Prosper Australia welcomes the opportunity to provide a submission to the NSW Federal Financial Relations Review (the Review). Prosper is an independent, not-for-profit organisation campaigning for economic justice. Our reform agenda derives from the work of nineteenth century philosopher, Henry George. Prosper’s mission is to influence revenue policy by educating policy makers and the general public in the economics of locational advantage. We have expertise in a number of areas relating to the Review, most notably in analysis of state tax systems and design of property tax reforms. In recent years we have published several commissioned reports on these topics which the Panel and Secretariat may find useful.
• Stamp duty to land tax: designing the transition (2019), by Dr Tim Helm, a report considering how the transitional issues and political barriers standing in the way of this important reform can be overcome;
• The transit transformation Australia needs (2019), by Dr Chris Hale in conjunction with Prosper, which discusses beneficiary funding (value capture) for mass transit;
• The First Interval – Evaluating ACT’s Land Value Tax Transition (2016), by Dr Cameron Murray, a report evaluating the economic effects of this reform and assessing the revenue potential from nationwide adoption of the ACT model of selling planning rights.
Our full report library may be found at www.prosper.org.au/reports.
Our submission contains two parts. First, an overarching comment about the emphasis of the Review and the most productive directions for the Panel’s work. Second, in direct response to questions 1, 2, 4 and 5 in the discussion paper, we describe directions for reform for various land-based taxes that NSW could adopt or modify, and provide an indication of revenue potential.
States have the best taxes – they just need to use them
One major theme runs through the discussion paper. It is an implicit premise that shapes the arguments in the paper, and it is not correct. We refer to the assertion in the Terms of Reference, which the discussion paper repeats without supporting evidence, that states have “limited taxation powers”.
It is wrong because states have the constitutional power and administrative capabilities to tax land, as they already do in various ways. As has been well canvassed over numerous tax reviews, the return to land is an economic rent that may in principle be taxed without distorting behaviour. So states already have access to the most efficient – i.e. productivity and growth-enhancing – set of taxes possible. Well-designed versions of these taxes also find favour on other standard policy criteria: vertical and horizontal equity, beneficiary funding, simplicity etc. As Nobel laureate James Mirrlees concluded in a recent UK tax review, “the economic case for land value tax is simple, and almost undeniable”.
To be clear: it is not correct, as the discussion paper claims, that all taxes impose costs on the economy. And so it is not true by necessity that “a lower tax burden would support economic growth”, as the Terms of Reference assert. These claims are not true of well-designed taxes on land rents even when considered in isolation, let alone when the associated spending is taken into account.
The Panel will be aware of the principles of tax assignment in a federation. One more important characteristic of land tax is that the immobility of the base makes it suitable for assignment to any level of government. At every level, voters may express preferences over tax and expenditure free from concern for competitive disadvantage, i.e. flight of firms or workers. So there can be no ‘race to the bottom’ competition with land taxes, no dark side to competitive federalism. Nothing stops states solving their revenue problems with land taxes except politics.
All of this has been covered in prior reviews and should be the starting point for any discussion of state revenue systems – not something that must be brought up again and again in response to unsupported assertions that states have “limited” taxing powers, and the implication that state taxes are necessarily inefficient and inferior to those used by the Commonwealth.
In public discussions of tax and federalism the superiority of land taxation is the elephant in the room. That is understandable: the politics seem daunting and the vested interests powerful. But for the Review to ignore it as well, and thus to proceed towards a conclusion that states must be rescued from budget pressures or supported to abolish inefficient taxes with the help of the Commonwealth, would be a major error given how comprehensively this ground has been trodden in the past. The discussion paper leans in this direction, and the Panel would be well advised to steer clear of doing so as well, lest it render this review a lost opportunity to promote rational tax reform.
We also recommend the Review clearly demarcate questions of the quantum of state funding – how can future needs be met, and how can stamp duty abolition be funded? – from questions of the design of Commonwealth support – how can state autonomy and flexibility be preserved despite vertical fiscal imbalance? The discussion paper blurs these distinct questions.
There are legitimate issues with the latter that might be solved via hypothecation of income tax or other means of removing the strings from Commonwealth funding. But these would be inferior solutions to the former, since states already have all the taxing powers they need.
A note on the politics of federalism and the role of the Review.
The political incentives that erode accountability and are toxic to tax reform in Australia’s federation are obvious. States are happy to bank political points from cutting their own taxes, but prefer to ‘cry poor’ and transfer the pain of raising more revenue to the Commonwealth. The Commonwealth in turn wants to cut ribbons in areas beyond its constitutional responsibility.
Vertical fiscal imbalance and tied funding inevitably grow through time as a result of this dynamic; they are a product of the underlying politics and cannot be willed away by those who bear half the responsibility.
If the Review is to be seen as more than an elaborate and resource-intensive exercise in the same game of political cost-shifting, of revenue without accountability, the Panel will need to take seriously the aspirations to ‘sovereignty’, ‘autonomy’, ‘dynamism’ and ‘rewarding state-led reform’ expressed in the Terms of Reference by doing justice to the question of how states could raise more revenue themselves – which means, primarily, from the economic rents of land. To support that work we describe some of the opportunities below.
Read the full submission.