Victoria’s new Treasurer Michael O’Brien has called for a discussion on ending Stamp Duty on property conveyances.  Prosper welcomes this opportunity to consider the quality of Victoria’s tax bases and the costs they impose on citizens.

Stamp Duty is a very bad tax and highly inefficient.  It discourages buying and selling property.  It excludes some from homeownership and traps others in the wrong houses.

Imagine a wonderful job offer with more pay on the other side of sprawling Melbourne. One could sell and move, rent your home out and rent over there, commute for 3 hours a day or decline the opportunity.

Tough choices are dictated by the near $24,000 in Stamp Duty payable on buying a median-priced home.  The costs don’t just fall on the hapless individual, they resonate through the economy.

Stamp Duty is an unreliable source of funds for government.

The significant and sustained fall in the volume of property sales and the corresponding fall in Stamp Duty receipts drove the state budget into a $349 million deficit in the first half or 2012/13.  Victoria must borrow money just to balance the books, which threatens our AAA credit rating.  While borrowing to build infrastructure and increase Victoria’s productive capacity is sensible, borrowing because we have poorly designed taxes is not.

Stamp Duty was condemned by Treasury’s Australia’s Future Tax System for its sheer wastefulness.

“Conveyance stamp duty is highly inefficient and inequitable. It discourages transactions of commercial and residential property and, through this, its allocation to its most valuable use. Conveyance stamp duty can also discourage people from changing their place of residence as their personal circumstances change or discourage people from making lifestyle changes that involve a change in residence. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth.”

Treasurer O’Brien has mentioned higher GST and higher Income Tax as alternative revenue sources. The GST is regressive and hurts the poor.  And while Income Taxes are progressive, they penalise wage-earners and deter people from working. There is a better base, one entirely in the hands of the Victorian government: removing the principal place of residence exemption from State Land Tax.

 AhURI modelled the consequences of a change from Stamp Duty to State Land Tax for Melbourne. Their research shows most Melbourne homeowners would benefit mightily from such a change.

It must be understood the issue is not the size of government or its spending – which is fertile territory for another day – but rather where it takes its revenues and the effect this has on our lives and economic activity.