Last week the Australian Bureau of Statistics (ABS) released data which revealed that 48.7% of state and local government taxation revenue over the 2013-14 financial year came from property related taxes.
The data showed that over the year, state and local governments collected a record $40.485 billion in taxes from property related sources.
In comparison, they collected $21.341 billion in taxes from employers, $11.208 billion in taxes from the provision of goods and services and $10.024 billion 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.
Although property accounted for 48.7% of total tax revenue over the year, it has previously accounted for as much as 50.6% of all revenue in 2003-04.
The total value of property related taxes increased by 12.6% over the most recent financial year.
This represents the greatest year-on-year increase in property related tax revenue since it rose 14.3% over the 2009-10 financial year.
In comparison, taxes on employer’s payroll and labour force rose by 2.8%, taxes on the provision of goods and services rose 1.2% and taxes on the use of goods and performance of activities rose 3.5%.
Overall, state and local government tax revenue increased by 7.2% over the year
With home values nationally beginning to rise in June 2012, it is clear that state and local governments are a major benefactor of the strong housing market conditions.
With higher home values, taxes such as land tax, municipal rates and stamp duty on conveyances all increase.
Conversely when housing market conditions shift and value growth slows or values falls the largest source of tax revenue (property) is adversely affected.
Of the $40.485 billion in property related tax revenue collected in 2013-14, 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 24.4%.
The amount of tax revenue collected from municipal rates increased by 5.3%, and land taxes increased by 2.8%.
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.
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.
Looking more closely at stamp duty over time you can see just how inefficient the tax is, being heavily reliant on the performance of the housing market.
The 2013-14 financial year was a bumper one for stamp duty revenue thanks to strong growth in home values and an increase in sales activity.
I have previously argued that the removal of stamp duties would encourage greater mobility of residents and provide less of a barrier to those home owners looking to upgrade or downsize.
As we’ve seen in the past, these good times won’t last forever and eventually state and local governments will feel the impact of a downturn in tax revenue as the housing market cools.
Of course state and local governments would lose 36% of their property related tax revenue and 17% of their total taxation revenue.
What’s the solution?
Replacing stamp duty with a blanket land tax, another tax, would likely be unpopular and you’d have to consider how equitable that would be particularly for those who have recently paid stamp duty (if a blanket land tax regime were to be introduced it would likely be accompanied by compensation or discounts to those who recently purchased under the stamp duty regime).
To put a blanket land tax into perspective to cover the $15.976 billion in stamp duty revenue over the 2013-14 financial year, each residential dwelling would have to pay $1,705.60 based on the ABS estimate of 9,366,800 residential dwellings as at June 2014.
Keep in mind that stamp duty isn’t just payable on residential property transactions and more revenue is available from commercial and industrial properties or the cost per home could be reduced.
Over the year, stamp duty revenue was higher in each state and territory except for the Australian Capital Territory (-1.7%).
Across the other states the rise in stamp duty revenues were recorded at: 32.3% in New South Wales, 27.9% in Victoria, 27.3% in Queensland, 2.1% in South Australia, 9.5% in Western Australia, 10.8% in Tasmania and 12.7% in the Northern Territory.
According to the CoreLogic RP Data Home Value Index, home values rose across each capital city except for Darwin over the year with the largest rises in Sydney, Melbourne and Brisbane.
Clearly home value rises across the capital city markets have had a positive effect on stamp duty revenues.
The data highlighted shows that property related taxes are the most important source of revenue for state and local governments, accounting for 48.7% 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 capital city home values continuing to rise throughout the 2014-15 financial year, we anticipate that stamp duty will be higher once again.
The question is whether governments can continue to rely on property being a one-way bet?
The ACT has already announced a phase out of stamp duty over the next two decades, and there is also discussion around a move away from stamp duty in South Australia.
The major benefit to State governments under a broad land tax arrangement as opposed to stamp duty would be the consistency of revenue flows rather than the lumpy market driven revenue which is evident under the stamp duty system.