A small step to correct a flawed tax

The NSW Treasurer Dominic Perrottet this week announced a plan to index real estate stamp duty thresholds to inflation from 2019. This means the points at which the graduated duty rates cut in would increase automatically each year without new legislation being required.

Indexation is a good idea in principle and Perrottet is to be applauded for going where no state Treasurer has gone before, but his proposal is but a small step towards correcting the state’s addiction to a flawed tax.

The stamp duty scales have not been adjusted since 1986. Since then the revenue yield from this tax has ballooned from a mere $500 million a year to almost $10 billion at the peak of the recent boom.

Although revenue is now in retreat, this will no doubt prove to be another temporary set-back. Over the long term State governments — Coalition and Labor, and in all states, not just NSW — have enjoyed the revenue ride and have never wanted to do anything to stop it.

The flip side to governments’ addiction is a steadily rising burden on home buyers. As values increase but the transfer duty scale remains unchanged, the percentage of stamp duty in average values goes up. Since 1986, on the median Sydney house price it has roughly doubled from 2% to 4%.

Indexing the stamp duty brackets to the consumer price index would slow the increase in duty as a percentage of average values, but it wouldn’t stop it because house values over time rise faster than the CPI (even if they are falling at the moment). Since 1986, the Sydney CPI has risen by about 170%, but the median house value by 1,000% or more.

Instead of indexing to the CPI, the state government should index to some measure of average property values in NSW, just as they index the land tax threshold to average land values in NSW.

Also, the thresholds are in need of a major increase right now, before automatic indexation starts next year.