Stamp duty reform: Time for a national approach?

The recently released 2023 Intergenerational Report (IGR) highlights several major problems facing the nation. Two related problems are the challenges of meeting future spending needs through the existing tax system and the decline in labour productivity. The IGR highlights that the rate of growth in labour productivity has slowed dramatically, and it is projected to trend further downward. 

Think of the effects of this as lowering the speed limit on growth in wages and in the size of the national economic pie available to meet spending pressures from climate change, defence, biodiversity loss and population ageing. The slowdown has focused the national conversation on what needs to be done to boost labour productivity growth. Essentially the options boil down to four areas: fostering innovation, improving skills, boosting investment, and reforming inefficient government policies to raise the speed limit of the economy.

So far, Federal, state and territory governments seem to be placing more emphasis on the first three drivers of labour productivity growth via initiatives designed to expand Australia’s manufacturing capabilities and lift ‘human capital’ through education and skills. But governments may get more rapid “bang for buck” by reforming inefficient policies limiting future productivity growth, particularly around state taxes.

It has long been recognised that stamp duties on property transactions are a major source of inefficiency in the economy. Stamp duty is triggered by the sale of a property and paid by the buyer. Average rates of stamp duty in Australia vary across the nation but have risen dramatically in recent decades due to a combination of bracket creep from rising house prices and increased rates.

Stamp duties have been around for a long time and are major sources of revenue for state governments. Their primary advantages –  administrative simplicity and the capacity for people to avoid them by choosing not to buy or sell property  – are offset by their disadvantages. They encourage people to stay too long in houses that are too large and could be better used by somebody else, they encourage people to undertake expensive renovations rather than move to more suitable housing, and they are inequitable because they penalise people, especially the young, who must move more frequently. In economic parlance, stamp duties reduce the efficiency of housing markets by deterring worthwhile transactions and discouraging the efficient use of the existing housing stock.

But stamp duties also have the potential to affect labour markets and business investment by influencing the locational decisions of people and businesses. By acting as a tax on moving, stamp duties may discourage some workers from re-locating to take up jobs paying higher wages, or to reduce their travel times and costs. Likewise, stamp duties may discourage business relocations to areas with greater commercial opportunities, deeper labour markets, or areas with lower land costs. Measurement of the national impact of stamp duties (and the benefits of reform) should account for these spatial effects and the impact on labour productivity, not just the efficiency of housing markets.

Researchers at Deakin University are attempting to improve our understanding of the impact of stamp duties on labour mobility and productivity. Preliminary work found that replacing state government stamp duties on property transfers with a revenue-neutral land tax could increase national output by up to five per cent when these long-run spatial effects are taken into consideration. Around three-quarters of this gain comes from the increased movement of labour from lower- to higher-productivity areas, with the balance (around one-quarter) coming directly from improved efficiency in the housing market.

Drilling down further, while all states would gain from reform, those with relatively high stamp duty rates and labour productivity levels (such as Victoria) would gain more than those with lower stamp duty rates and labour productivity levels (such as South Australia). Over time, labour would move between the states and within individual states, giving rise to concerns about winners and losers.

These early results suggest that a national approach to stamp duty reform may offer a greater overall benefit than a state-by-state approach. State governments have resisted stamp duty reform, mainly due to the expected revenue impacts. This reluctance or inability to reform is costing the nation through lower household and business mobility and lower labour productivity. Given the taxation and productivity challenges identified in the IGR, perhaps it is time to discuss how to bring about a national approach to reforming state stamp duties.

This article is based on the work of Dr Yan Liang, Lecturer, Dr Xueli Tang, Senior Lecturer (both from the Department of Economics, Deakin University) and Dr Philip Chang, Director at the Office of the South Australian Productivity Commission.