Beware of Politicians Bearing Gifts – Let’s Start the Stamp Duty Discussion
Almost 2 months ago the property industry was abuzz with talk of the removal of stamp duty on property transactions. The NSW Treasurer announced he was seriously contemplating such a move and was being advised by a high-powered advisory board. At the time, no one asked the obvious question – when has any Government voluntarily given up such a significant revenue contributor without replacing it with another way to collect the same amount (if not more) revenue or relying on bracket creep? I cannot recall one time in the last 30 years.
On the 20th anniversary, David Thodey and the NSW Treasurer did a song and dance routine at the National Press Club calling on a broad-based land tax amongst other things.
When you view the public statements since then, it now makes perfect sense.
Since the initial announcement, we have seen numerous kites being flown. The first one in the air was a broad-based land tax. From a pure public policy perspective, this isn't such a bad idea and has been around since the late 1800s. There’s only one issue, and that is that in New South Wales there is an unimproved capital valuation regime for all properties – so valuations only relate to land and not improvements. Hence, as it relates to the land alone, a whole range of economic distortions will emerge.
In addition, when all things are considered a broad-based land tax under the current conditions have the impact of increasing Council rates (it would be levied on a rather similar basis). Raising $9 billion per annum from a broad-based land tax could have the impact of almost doubling local rates.
Other questions also emerge such as, should homeowners that have already paid stamp duty still be liable for new broad-based land tax? If they are liable, then they are being double-taxed – if they are not, the imposition of the new tax may have a lock-in effect and reduce potential revenue collections.
The ACT has started a program to replace stamp duty with a broad-based land tax. The ACT has no private ownership of land and has a 99-year leasehold. The Government is largely responsible for land release and its population is about the size of the Northern Beaches of Sydney. Sure, lessons should be learned but differences should be acknowledged.
By far the scariest proposals are betterment taxes and value capture. This has been the topic du jour of the Sydney Morning Herald (SMH). Many Government agencies are enticed by the prospect of capturing the uplift created by a pen stroke without taking any risk. The SMH reported that the Government could capture 75% of the value uplift. Such methods of taxation are lauded as international best practice. What they fail to mention, is the contention surrounding the drawing of tax increment financing boundaries and the community division it creates in the United States. They also fail to mention the small contributions to the CrossRail project from value capture as it also included reimbursements for value decrement. Admittedly, value capture did work rather well in Hong Kong with the development of the Mass Transit Railway (MTR) but that was for a discrete and continuous piece of infrastructure where value could be clearly demonstrated.
You don’t replace one distortionary tax (stamp duty) with another distortionary tax. There are pros and cons of all proposals. But the trick will be in the design. A broad-based land tax appears the best way to go but it should be levied on the improved capital value of land. This will incorporate elements of all the taxes discussed and will tax the marginal improvement in value throughout the lifecycle of the development. There is far more work needed by policymakers before we accept the removal of stamp duty as a Trojan Horse.
