The other housing tax no one’s talking about this election

With the pandemic property boom turning the Great Australian Dream into a nightmare for many aspiring buyers, housing affordability has been an issue in this election campaign.

Labor announced its Help To Buy plan, the Coalition showcased a Home Guarantee Scheme plus access to up to $50,000 worth of super, and the Greens pledged that just one property could be negatively geared, a move they say would save the government $63 billion in a decade.

But experts say there’s another reform that could help: stamp duty. Scrapping this tax would not only improve housing affordability over time and help grow the economy, it could also be an easier sell for any federal government than changing negative gearing.

While stamp duty is a state government tax, federal counterparts could offer to pay the gap to states who drive reform and face a short-term budget shortfall, economists suggest.

Stamp duty is levied on property transactions and can add tens of thousands of dollars to the cost of moving house or saving a deposit for a first home, whereas an annual land tax would allow taxpayers to spread their contributions over a longer period.

The ACT is halfway through a 20-year switch from stamp duty to land tax, and the NSW government has started a consultation on how it could scrap stamp duty, although Treasurer Matt Kean has called for federal support. The federal government’s recent housing inquiry also called for states to replace stamp duty with land tax.

“Stamp duty is a really inefficient tax compared to land tax and so you don’t want people not moving to a more appropriate property because they’re going to have to pay a big stamp duty cheque,” Richard Holden, Professor of economics at UNSW Business School, said.

“The obvious wrinkle is, a pretty big part of a state government budget is made up of stamp duty revenue. If you move to land tax over time, there’s an immediate budgetary hit.”

Professor Holden said one solution could be for the federal government to provide slightly higher Commonwealth grants for a period of time to states who move away from state duty.

He previously called for a scaling back of negative gearing tax breaks, which were taken up by federal Labor, rejected by voters at two elections, and then dumped by the party.

Holden says stamp duty reform could be an easier sell to voters.

“Stamp duty is not something that people like,” he said.

“Yes, it is an easier sell than negative gearing, but it’s not totally uncomplicated, and if it was totally uncomplicated, it would have already happened in a state like NSW where both sides of politics are in favour of it.”

Holden acknowledged the risk that allowing buyers to use the cash saved for their stamp duty to instead spend on housing could push up property prices, but still backed the reform, saying it would help first home buyers most because stamp duty is a bigger proportion of their savings than for other buyers.

Grattan Institute economic policy program director Brendan Coates warned against getting caught up on the risk prices could move marginally higher in the short term, saying it was “short-sighted” thinking.

Over the longer term, property prices could be as much as 4 per cent lower than they would otherwise be, he said, citing NSW Treasury modelling.

“Stamp duty reform could give the economy a big kick, which it needs, while also making housing more affordable in the long run,” Coates said.

“The federal government should come to the party in helping to commit to fill part of the revenue hole. They should do that both in NSW and in any other state that is willing to make the transition to a land tax, because the federal government will collect most of the extra revenue when the economy grows after the reform.”

For example, if a state planned a 10-year transition, the federal government should fill the revenue shortfall over that time, and this should be a standing offer to any state willing to embark on the reform, Coates suggested.

Independent economist Saul Eslake took the view that stamp duty reform could be a hard sell because only a small proportion of people pay it in any given year, whereas a land tax would be a smaller amount of money but many taxpayers would pay it every year.

He backed scrapping stamp duty and pointed to a Productivity Commission report from 2017 that recommended shifting from stamp duty to land tax, with provision for low-income households. He also highlighted a review by former Telstra boss David Thodey, who suggested it was not fair for people who move often to contribute more to public services.

“One possible role for the federal government could be to offer states that are prepared to make the switch financial assistance to alleviate – either in whole or in part – the revenue hole,” the principal of Corinna Economic Advisory said.

“The other thing is some states worry, if they were to make the switch, it would adversely affect their share of GST revenue … the [Commonwealth] Grants Commission would say, ‘you now have a stronger revenue base.’

“The other thing the federal government could potentially do is to provide some form of assurance that wouldn’t happen.”

He said it would likely help first home owners over time by either marginally lowering land values or reducing the rate at which they rise.

A spokesperson for Housing Minister Michael Sukkar said state and territory governments have primary responsibility for housing, including stamp duty and land tax.

“Rising state taxes, increasing regulatory imposts and unresponsive planning rules, that have led to declining housing affordability. Any move to reduce these costs of homeownership would be welcomed,” the spokesperson said.

“However, any tax reform must be funded through state budgets.”

A Labor spokesperson said: “Stamp duty is a state government issue.

“Through our National Housing Affordability and Supply Council and National Housing and Homelessness plan, an Albanese Labor government will look to work with all levels of government and other stakeholders to make it easier for more people to buy a home.”