Should We Phase Out Transfer Stamp Duty?
/As property prices in Sydney have soared so have the revenues flowing to the State government as it rakes in record levels of tax revenue through the stamp duty on property transfers. This stamp duty, approximately 4% of each property transfer, is a significant impost which increases the savings threshold for first home buyers and acts as a brake on mobility in the property market.
According to the Re:Think Discussion Paper released by the Federal government in 2015, stamp duties on the transfer of residential and commercial property are the second-largest source of state tax revenue (generating 24 per cent of state tax revenue). The paper argues that stamp duties can discourage businesses from undertaking productivity enhancing purchases of existing land and capital, and can also be a barrier to labour mobility.
The Case for Land Tax
Organisations such as the Grattan Institute suggest there are significant economic gains associated with state tax reform, particularly reducing stamp duties and making greater use of land taxes; essentially by replacing the big one-off stamp duty on each property transaction with an ongoing more modest annual land tax based on property value. So far the only Australian state to venture down this path is the ACT where they are now 7 years into a 20 year plan to phase out stamp duties.
But as with any argument requiring a political solution many of the proponents put forward their case based on self-interest. For example, Domain Business Editor, Chris Kohler argues that stamp duty leads to a disproportionate amount of property renovation, and that can lead to overcapitalisation of properties. But Domain’s business model is based on the volume of property transactions so they would argue that, wouldn’t they?
The Case For Stamp Duty
On the other hand, Cameron Murray, Lecturer in Economics at University of Queensland argues that this “holy grail” of tax reform is bad economics because its proponents miss or overlook 4 consequences of making the change:
In a market where house prices are at least partly affected by what people can afford to pay, the removal of stamp duty may not lead to any change in house prices. This would result in a transfer of wealth to existing property owners
Mobility – Murray argues that people who relocate for work do not buy or sell homes to do it. Instead he sees the brake on property turnover as a positive deterrent to speculative investors.
Economic stability – he sees the fluctuations in stamp duty revenues between periods of boom and bust as having a stabilising effect on the economy.
Odd modelling – he contests the basis of Treasury modelling of the wider economic impact of various types of tax does relies too heavily on anecdotal or illustrative examples, which cannot be extrapolated to all property transactions.
My View
Despite Murray’s points I think the arguments for the phasing out of stamp duty are strong. If there is a wealth transfer to existing property owners, this could be recouped via the tax system in the design of the new tax. Whilst it is often true that people do not immediately buy and sell property when they move jobs, most manage the transition through extended commuting times leading to greater congestion on our roads and public transport systems. This is economically inefficient.
Overall stamp duty is a significant one-off cost which clogs up the efficient working of the property market. It impacts housing affordability. It leads to distorting of other government policy; for example through the stamp duty concessions provided to some first home buyers which are a de facto gift to existing property owners.
How Would it be Done?
The weight of economic arguments is on the side of the reformers. The Grattan Institute calculates that that making the transition to a broad based land tax could make Australians up to $9 billion a year better off, while also making housing more affordable.
There are several challenges to be overcome when re-designing the property tax system:
Maintaining stable government revenues
A property tax would pose difficulties for people who are asset-rich but income-poor, eg retired people and pensioners.
Recent purchasers would be reluctant to pay an annual tax so soon after paying stamp duty.
But these challenges are not insurmountable. They can be addressed by phasing in the changes over say, a 10 year period, while allowing those who cannot afford to pay the annual land tax to defer their tax payment until their property is sold.
What Do You Think?
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