Opinion & Commentary

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Stamp duty needs reform

Robert Carling | The Australian Financial Review | 19 November 2013

State governments enjoy real estate booms, like the one that gathered momentum in Sydney this year, because rising prices and turnover combine to send stamp duty revenue gushing into the Treasury coffers. But the states’ reliance on this source of revenue is unhealthy and highlights the need to rethink how states are funded.

The beginnings of the Sydney boom helped push the NSW budget to an unexpected operating surplus in 2012-13. The boom strengthened further in the early months of 2013-14, and if sustained, could result in stamp duty revenue over-running this year’s budget estimate by possibly $500 million or more. On its own, this would flip the budget from the expected operating deficit to a small surplus.

For Treasurer Mike Baird, this is a mixed blessing. He will welcome anything that helps offset sluggish GST revenue (the state’s biggest revenue source), but he should also be wary of the extreme volatility of stamp duty revenue, which has quite often gone up or down by 20 per cent to 40 per cent in a single year.

The O’Farrell government’s management of this stamp duty bonanza will be a test of its fiscal discipline. In similar circumstances, its predecessors initially booked surpluses but then ramped up recurrent spending to match unsustainable revenues, leaving the state’s finances exposed when the boom ended in 2003. The current government should heed that lesson and resist the temptation to spend what will surely turn out to be a temporary surge in revenue.

Over the long term, states have benefited from huge growth in stamp duty revenue from property, as increases in values interacted with progressive stamp duty scales to produce massive bracket creep. The scale has remained unchanged in NSW since the mid-1980s, except for the addition of an increased top rate of 7 per cent in 2004, which made it even more progressive. The government has not adjusted thresholds to reflect increased values, resulting in transactions drifting into higher duty brackets. The huge increase in the weight of stamp duty on real estate transactions over time is a concern, not only because of the burden it places on buyers and sellers of homes, but also because stamp duty is widely recognised as one of the most distorting taxes. At the margin, it locks people into inappropriate housing and discourages mobility.

The median-priced Sydney house transaction of around $100,000 in the mid-80s incurred duty of 2 per cent. Today’s median-priced house of around $650,000 incurs 3.8 per cent – a near doubling of duty through the stealth of bracket creep.

For these reasons, various government-initiated tax reviews, including the Henry review, have recommended replacing stamp duty with broader and less distorting taxes, including land tax. However, land tax attracts much more political protest than stamp duty. To date, the ACT is the only jurisdiction to adopt a stamp duty/land tax swap, phasing it in over 20 years (we shall see). In contrast, NSW indexes the tax-free threshold for land tax every year, but has never felt political pressure to index stamp duty thresholds, other than provide a concession for first-home buyers.

State treasurers will say economic theory is all very well but that state governments need to have at least some buoyant revenue sources. It is an understatement to say property stamp duty has served that purpose. Stamp duty revenue in NSW has increased more than 10-fold since the mid-1980s, far in excess of the growth in consumer prices, population or even average house prices.

States are right to say they need growing revenue bases, but property stamp duty is one that fails other criteria for sound revenue raising. Stamp duty reform is needed by re-examining how states are funded overall.

Robert Carling is a senior fellow at The Centre for Independent Studies.