Victorian Treasurer Tim Pallas has pre-announced Land Tax changes ahead of Monday night’s state budget. Expect a dramatic budget contraction as Victoria’s key ‘own revenue’ source, Stamp Duty, has shrunk with the fall in both property transaction volumes and prices.

“The government says stamp duty revenue will collapse by an average of $1.3 billion a year for the next four years, the worst such result in Victoria’s history, dwarfing the losses seen during the global financial crisis,” says The Age.

With $5.2 billion cut from forward estimates, Victoria’s capacity to spend on infrastructure vanishes, as does the ability to borrow against future revenues.

Most state spending is on wages for the nurses, police, teachers and transport workers providing front line services. Cutting numbers or wages would plunge the state into chaos. The only variable is infrastructure spending.

The popular rail level crossing removals, seen as instrumental in the reelection of the Andrews government with a resounding majority, will stall, as will the congestion-busting North-East link.

Victoria is already into a construction downturn, with high rise incinerator starts in free fall and other residential starts also tracking down.

The recently-reelected state Andrews Labor government has picked a fight with the just-reelected federal Morrison Liberal government, refusing funding for the East West Link as it prefers other projects. Andrews now desperately needs the money and activity.

Leith van Onselen has a sore arm from pealing the alarm bell on the risks to Stamp Duty for the last year. See here, here, here, here, here, here, here and here.

Treasurer Pallas is responding. He has announced the removal of the land tax exemption for separately titled land contiguous to principal place of residence in the metropolitan region. The revenue gains will be modest as only 1700 properties are effected, yet Pallas deserves congratulations and every encouragement for his initiative to improve the quality of the land tax base and drive more land into use.

I have described this loophole thus:

The ‘Tennis Court Exemption’. Prosper sees the Principal Place of Residence (PPR) exemption from land tax as a serious behavior-distorting tax concession. Separately titled land contiguous with a PPR and used solely for private benefit is also deemed exempt.

Multiple titled holdings can come about in a number of ways and from a range of landholder intentions. Some are old impractical subdivisions, overtaken by zoning changes or holder preference. Others are land holders buying more open space – for a vegetable patch, a tennis court or simply to distance themselves from neighbours. For others again, this is a form of land banking sheltered from tax by the PPR exemption.

While individual responses to removing the PPR exemption on contiguous land would vary, the overall consequence is to prompt economic activity as holding vacant land has a cost. Holders on old impractical subdivisions can amalgamate titles and restore the PPR status, a straightforward and inexpensive administrative exercise. Others have an obligation to pay for the privilege of landbanking.

Foreign property holders are doubly hit by increases in the existing absentee holder land tax surcharge of 1.5% and foreign Stamp Duty charge up from 7% to 8%. At these levels, the state government is probably capturing all the land rent available. Foreigners can’t vote the government out, so they will sell, improving affordability for Australian residents.

Pallas also closes a loophole opened by VCAT in December 2018 that deemed the land under classified heritage properties as worth $1 due to the perceived difficulty in valuing these special situations. The Valuer-General is quite capable of valuing this land correctly using the ‘rent differential’ method. This will be the law.

These Land Tax improvements don’t fill Victoria’s Stamp Duty black hole. However, they are worth while enhancements that improve land tax without cost.

Land Tax is the best tax available to government. It has a positive excess burden, meaning we Victorians actually make a profit raising government revenue this way. Time to ditch Stamp Duty for Land Tax, Treasurer Pallas.