Not all taxes are created equal, but it is imprudent for governments in Canberra and the rest of the country to escalate the land tax burden.
The Barr government is implementing a textbook model of taxation reform in the Australian Capital Territory, and policymakers around the country are watching reform progress with a keen eye. Announced in 2012 in response to a territory tax review, key elements of the ACT reform plan involve phasing out conveyance duty and abolishing commercial land tax, and replacing it with new and increased taxes elsewhere.
These include revenue replacement through general rates on both commercial and residential properties, and making general rates and residential land taxes more progressive.
As reports in this paper have indicated in recent weeks, the sweeping package of property tax reform is not without distributional consequences as rising taxes and charges eat into the disposable incomes of home owners. Over the past four years the average residential rates bill has increased by 42 per cent, or $540, across Canberra, from $1280 to $1820, with residents in suburbs with more strongly rising land values (averaged over three years) facing larger rate increases.
For example, residents in Aranda, Campbell, Red Hill and Yarralumla have already borne average rate bill increases in excess of 60 per cent over the period, which are well in excess of general price inflation. And spare a thought for homeowners, especially those who have purchased a new residence in recent years, having already paid their conveyancing duty but now incurring rate increases.
Businesses across the territory are also reporting significant increases in general rates on commercial properties, exceeding the staged reductions in duties, and this is exacerbating the tax differential between Canberra and other jurisdictions.
The recent ACT Budget implies even more property tax increases are on the way, with rising commercial and residential real estate values meeting more steeply progressive tax rate structures to yield expected increasing revenues.
According to the Budget papers, the government is banking on revenue from general rates and land tax in the order of $670 million in 2018-19, which is more than double the level of revenue raised from those imposts in 2011-12. The ACT Treasury is even modelling an increase in conveyancing duty revenue collections over the forward estimates, in spite of the government's program of tax cuts.
To some degree this is because duty threshold and rate reductions tend to encourage even greater market turnover of properties, thus enabling the government to collect revenue windfalls along the way.
Such an outcome has been explicitly engineered by the government, with the extremely long transition toward eventual duty abolition testament to the political inclination to keep raking in revenue from this antiquated and inefficient transaction-based tax.
But the long transition toward abolishing conveyancing duty comes with an added political risk, because government in the future could be tempted to renege on the timing of its previously announced duty cuts.
That such a prospect could unleash greater uncertainty within the Canberra property sector has been raised in recent weeks, courtesy of some loose language about the exact timing of conveyance duty cuts by the Chief Minister during an estimates committee hearing.
But whichever way the property tax reform wind blows, constrictive planning regulations will help ensure artificially inflated values for commercial or residential land developments, underpinning ample revenue collections for the Territory government.
The fervour to increase taxation burdens upon land and property has been informed by orthodox tax policy advice, suggesting more efficient taxes minimise individual and corporate taxpayers altering their economic decisions in response to a tax imposition.
A tax review commissioned by the South Australian government referred to developments in the ACT when providing an efficiency justification for a broad-based property tax. The SA review stated "replacing conveyance duty with a broad-based property tax will mean that people will no longer pay a large tax amount when they purchase a new property; instead, all people, including those that have not moved for some time, will be required to pay an annual tax".
Efficiency in tax design is construed to be synonymous with the inescapability of a taxpayer meeting their payment obligation, but this would merely give rise to the "fiscal trap" of gradually increasing liabilities especially if a broad-based land tax is not indexed for asset price inflation.
There is also the threat that imposing higher rates of effective tax on land, and applied to a broad base, will simply reduce the relative attractiveness of investment in land in Canberra, compared with other asset classes.
Alternatively, investors would be encouraged to invest more across the border, in Queanbeyan or greenfield sites such as Tralee, in the face of uncompetitive ACT tax levels in the longer term.
Aside from an unenvied prospect of crippling land tax burdens in the ACT, another problem is that the Territory government is seeking to inappropriately smuggle equity objectives into tax design. This is reflected in the policy to embed more progressive rate structures within the revamped property tax regime, bearing in mind the concessional schemes and phased implementation of reform.
But as taxation reviews commissioned by other states in the past have reported, there are a wide variety of land ownership methods, in practice, and it is not necessarily so that owners of the most valuable land always have the greater capacity to pay tax. For example, commercial properties may be owned by trusts and superannuation funds on behalf of small investors and fund members, the latter not necessarily wealthy themselves.
The latest federal tax discussion paper noted levying land tax at progressive rates on total landholdings "introduces a bias against large investments in residential property and discourages institutional investors from investing in private rental housing", with consequently adverse effects for those on lower incomes.
Given landholding is not an accurate reflection of the ability to pay, moving toward a proportional rate tax structure instead would represent a much better outcome on both efficiency and simplicity grounds.
With the ACT leading the charge, other governments around the country are now shaping up to increase taxes. Western Australia have invoked another round of land tax increases, whilst the federal and Victorian governments announced new, discriminatory taxes on foreign investors in property.
The sober reality is that tax reform in Canberra and elsewhere will turn out to be more like an unmitigated tax grab in coming years, with homeowners and commercial property holders paying a heavy price.
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