Is it time to consider a wider land tax?

Stamp duty is a tax that discourages the buying and sale of homes. 

It provides the NSW State Government with a fairly reliable income.

There are two debates running ahead of the upcoming state budget. One is on the rate of the tax, the other on whether it should be phased out and replaced with another tax.

This week the Real Estate Institute of New South Wales (REINSW) really lashed out having long failed in their lobbying efforts to persuade the government to respond to the stamp duty bracket creep that has been in place for more than three decades.

It was time for the NSW government to amend the 1986 stamp duty brackets, according to the REINSW president Leanne Pilkington, who said the Government’s conduct was "nothing less than unconscionable”.

Pilkington noted the second reading to the 1986 Bill noted the increased rates for conveyances only affected properties worth more than $300,000 "and thus will not affect the average home purchaser”. 

The median house price in Sydney is now at $1.1 million, costing $46,000 in stamp duty.

Last financial year more than $7.3 billion was collected in stamp duty.

Up until February this year the government has raised $4.7 billion, so is on par with last financial year.

That's despite first home buyers being able to buy property up to $650,000 without having to pay stamp duty, and homes up to $800,000 seeing a discounted stamp duty.

Any adjustment to the standard stamp duty threshold rate would be simple, though likely at cost to overall revenues.

However the revenue could potentially go higher, and certainly be more stable, if the NSW government took the braver decision to phase in a broad based land tax that spreads the income across all land owners rather than only on those buying homes.

Many economists, and Ken Henry, author of the 2010 Henry Tax Review, have long argued that a broad based land tax is the most equitable way to tax property owners.

Earlier this month CEDA, the Committee for Economic Development of Australia, raised the issue in its report on inequality, How unequal? Insights on inequality.

Unlike stamp duty which imposes a huge up-front financial burden upon only home buyers, a broad-based land tax, paid annually and spread over a wider base of people, provides a steady income stream to government to fund infrastructure.

It also would not stymie listings because many more homes would be listed by elderly downsizers if they weren't facing the repurchasing stamp duty burden.

John Daley, the chief executive of independent think tank the Grattan Institute, calculates an annual tax of $1 per every $1000 of a home's value would cost the median Sydney household $845 a year in tax.

I would however question the estimate due to the low reliability of NSW land valuations, which remain a flawed system. Any shift would require a fresh equitable modern revaluation of the state.

This article first appeared in The Daily Telegraph.