Is there anything to fear in Dan Andrews tax plans?
Victoria is two weeks out from an election and finally somebody is talking revenue policy.
The Liberals have launched a new website, in ominous shades of red and black, detailing the government’s taxation agenda.
The website reveals Labors’ shocking new taxes (9) and their dastardly agenda to increase taxes.
While the site is designed to scare voters, it’s had quite the opposite effect here at Prosper. In fact, this is as close as we might get to a spruik for the Government’s fiscal management.
On balance, this is good policy (with a few exceptions).
Taxes on land are up. Vacant homes are taxed. Brown coal royalties are up. Taxi licenses have been abolished. Victoria now has a fairer regime for taxing online gambling.
The Liberal party are making some seriously misleading claims about the effect and incidence of these taxes. Please read on as we systematically evaluate each point raised on the website.
Tax on Uber and Taxi rides
Last year the crossbench–namely Fiona Patten (Reason Party) and the Greens–pushed the Government to abolish the taxi license monopoly. The change introduced a single regulatory regime to cover all “commercial passenger vehicles” (CPVs) including ride-sharing services such as Uber.
The fixed supply of taxi licenses supported a rent-seeking industry where license holders benefited from government protection against competition, which in turn squeezed consumers in higher fares.
Taxi licenses did not benefit drivers, but rather license holders. Many drivers were reliant on leasing licenses from license holders in order to work. License holders gobbled up the economic rents from license protection.
A temporary $1 per trip levy on all CPV operators was introduced to fund a $494m compensation package. Compensation was deemed fair to previous taxi license holders who effectively lost monopoly licenses valued at hundreds of thousands of dollars.
Overall this is a significant improvement over the previous status quo. Tariffs are better than quotas, and given we have now abolished the taxi license monopoly, competition in the market has opened up to many new players e.g. Uber, Taxify, OLA, DiDi.
The levy can be abolished once compensation has been paid. However, even if Government retains it, this is still a superior outcome to ever escalating fares under a fixed supply of taxi licenses which support a monopoly industry of rent seekers.
Ironically, the Liberals have tried to play it both ways by firstly arguing compensation was not generous enough (https://www.abc.net.au/news/2018-08-05/falling-taxi-licence-values-sparks-suicide-fears/10060558), while also attacking the implementation of the very levy implemented to compensate them.
If license holders are going to be compensated (perhaps even more generously), how will it be paid for? If not by this new levy, then in reduced spending or higher taxes elsewhere.
The current Parliament have implemented a number of measures to strengthen the existing State Land Tax regime. Hurrah! This means a greater share of economic rents going back to the public.
Land taxes (irrespective of who they target) do not increase rents or make housing less affordable, nor do they “increase the cost of living”.
Victoria will now finally have its land valued annually for land tax (and rates) as we have previously endorsed. This is just common sense: one should pay their land tax based on the actual land value of their underlying asset.
Imagine if we paid income tax based on the income from two years prior. A person who lost a job paying $80k and became unemployed for a year would find themselves paying more income tax than their Newstart payment. Tax should be assessed on current wealth and income.
Anyways, land values are falling in Melbourne, so it’s a bit bizarre to claim that annual valuations will increase tax bills. If anything, annual valuations will ease things on the downside.
Absentee Landowner Land Tax and Foreign Buyer Stamp Duty surcharges:
These taxes do not fall on Victorian residents. Foreign property speculators (which includes hot money outflows from China) copped significant Stamp Duty and Land Tax surcharges. This shields Victoria’s from the kind of foreign investment that pushes up land prices.
Higher rates of Land Tax encourages foreign owners to ensure their property is effectively utilised, with no disincentive to develop.
The Stamp Duty surcharge mostly capitalises into lower land prices, which prevents domestic buyer from being crowded out. Domestic buyers are more likely to occupy the property rather than treat it as a deposit box for storing wealth. Building apartments to be left vacant by foreign investors is not an efficient use of resources. Which brings us to…
Statistics from Prosper’s Speculative Vacancies Report provide the foundation for this tax. While a vacancy tax was not our recommendation, we supported its introduction and consulted on its design.
This tax is not designed to raise any revenue. To avoid it, do the right thing and give someone a place to live.
Spouse transfer Stamp Duty exemption restriction:
A recent change means that investment properties transferred between spouses (excluding during a relationship breakdown) no longer qualify for an exemption.
