Grattan Institute: state governments property tax would raise $7 billion a year

Ross Gittins: Increasing property tax the fairest thing to do

State and territory governments need to introduce a low-rate property tax to help raise billions of dollars a year in extra revenue and reduce their reliance on Commonwealth funding, the country’s most well-respected public policy institute says.

The Grattan Institute says a broad-based “property levy” would raise $7 billion a year for state governments, helping them to repair their budgets.

It would also raise enough money so that state stamp duties on property – considered the least efficient taxes – could be abolished, while giving state governments more control over their destinies by making them less reliant on Commonwealth funding.

The Grattan Institute says an annual levy of just $2 for every $1000 of unimproved land value would raise $7 billion a year in revenue for state and territory governments, to help address their deteriorating budgets.

It would be an annual charge of $772 on the median-priced Sydney home, and $560 on the median-priced Melbourne home, with lower average rates in other cities and the regions.

People with low incomes and no wealth would pay nothing. Low-income retirees with high value houses could defer paying the levy until their house is sold.

John Daley, Grattan Institute chief executive, says the levy would eventually raise enough money to eventually replace stamp duties, which raised $16 billion for the states in 2013-14.

“Stamp duties are among the most inefficient and inequitable taxes available to the states, and their revenues are inherently volatile,” Mr Daley said.

“They deter people from buying and selling property, and therefore can prevent them moving closer to jobs or upsizing and downsizing their homes as their needs change.”

The policy proposal is found in a new Grattan Institute paper, called “Property Taxes.”

It is the second in a series of Grattan working papers on directly confronting Australia’s weakening fiscal position, and criticising the projections for long-term growth in the Abbott government’s second budget.

The Institute has said the government’s projections for long-term growth ought to be lower if it does not want to keep getting surprised by larger-than-expected revenue shortfalls and bigger-than-expected budget deficits.

It says governments ought to seriously consider reforms that will both increase government revenues and make tax policies more efficient and economically productive.

“Attention is focussed right now on the worsening Commonwealth deficit, but states and territories have a looming funding gap, and have provided little insight into how they are going to fill it,” Mr Daley said, adding that a broad-based property levy calculated from the council rates base would be the best revenue measure to fill that gap.

“While property taxes can be unpopular because they are highly visible and hard to avoid, they are also efficient and fair, and don’t change incentives to work, save and invest.”

“Unlike capital, property is immobile – it cannot shift offshore to avoid taxes. Over the last 25 years, taxes on property and property transactions have been the only significant ‘growth taxes’ for States, with revenues keeping pace with the economy.”

Shifting from stamp duty to a property levy would provide more stable revenues for states and add up to $9 billion in annual GDP, the paper says.

Grattan’s next paper in the “Budget Repair” series will propose reforms to superannuation tax concessions.