Major state tax reforms are few and far between in Australia, which is what makes Tuesday‘s Victorian budget very, very significant.
Victoria’s government announced it will abolish stamp duty for commercial and industrial properties and replace it with an annual property tax.
The Victorian model shows how state governments could abolish all property stamp duties once and for all – including stamp duties on homes.
Stamp duty is a bad tax
Originally intended to be abolished as part of the deal to introduce the goods and services tax back in 2000, stamp duty on commercial and industrial properties accounts for about one-fifth of all stamp duty revenues collected in Victoria.
They are one of the most economically harmful taxes Australia has.
Stamp duties on commercial and industrial properties act as a brake on new businesses, stop many businesses from shifting premises as they grow and ultimately mean we don’t use scarce urban land as efficiently as we should.
Read more: Finding the losers (and surprising winners) from phasing out stamp duty
Economists estimate that stamp duties on commercial property cost the economy between 50 cents and 60 cents for every dollar of revenue they raise – more than any other state tax.
So far, only South Australia has fully phased out stamp duty on commercial properties, although it never replaced it with a land tax.
The Australian Capital Territory is well on the way to abolishing them as part of its broader property tax reforms, which will see stamp duty replaced with a broad-based land tax for all types of property over two decades.
The ACT is just over half-way through that transition.
Victoria’s bold moves
From July 2024, buyers of commercial and industrial properties will have the option of paying stamp duty upfront or the same amount (with interest) stretched out over a decade.
A decade after that purchase, the property will attract an annual land tax of 1% of the property’s unimproved land value.
If the new owners sell again, even within the first decade, no stamp duty will be charged and the same deadline for the introduction of the land tax will apply.
Land tax won’t be charged on properties bought before July 2024 until they are sold. After they have switched to land tax, they can’t switch back.
How quickly things transition will depend on how quickly these properties turn over, and it might take decades.
But once the transition is complete, the budget predicts a long-term payoff to the state economy of as much as $50 billion over some decades.
Abolishing homebuyer stamp duty is the big prize
Abolishing stamp duty on commercial properties is a big step forward. But the main game remains abolishing stamp duties on homes, which raise four times as much for state governments.
Economists hate stamp duties on homes because they discourage homeowners from moving house as their lives change. Doing so would mean having to pay stamp duty a second time.
It’s also unfair because it punishes younger households that move around more, while rewarding older residents who tend to stay put for decades.
Read more: Victoria bites $117 billion bullet, begins the long march of land tax reform
Stamp duty even acts as a tax on divorce. It’s a big reason why more than half of divorced women who lose their home don’t buy again. Divorced women are already three times more likely to rent in retirement than married women.
Removing stamp duty would lead to better use of the existing housing stock: first homebuyers could buy smaller homes knowing they could more easily upgrade later, and more retirees would downsize. Past NSW Treasury calculations suggest this could result in rents and house prices falling by up to 6% in the long term.
In 2018, the Grattan Institute found a national shift from stamp duties to land tax would add up to $17 billion per year to gross domestic product.
Victoria’s approach could inspire others
Broader stamp duty reform has stalled. Despite the obvious benefits, only one Australian government, the ACT, has made the move from stamp duties to a broad-based property tax.
Adopting the ACT model – by gradually phasing down stamp duty while lifting land tax – would ensure Victoria could transition without losing revenue.
But it would impose land tax on those who haven’t moved homes, which would make the politics harder.
The former NSW Perrottet government tried to give homebuyers a choice between paying stamp duty and land tax as a way around forcing existing home buyers to start paying land tax, but the reform fell flat once the true cost to the state budget became apparent.
Read more: Axing stamp duty is a great idea, but NSW is doing it wrong
Victoria’s model provides an alternative for weaning homes off stamp duty. No one would be forced to pay land tax until they moved, which would make the politics much easier. But it would take longer to reap the economic benefits than the ACT’s approach.
It would still cost the budget money as the government would collect less in land tax than it would from the stamp duty during the transition. But the budgetary cost would be much less than adopting the failed NSW model, especially if the federal government committed to filling part of the (smaller) revenue hole.
Ditching stamp duty for land tax for all properties could be a game-changer across Australia. The ACT showed us one path. Victoria is opening up another.