The family home is still exempt.
The most likely losers from this change are those moving assets between partners to restructure their tax affairs and minimise tax.
Ideally Stamp Duties are replaced with a broad based land tax, making such a policy redundant.
Fire services property levy:
A rates surcharge to replace the insurance duties that “funded” fire services.
It consists of a fixed charge and a component levied on the Capital Improved Value of property. While neither of these are ideal, the FSPL is vastly superior to the insurance duties they replaced. Insurance duties penalised people for insuring their properties and let others free ride.
We are of the opinion that the FSPL is necessary to meet threats posed by (climate change enhanced) bushfire season. What is the alternative?
Either we cut funds to the service and let people’s homes burn down; or we regress to an abhorrent tax base to fund it.
Online gambling point of consumption tax
Victoria introduced a point of consumption tax for online gambling in line with other states. It addresses a serious flaw in Victoria’s efforts to tax monopoly rents from gambling and the overall pigouvian tax regime.
Prior to this, multinational online wagering firms dodged tax by registering in the Northern Territory (effectively the Cayman Islands of Australian Gambling), while established wagering company, Tabcorp, paid wagering taxes in Victoria.
The point of consumption tax levels the playing field, ends online gambling’s free ride, and ensures the financial power of the wagering sector is kept in check.
Some of the revenue will is hypothecated to support for problem gambling and hospitals. Arguably it is not high enough relative to other states.
Brown coal royalties
Reclaims more of our natural resource wealth, and goes some way to pricing fossil fuels that contribute to climate chaos (absence any carbon tax). The subsequent closure of Hazelwood power station supports investment in less carbon intensive electricity. However, the Government needs to ensure workers and communities undergo a just transition.
West Gate Toll tunnel
Be afraid. Be very afraid.
Toll roads initiated in this manner are usually not in the public interest, and not an ideal way of funding infrastructure. Value capture is a far superior funding mechanism. That said, using a toll road is ultimately optional. Existing road users effectively pay for something which they never would have had the choice to pay for previous.
Andrews Government to expand value capture?
The Liberal’s website also asserts that a re-elected Andrews government would fund their underground rail loop proposal with value capture.
We really hope this is the case.
Land Value Capture (VC) is the best funding mechanism for rail infrastructure. It ensures that landowners whose property values go up due to nearby public investment contribute their fair share for such projects.
So what form might VC take? The opposition speculates for us having gone through the various Infrastructure Victoria and Australian Government reports (that have been in the public domain for several years).
Off-the-plan apartment tax?
This appears to reference developer contributions. We know from experience that these sorts of taxes do not make housing less affordable.
They fully capitalise into lower land prices and landowner (usually developer) profits. The people buying the properties do not have an increased capacity to pay and thus it cannot be passed onto them in higher prices – they already pay what the market will bear.
Taxes on the family home?
This equates to a land value tax (Betterment levy) applied within certain municipalities. Taxing a share of the windfall gains to land values from infrastructure is both fair and economically sound.
Bad idea – taxing jobs is as stupid as it sounds…
Surcharges on parking?
Depends… Paid parking is a demand management mechanism. The charge works to ration car parks during peak times.
However, paid parking could discourage the uptake of rail transit, especially in the absence of a frequent and reliable feeder bus network. Transport planning should not be done by announcement during the election campaign. Both major parties are guilty.
Higher public transport fares?
Bad idea… Lower fares are needed to attract people onto the public transport we build. Although, studies show that public transport patronage is more responsive to frequency and network coverage than price.
We know that land with good public transport access attracts higher bid rents i.e. it’s pricier to buy land near a tram stop. Landowners with good access to public transport are better placed to bear the cost (rather than users). Here’s an entertaining story to highlight the difference.
Overall, workers and businesses have little to fear from Labor’s tax plan.
Who should be afraid of Dan Andrew’s taxation plans?
- Proponents of brown coal mines (in Vic)
- Multinational online gambling platforms
- Taxi licensees who’d prefer their compensation came out of your wages rather than their competitors pricing structure
- People who own more homes than they can live in
- Foreigners who want to buy real estate in Victoria
- Landowners who will benefit from government investment in infrastructure
- Those avoiding income tax by sharing their property portfolio with hubby