Leading think tank, the Grattan Institute, has proposed the introduction of a new property levy that could raise $7 billion and put state governments back on track.
<i>Property Taxes</i>, the second working paper in the Grattan Institute’s 'Budget Repair' series, found that a levy of just $2 for every $1000 of unimproved land value would raise $7 billion a year.
In the Institute’s first paper, <i>Fiscal challenges for Australia</i>, it found that Australia is set for more than a decade of deficits between 2008 and 2019, with Commonwealth net debt projected to peak at 18% of GDP in 2017, higher than any year since the mid-1990s.
The co-author of both working papers, Grattan CEO John Daley, identified the struggle for state budgets with increased spending in health and education, worsened by the Commonwealth’s decision to substantially reduce promised funding to the states for hospitals and schools.
“Current attention is focussed on the worsening Commonwealth deficit, but states and territories have a looming funding gap, and have provided little insight into how they are going to fill it,” Mr Daley said in a statement.
The paper argues that a broad-based property levy calculated from the council rates base would be the best revenue measure to fill that gap.
Though Mr Daley conceded that property taxes are likely to be an unpopular choice as they are highly visible and hard to avoid, he claimed they are also efficient and fair, and they do not change incentives to work, save and invest.
“Unlike capital, property is immobile – it cannot shift offshore to avoid taxes. Over the last 25 years, taxes on property and property transactions have been the only significant ‘growth taxes’ for states, with revenues keeping pace with the economy.
“Our proposal is manageable for property landowners, and protects low-income people. Low-income retirees with high-value houses could defer paying the levy until their house is sold,” he said.
A property levy could also be used to fund the reduction, and eventual abolition of stamp duties, which have been regularly slammed by industry bodies as inefficient and inequitable state taxes.
Shifting from stamp duty to a broad-based property levy would provide more stable revenues for states, spread the tax burden more fairly and add up to $9 billion in annual GDP, the paper argued.
The Urban Development Institute of Australia (UDIA) has hailed Grattan’s proposal for a low rate, broad-based tax on the value of land as a “huge step in the right direction”, particularly along with the abolishment of stamp duty, which the UDIA has regularly rallied for.
“Stamp duties are widely recognised as among the least efficient and most economically damaging taxes available to governments, and they have no place in a modern tax system,” said Cameron Shephard, UDIA national president.
“As the Grattan Institute notes, taxes on the value of land are far more economically efficient than stamp duties, and provide a more stable source of revenue for governments.
“If implemented carefully, [land taxes] could provide big dividends for both the Australian economy and government budget bottom lines.”
The UDIA recently also called for a major shakeup of Australia’s tax system in its submission to the Federal Tax White Paper process, including a shift away stamp duty and large upfront developer levies on new housing, to more efficient taxes such as a broadened GST, and a broad, low rate land tax.
“…UDIA believes that land taxes should be utilised by governments to reduce reliance on upfront developer charges, which add tens of thousands of dollars to the cost of a new house, and severely impact on housing affordability,” said Mr Shephard.
“To be most effective, land tax should apply only to the unimproved value of land, not the capital improved value, and should not seek to penalise large land holdings, which would discourage large scale land development and investment."
Given the challenges facing the economy, government budgets, and housing affordability, Mr Shephard said Australia cannot afford inaction on tax,
Recent research from the Property Council of Australia (PCA) has also revealed a better mix of taxes could lead to a boost of up to $10 billion for Australia’s economy.
A report by ACIL Allen Consulting last month on behalf of the Property Council, <i>Modernising Australia’s Tax System</i>, analysed three tax reform packages that use increased GST revenues to retire inefficient state taxes. Some options also incorporate company tax cuts or Henry Tax Review recommendations to boost growth.
The mixed tax ‘switch packages’ incorporated into the study were found capable of increasing Australian economic welfare – which incorporates GDP, incomes and labour – by up to $10 billion, while still raising up to $7 billion of additional revenue for governments.