Tracking a pioneering land tax reform
In 2012, the Australian Capital Territory Government announced it would embark on a twenty year tax reform program, abolishing stamp duties and insurance taxes and replacing the revenue by increasing general rates for all landowners.
Propser is undertaking a series of five reports, to be published every four years, examining the progress and impacts of this ambitious tax reform agenda.
The ACT Government gave three main reasons for replacing stamp duty and insurance taxes with land tax (general rates): revenue predictability, efficiency and equity. They also promised that the reforms would be revenue neutral, reassuring residents that this was not a tax grab.
In theory we would expect the introduction of a land tax to have a one-off impact on prices by reducing the land value in line with future land tax obligations. At the same time, we would expect the abolition of stamp duty to increase prices, at least by as much as the reduction in duty, but likely more so as larger deposits can be leveraged for larger loans. Exactly how these two pricing effects will play out is difficult to forecast in advance.
The ACT transition provides a unique opportunity to study the real world impacts of a transition to land taxes in a small, sub-national jusrisdication.
- Increasing land tax rates appears to have deterred housing speculation
- Future land tax obligations are already capitalised into lower land prices
- Because of this, new home buyers save between $1000 and $2000 per year on mortgage costs
- New housing construction has remained strong during the tax transition period
- Residential rental growth is at historical lows, benefiting renting households
- The distribution of land tax obligations between different types of land holders is the main political sensitivity
The Second Interval: evaluating the ACT’s 20 Year Land Value Taxation transition after 8 years authored by Warwick Smith and Jesse Hermans was published in 2020, eight years into this transition period. This report focuses on assessing the impact of the reforms against the criteria of revenue predictability, efficiency and equity, as well as examining the impact on prices and rents.
- Fears that the reforms would cause ACT land prices to fall have proven unfounded with continued rises in residential land prices and house and unit prices.
- Owner-occupiers (including First Home Buyers) have increased from about 60% of the value of purchases in 2012, to 78% in 2020.
- The average residential landowner paid $15,039 in rates during the reform period (between 2012-13 and 2019-20) but saw their land value rise by $63,681 over the same period.
- The average Treasury forecast error for revenue has fallen from 7.9% before the reforms to 2.6% since the reforms began.
- Substantial increases in general rates charges have coincided with slower growth of commercial land prices relative to residential land prices.