage is older households are discouraged from downsizing. This results in the inefficient use of Australia’s housing stock as older households are often in homes too big for their needs while younger families, who would normally purchase these dwellings, are forced to look elsewhere. Affordability constraints often force younger families to the outskirts of our major cities, further away from employment hubs. Inadvertently, this can also lead to increased traffic congestion and pollution.
The Australian Government stated that everything is on the table and that they are looking for ways to boost Australia’s economic growth in both the short- and long-term. Welfare and productivity boosting reforms that have long been advocated for, but are too politically difficult to accomplish (which includes stamp duty), have the potential to finally be undertaken.
Stamp duty is one of the most inefficient taxes in Australia. Modelling done by the Treasury found that it costs the economy about 70 cents for every $1 of revenue raised from stamp duty on property. GST on the other hand, costs the economy 18 cents because it is a more efficient tax and is harder to avoid.
Stamp duty distorts the market since it affects the decision-making process. It is a barrier for people entering the housing market and it discourages people from moving house. This can hurt the wellbeing of Australians as some homeowners may choose not to move to a new suburb or city for employment opportunities due to costs, and as a result may not earn as much as they could. On the other side of the equation, firms may not be able to hire the best staff for jobs which reduces productivity.
Another disadvantage is older households are discouraged from downsizing. This results in the inefficient use of Australia’s housing stock as older households are often in homes too big for their needs while younger families, who would normally purchase these dwellings, are forced to look elsewhere. Affordability constraints often force younger families to the outskirts of our major cities, further away from employment hubs. Inadvertently, this can also lead to increased traffic congestion and pollution.
'Stamp duty is an unreliable source of revenue and one of the most volatile sources of taxation for state governments'
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.
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.
'Another disadvantage of stamp duty is that older households are discouraged from downsizing'
An ongoing tax every quarter would also be a friendly reminder that the only certainties in life are death and taxes. Stamp duty is a one-off lump sum payment, so the metaphorical pain felt from parting with one’s hard-earned money is felt once and soon forgotten. With stamp duty, it can be minimised by not moving house or even completely avoided by choosing to rent instead of purchasing a house. These negative sentiments are also partially offset by the excitement of having a new place to live.
Furthermore, stamp duty is in the domain of the states and territories to manage. This is why households pay different amounts for a comparable property depending on the location. Any reform needs to have the support of the state and territory governments.
The ACT is the only jurisdiction that has started the process of moving from stamp duty to a land tax. It is mid-way through an ambitious 20-year taxation reform program that involves the phasing out of stamp duty and the phasing in of a general rates system.
The process will be completed over two decades (split into four, five-year plans) to avoid a shock to the property market and to allow the policy to be ‘revenue neutral’ – that is, the reduction in stamp duty will be offset by the increase in land rates. A long transition period such as this risks another political party gaining power and abandoning or pausing the program before stamp duty is abolished. This could result in the government ‘double-dipping’ into revenue streams and homebuyers being hit with both stamp duty and ongoing rates.
Such a scenario further highlights the difficulties in moving from a transaction-based tax such as stamp duty to a broad-based tax on land. It wouldn’t be easy but it would be worth it, particularly if done in tandem with other major taxation reforms.
Furthermore, stamp duty is in the domain of the states and territories to manage. This is why households pay different amounts for a comparable property depending on the location. Any reform needs to have the support of the state and territory governments.
The ACT is the only jurisdiction that has started the process of moving from stamp duty to a land tax. It is mid-way through an ambitious 20-year taxation reform program that involves the phasing out of stamp duty and the phasing in of a general rates system.
The process will be completed over two decades (split into four, five-year plans) to avoid a shock to the property market and to allow the policy to be ‘revenue neutral’ – that is, the reduction in stamp duty will be offset by the increase in land rates. A long transition period such as this risks another political party gaining power and abandoning or pausing the program before stamp duty is abolished. This could result in the government ‘double-dipping’ into revenue streams and homebuyers being hit with both stamp duty and ongoing rates.
Such a scenario further highlights the difficulties in moving from a transaction-based tax such as stamp duty to a broad-based tax on land. It wouldn’t be easy but it would be worth it, particularly if done in tandem with other major taxation reforms.