Why COVID Strengthens The Case For Stamp Tax Abolition
Of course, economists have been advocating for decades the abolition of stamp duty and its replacement by a broad land tax.
Why? Because land taxes are impossible to circumvent, land cannot be hidden, while stamp duties are more easily avoided simply by not changing homes.
And why is it so important? Because economies thrive when people and resources are free to move where they can be used most productively.
Workers benefit when they can live closer to their workplace. Retirees benefit when they can downsize and unlock some of the equity in the family home to finance their retirement. Young families benefit when they can upgrade to larger homes that suit their needs.
So how would a land tax work?
That’s literally the billions of dollars question, roughly equivalent to the gaping hole that would be made in state government coffers if they chose to forego stamp tax revenue.
To replace this lost revenue in its entirety, a property tax of approximately 0.44 per cent in Sydney and 0.50 per cent in Melbourne should be applied, as modeled in the report.
This tax would apply only to the “unimproved land value” of the home, which is generally about two-thirds of the total value of a home. So for a $ 1,000,000 property, and assuming the land value was about $ 666,000, that gives an annual property tax of about $ 3,000 a year.
Would you pay for it?
The move is not without precedent. In 2012, the ACT government began a 20-year transition to phase out the stamp tax and gradually reduce the property tax. Last year in New South Wales, Treasurer Dominic Perrottet signaled his determination to ditch the inefficient tax for good, in favor of a land tax.
Consultations continue, but the NSW government has signaled its preference for home buyers to choose whether they want to pay the new property tax in progress or choose to continue paying the old stamp tax rates.
How would rational New South Wales shoppers decide? Crucially, it would depend on how long they intended to stay in the home. According to the NHIFIC report, the average period of home ownership in both New South Wales and Victoria is about 12 and a half years. In other words, on average, people move about every 12 and a half years. Of course, some people stay much longer and could end up paying more in an ongoing property tax than they would pay in the initial stamp tax.
Per the report’s model, a Sydney driver who bought a million dollar home and stayed there for more than 13.8 years would end up paying more in ongoing land taxes than if he had opted for stamp duty up front.
In Melbourne, the buyer of a million dollar home would end up paying more in property taxes after 16.5 years, given the relatively higher cost of stamp duty.
But given that the average length of home tenure of 12.5 years is below these two scenarios, the authors of the report conclude that most buyers at this price level would opt for the property tax.
Of course, a much simpler option would be to simply enact that all new property sales must fall under the new land tax regime.
Either way, moving away from high upfront stamp taxes would encourage more people to move house, the report concludes. Nathan Dal Bon, executive director of NHFIC, says: “Households that are considering downsizing and increasing in size, or simply looking for more space when working at home during COVID-19, would not be penalized.”
Regardless of how long it takes us to get there, a stamp duty free world would be a world where more Australians would have more freedom to move into homes that are better suited to their needs.
Hopefully home beauty salons and home school facilities aren’t necessary features for much longer.
Jessica Irvine is a senior economics writer.