Stamp duty hurts young, working families the most and unfairly targets those who need to move. Abolishing stamp duty and expanding land tax will mean families won’t be unfairly burdened when they need to upsize (or downsize) or move closer to work. Average homebuyers will be better off.
Stamp duty discourages moving and business investment in land. If we make the switch to land taxes, cities will see more efficient land use, leading to decreased traffic congestion, easier commutes, and a freed-up labor market. Making the switch will give us the productivity boost our economy badly needs.
Why replace stamp duty with land tax?
Stamp duty is an unfair tax. People who have to move because they can’t afford their mortgage anymore or because they are going through a divorce, are taxed heavily during what is likely to be a difficult time in their life. Meanwhile, people with stable enough livelihoods to hold their property for 50 years have only pay tax once, 50 years ago.
Broad-based land tax is not only fairer but it is more efficient. It’ll be cheaper to downsize or move closer to work, resulting in more efficient use of housing stock and perhaps even less traffic congestion.
Land tax is also a more sustainable revenue source for Governments. Victoria just lost around one billion in stamp duty revenue over the last year due to the recent property market downturn. That is less to spend on the schools, hospitals and transport we all need. Land tax provides a stable revenue alternative.
Where do we come in?
Stamp duty reform has been on state government wishlists for years. However, it is politically difficult to achive. That is why we commissioned a transition design with the goal of making this reform politically feasible. This project challenges that notion that stamp duty to land tax reform is “too hard” and puts forward a clear roadmap for change.
A PATHWAY TO REFORM
The following policy points are excerpts from Prosper’s Stamp Duty to Land Tax transition design model which can be accessed here.
Immediate abolition of stamp duty to realise the efficiency benefits without delay.
Credit for recent buyers, to avoid the inequity of double taxation. This credit would be equivalent (in economic terms) to refunding the duty paid by current owners, then retrospectively applying the new LVT.
Tax deferral should be used to alleviate liquidity issues for all taxpayers. Deferral as default at commercial interest rates would make the new land tax act like a ‘vendor stamp duty’, but without the inequity and most of the inefficiency of the current buyer duty.
A short phase-in of land tax (e.g. over three years) would give current owners (not eligible for a stamp duty credit) time to get used to the idea as land tax is phased in at 25% increments. A tax holiday might encourage prospective buyers to bring their home purchase forward: stimulating turnover, and protecting house prices from the effects of uncertainty.
A time-limited ‘opt-out’ option to allow prospective buyers to be no worse off under the new scheme. (open for three years). Opt-out makes the transition voluntary for people considering a purchase in the near future. Opt-outs would be exempt from land tax for 20 years.
‘Internally funded.’ The revenue costs of these policies are funded via a higher land tax rate over a defined transition period, so the overall reform package is budget-neutral. The cost of concessions could be funded with a tax rate of around 0.75% over the first 10 years before reverting to around 0.5% beyond that.
For politicians searching for a circuit-breaker on state tax reform, our model offers generous but logical concessions for existing owners, choice for future buyers, and an attractive introductory period to secure support early on. It is complex at the policy design back-end but simple at the taxpayer front-end.