Can governments continue to rely on property being a one-way bet?

Earlier this week the Australian Bureau of Statistics (ABS) released data which revealed that 46.4% of state and local government taxation revenue over the 2012-13 financial year came from property related taxes.

The data showed that over the year, state and local governments collected a record $35.931 billion in taxes from property related sources.  

In comparison, they collected $20.752 million in taxes from employers, $11,089 million in taxes from the provision of goods and services and $9.638 million in taxes on the use of goods and performance of activities.  As this shows, at a state and local government level property taxes are the largest source of revenue.

Source: RP Data, ABS.

The total value of property related taxes increased by 7.2% over the most recent financial year.  In comparison, taxes on employer’s payroll and labour force rose by 5.1%, taxes on the provision of goods and services rose 2.4% and taxes on the use of goods and performance of activities rose 8.6%.

With home values nationally beginning to rise in June 2012, it is clear that state and local government are a major benefactor. With higher home values, taxes such as land tax, municipal rates and stamp duty on conveyances all increase.

Source: RP Data, ABS.

Of the $35.931 billion in property related tax revenue collected in 2012-13, 40% came from municipal rates and 36% came from stamp duties on conveyances.  Land tax was the only other sizeable contributor to property related tax accounting for 17% of revenue.  Over the year the most significant increase in property related taxes came from stamp duty, up by 16.9%.  The amount of tax revenue collected from municipal rates increased by 6.8%, and land taxes increased by 1.5%.

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Property related tax revenue is only collected by those who own properties. Ultimately every property is owned by someone, some as an owner occupier and some as an investor. 

The taxes levied against property are typically only payable by the owner of the property.  Given this, those who choose to rent rather than own property pay no tax on property.  Not to mention the fact that the cost of renting is typically much lower than the cost of owning, it is no surprise more people are choosing to rent rather than own property.

State and local governments have clearly experienced a significant revenue boost via the improvement in the residential housing market over the year.  Stamp duty in particular has seen a significant rise.  With sales volumes and property values rising there have been more sales to receive stamp duty from and at a higher price which also increases the stamp duty collected. 

Of course, the issue with stamp duty is that it is a tax only collected across those properties which sell.  From a residential perspective this is just 5% to 7% of the total housing stock over a given year.  Stamp duty also acts as a disincentive for home owners to transact property on a more regular basis because it is a tax paid on a new purchase.

Many people have called for the removal of stamp duties which would be a positive move to encourage greater mobility of residents.  Of course state and local governments would lose 36% of their property related tax revenue and 17% of their total taxation revenue. 

Many have called for replacing stamp duty with a blanket land tax, another tax would likely be very unpopular and you’d have to consider how equitable that would be particularly for those who have recently paid stamp duty. 

To put a blanket land tax into perspective to cover the $12.841 billion in stamp duty revenue over the 2012-13 financial year, each residential dwelling would have to pay $1,391.69 based on the ABS estimate of 9,226,900 residential dwellings as at June 2013.  Keep in mind that stamp duty isn’t just payable on residential property transactions.

Source: RP Data, ABS.

Over the year, stamp duty revenue was higher in each state except for Victoria (-1.4%), Queensland (-6.7%) and the Australian Capital Territory (-3.3%).  New South Wales (21.4%), Western Australia (33.0%) and the Northern Territory (35.5%) recorded the greatest rises in stamp duty revenue. 

According to the RP Data-Rismark Home Value Index, Sydney home values rose by 5.6% over the year, Perth values were 6.0% higher and Darwin values were 6.1% higher.  Conversely, Melbourne home values were 3.4% higher, Brisbane values were just 0.6% higher and Canberra value were 1.1% higher.  Clearly home value rises have a positive effect on stamp duty revenues.

The data highlighted shows that property is the most important source of revenue for state and local governments, accounting for 46.4% of their total taxation revenue.  The issue of course is that these levels of government are looking to constantly grow their revenues. 

The two main sources of property related revenue are rates and stamp duty.  Rates can be grown by encouraging a greater number of ratepayers into a region (create more housing) and stamp duty can only be lifted by changing the rates or encouraging higher prices and/or more sales. 

In certain regions increasing the supply of ratepayers is not possible so it is clear that stamp duty is an extremely important source of revenue. With the housing market recording significant value growth and much higher sales volumes throughout the 2013-14 financial year, no doubt stamp duty revenue will be much higher again. 

The question is can governments continue to rely on property being a one-way bet?  Particularly when the Reserve Bank has repeatedly warned of late that it is not.