ACT’s tax reform test case

Elections for the ACT Legislative Assembly do not normally attract national attention, but the one held last Saturday has done so — in part because the government was returned despite a bold tax reform project that led to large increases in municipal rates. Some post-election commentary has been along the lines that voters are open to well-argued tax reform — and even tax increases — after all. Higher GST, anyone?

Not so fast. Elections are always about bundles of issues, and it is difficult to discern the influence of any one issue on the outcome. Moreover, it can hardly be said that the ACT electorate is representative of Australian voters in general. What flies there won’t necessarily fly elsewhere. In NSW, the Carr Labor government’s attempt to expand coverage of land tax (similar to rates) was reversed in the face of a taxpayer revolt.

It is true that the increase in ACT rates is part of a broader, revenue-neutral tax reform package combining higher rates with abolition of stamp duty on insurance (already implemented) and — eventually — on property transactions as well. The territory is five years into a planned 20-year transition from stamp duty to higher rates. This is a tax reform most economists have called on all the states to adopt for its economic efficiency enhancing qualities.

Although the ACT model has survived its first electoral road test, it remains to be seen whether the 20-year transition is completed as rates become a heavier and heavier drain on families’ annual budgets. It also remains to be seen whether the transition is truly revenue-neutral. It has not been for all taxpayers, as its implementation has come with a socialist twist — the reductions in stamp duty being proportionately much larger for low value transactions than for high value ones.

State governments have become hooked on stamp duty — for example, NSW now rakes in $9 billion a year from it — and replacing it with rates or land tax would require hefty annual imposts on ordinary households. The ACT experiment is interesting to observe, but even if completed as planned would be a big challenge to replicate in other jurisdictions