Stamp Out this Tax

Stamp duties on house sales are lazy, outdated, distort markets, make planning difficult and impose a penalty on mobility. By Tim James.

Property is the perennial conversation topic in Australia, especially in Sydney and Melbourne, which were both among the ten least affordable cities in the world last year.

Yet we rarely talk about property taxes, especially stamp duty. It’s hardly an exciting topic for dinner table conversation but it’s a worthy question for policy makers, and a timely one. Is this tax efficient, fair and effective?

In short no, no and no. It’s lazy, outdated and distorts markets.

This week has highlighted how unpredictable and unstable this tax can be for governments. We've had two budgets from prudent Liberal governments that have both had to deal with a big drop in revenue from stamp duty.

In NSW, a staggering $10.6 billion reduction in stamp duty revenues over four years featured in Treasurer Dominic Perrottet’s budget, handed down on Tuesday. At the height of the property boom, stamp duty became the state’s single largest source of tax revenue, representing 31.4 per cent of tax revenue in 2016-17, the budget papers showed. It has come back a long way, and with little notice, which makes policy planning difficult.

In South Australia, the softer housing market led to almost $200m being written down over four years. Handing down the 2019-20 budget on Tuesday, Treasurer Rob Lucas said the state was in a "challenging financial position" because of decreased GST and stamp duty revenues.

Both of these show stamp duty is a bad tax. It gives state governments a false sense of confidence and strength when house prices are rising but causes sudden problems when the housing market slows.

It's bad for people too. It acts as a barrier to entry in home ownership and discourages mobility. It discourages workers from moving where the jobs are and older owners from downsizing. The latter is particularly noteworthy given our ageing population.

The Henry Review outlined that stamp duties may encourage people to live in one house when they would prefer to live in another, by discouraging transactions and relocation. It also stated that stamp duties may lead to over investment in large dwellings, by encouraging people to renovate and discouraging downsizing.

Stamp duty cost the median Sydney homebuyer more than $43,000 last year. The Berejiklian government announced last year that it would index stamp duty thresholds, the first major amendment to the tax since 1986. While the indexation was a positive move, it is not a ground-breaking reform.

In its 2008 report, Review of State Taxation, IPART suggested that a long-term reform option for property tax was to reduce reliance on stamp duty and increase the use of land tax. It noted that this reform would need to address the potential impact on different taxpayers, as land tax can adversely affect people who have high property values but low incomes.

More recently, indeed in the past fortnight, Productivity Commission Chairman Michael Brennan called for stamp duty to be eventually scrapped. He has told media that he recognises “it’s a very significant revenue raiser for the states” but makes a strong case that we need to think of ways to replace stamp duty in the long term. He describes it as a destructive tax, and in fact a tax on mobility.

Stamp duty is a tax with no real redeeming features. It should not be beyond the ability of sober-minded leaders, state and federal, to come up with a better tax. With the NSW and Federal Governments just re-elected, now is the time to look at it and ask how we can do better.