Reform Agenda Machinations

Published as The Planned Obsolescence of the Public Interest in Online Opinion

A fascinating power play continues in the debate over vertical fiscal imbalance. The strategic intent is prevalent from federal to local politics, where the health of the public revenue raising system is undermined. This sideshow diverts from the beneficiaries that Adam Smith once called the Public Enemy – rent-seekers.

The Abbott government set the textbook play into action with the 2014 budget emergency stripping $80bn from state health and education. Federal grants were also frozen, impacting greatly on growth area councils. State governments were forced to consider their own sovereign revenue raising capacities. This saw South Australia’s Weatherill government launch another tax review. Like so many others, it found Land Taxes the most efficient. In a sign of great promise, Treasurer Joe Hockey stepped forth to support the transition away from highly inefficient Stamp Duties to Land Taxes.

Mainstream debate predictably degenerated from high principle to the self-interest of property owners in pursuit of the windfall gains displayed so lavishly on reality TV most nights.

The 2015 Federal Treasury white paper submission raised the bar on Land Taxes. They found even greater efficiencies by including the revenue dividend of foreign investment in property. The benefits are profound. Land Tax is the only revenue mechanism to generate positive benefits for the economy. Accompanying the white paper was a much needed animation series attempting to break into the mindset of the everyday Australian.

Politicians have instead opted for an increase in the regressive GST as the only plausible option. Leading the charge was NSW Premier Mike Baird, who revealed during his pro-GST media blitz that households earning under $100,000 would need compensation. The tax churn was calculated at a staggering 60% deadweight cost for every dollar raised. With Treasury finding Land Taxes actually contributing 10% to the economy, the 70% differential demonstrates the cost of poor public education.

With Sydney housing prices topping $1 million and Melbourne now beyond $700,000, the need for clarity on what can appear a difficult concept has never been more important.

Economists brave the elements to discuss Land Tax as it acts as a counter-weight to mortgage debt. As a cost of ownership, market players incorporate future Land Taxes into their purchasing price. This saves thousands in mortgage interest payments. Money thus saved can be spent locally, triggering employment in the productive economy. Governments also benefit in reduced costs of sprawl, lower poverty levels and greater small business creation. In short it encourages good behaviour whilst raising revenues – something no other tax can deliver.

However, holding charges on land such as local council rates and Land Taxes on a typical Melbourne site have been hacked away to just $1,600 versus yearly capital gains of $95,000. Such lucrative returns have driven the speculative impulse behind half of all housing loans.

Local and state government have been caught in the middle by an out-dated tax system encouraging tax minimisation and a general public unable to decipher spin from self-interest. The failure of all levels of government to harness the rising value of property to solve problems is compounding quickly. Local democratic functions are being sacrificed under the weight of fiscal prudence.

Baird increased pressure for the amalgamation of local councils with the recent release of the IPART report ‘Fit for the Future’. It found 63% of local councils unfit for the future. This is unsurprising as councils have endured twenty five years of limited revenue sovereignty enforced by poorly targeted rating caps. The Municipal Association of Victoria finds “NSW councils effectively spent only 55% of the average capital expenditure by local government in other states, leaving a multi-billion dollar black hole for future generations.”

Despite this evidence, Victorian Premier Daniel Andrews championed local council rate capping with the release of the Essential Services Commission rate-capping formula. An annual 60% CPI index with a 40% Wage Price Index is expected to slow the 6% average increase in rates over the last decade. Local councils have been forced into this situation by cutbacks at Federal and State levels with greater service obligations passed down the chain of government.

A rarely discussed budgetary pressure is the combined effect of 30 years of privatisation. Local traders in Maribyrnong complain at the $2,000 fee municipal contractors charge for cleaning one single drain. The world’s largest privatised prison operator Serco runs the Melbourne City Council parks and gardens maintenance program – at what cost few know. The impact on government budgets of lavish consultancy fees must be more closely analysed. The privatisation agenda has effectively seen a few extra workers leaning on shovels replaced by executives on long Friday lunches.

In positive news, the Turnbull government has implicitly acknowledged the challenge rent-seekers provide to public revenues. After decades of tax reviews, Treasury is finally modelling the effect of Land Taxes on the macroeconomy. It’s akin to recognising the best parenting methods, but never understanding the lifetime benefits. The three major post-GFC tax reviews (the UK Mirlees report, the NZ Tax Working Group and the Henry Review) have all recognised the importance of harnessing economic rents as an essential element in a future tax system, but no major modelling work has been undertaken.

Turnbull’s recent advocacy of Land Value Capture as a means to finance sorely needed infrastructure is another positive step. Publicly financed infrastructure currently operates as a crude form of welfare for property developers, lubricating wealth inequality amidst the housing crisis. A growing number are recognising this leakage as a cost to government.

Former New York Mayor Bloomberg grasped the economic potentials by reaching out from his local government role to finance the extension of the state run No.7 train line to the Hudson Yards. The added amenity of the train extension was projected to deliver $30 billion in additional property taxes over the next 30 years. Infrastructure bonds were sold to the market with repayment via the increase in land values. This is world best practice at least cost. NSW and Victoria have effectively cut off this potential via rate capping whilst struggling to finance infrastructure. Instead we are told to accept second best, with ‘asset recycling’ a code for further privatisation.

Local government has been silenced whilst State and Federal government’s play pass-the-parcel in the great land game. We can only hope budget deficits, ineffective taxes and privatisations are not part of the planned obsolescence of the public interest.

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