By Hal Pawson, Associate Director, City Futures Research Centre.

Weekend reports suggest that an exchange of land tax for stamp duty might be, at last, under genuine government consideration. The potential significance of such a change – one we’ve previously backed – is hard to overstate. Cited in the Sydney Morning Herald, Grattan Institute economics guru John Daley describes it as ‘far and away the biggest [tax reform] prize on offer’.

The pitch is far from new. Perhaps the last time it got a serious airing was in Ken Henry’s 2010 tax review. At the time it was remarked that such a package already commanded wide support across economics advice agencies (i.e. Treasury and the Productivity Commission), as well backing from radical experts. But this Henry proposal fared no better than most of his other recommendations – famously disowned by Kevin Rudd and Wayne Swan before the report’s ink was even dry.

Now, apparently thanks to the active encouragement of Scott Morrison and the interest of the NSW and Victorian governments, it’s claimed that the package is back in contention. It’s being put forward mainly as an aid to housing affordability through re-profiling home buyers’ property tax obligations. Instead of raising revenue by charging what some see as an upfront home ownership entry fee, governments would generate the same quantum of income by charging an annual levy based on property value. Existing homeowners whose property purchase had already incurred stamp duty would be given a credit against the new tax or an exemption for a period of time.

As we’ve previously noted, the notion that just axing stamp duty will, by itself, improve housing affordability is highly dubious. Economic theory suggests that while the legal obligation to pay stamp is on the purchaser, the economic incidence falls on the vendor, who receives less of the purchase price they would otherwise receive. Furthermore, the research evidence indicates that higher rates of stamp duty result in lower prices generally.  However, stamp duties do impose costs on households in other ways, namely by discouraging owner-occupiers from moving house when it would make sense for them to do so (for example, for a new job, or because of changing household circumstances).

The advantage of a broad-based land tax is that by imposing a cost on holding property, it encourages owners make best use of it. While land tax is already paid by investor landlords, expanding it to other landowners (including owner occupiers, who comprise about 60 per cent of the tax base) would deter speculative holding generally, and instead bring under-utilised land and housing to the market. In this way, land tax helps drive the housing supply response that governments are so keen to trumpet as their main unaffordability solution. Greater use of land tax may also mean less need for the potentially cumbersome and difficult to police arrangements now being contemplated – e.g. in Victoria – for empty property taxes.

A broad-based land tax would also have significant benefits well beyond the realm of housing affordability. Importantly, these include the creation of a simple value capture mechanism to enable the whole community to benefit from asset values boosted by public investment. The most obvious case in point is new transport infrastructure. However, the argument also applies to publicly-funded upgrading of facilities such as social housing estates – a form of outlay which AHURI research has shown to enrich surrounding private home owners and from which, therefore, the wider community should reap a share to offset government expenditure.

Other AHURI research which modelled the spatial and distributional impacts of exchanging stamp duty for land tax also showed that this would be likely to shift the incidence of property tax towards better-off localities. More broadly, as something akin to a wealth levy, land tax has significant redistributive qualities. In a world where there is strong popular support for a Buffet rule mandating specified tax rates for the well-off, that could evoke wider public backing for the proposed reform.