The Grattan Institute has just released a working paper Property Taxes to lift our thinking about which are the best taxes to reform onto.

Grattan CEO John Daley and Senior Associate Brendan Coates say:

“…states and territories have a looming funding gap, and have provided little insight into how they are going to fill it. 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, tax on property and property transactions have been the only significant growth taxes for states, with revenues keeping pace with the economy.

Grattan’s proposal is manageable for property landowners, and protects low-income people. Low-income retirees with high-value houses could defer paying the levy until their house is sold.
The levy could also be used to fund the reduction and eventual abolition of stamp duties, among the most inefficient and inequitable state taxes.

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 report is excellent and I commend it. Surprisingly, Daley & Coates spend much time fussing over the relative merits of taxing land or land and buildings. The combined rate genuinely discourages construction and is way less efficient.  By all means, discuss and illuminate the relative merits, but please plump for the economically superior base – unimproved land.

Interestingly, they seek to sell the idea as a fresh property levy, rather than reform of the existing State Land Tax. Grattan invents a rate of 0.2% of land values to head off a perceived state funding emergency when the enduring challenge is to put state finances on a durable and least-harm base, noting that to replace SD a higher rate would be needed.  If politicians are to sell a reform, there has to be a benefit.  Ending Stamp Duty and the associated deadweight losses is an economic reform worth fighting for, even if it means a higher rate than Daley & Coates suggest.

Daley & Coates highlight the need for reliable state revenues, which is fine as far as it goes, but overlooks the powerful virtue land tax offers as an automatic stabiliser – advancing as land prices rise and retreating as they fall, moderating both booms and busts.

Daley frets over the difficulty of discovering site values in built up areas with few land-only sales. A quick conversation with a skilled valuer would have put his mind to rest on this – it really is quite easy.

Equally overlooked is recent federal Treasury modelling that shows land tax actually has negative deadweight losses (a very rare and special quality) as money raised from foreign and domestic landowners is spent entirely on domestic households.

Ross Gittins has more useful things to say about the Grattan proposal here.