Property Taxes
John Daley and Brendan Coates
July 2015
Property taxes
Grattan Institute 2015 1
Grattan Institute Support Grattan Institute Working Paper No. 2015-5, July 2015
This working paper was written by John Daley, CEO and Brendan Coates,
Senior Associate, Grattan Institute. Danielle Wood, James Button, Hugh
Parsonage, Priyanka Banerjee and Rebecca Joiner provided extensive research
assistance and made substantial contributions to the report.
We would like to thank numerous people from the public policy community and
Grattan Institute’s Public Policy Committee for their helpful comments.
The opinions in this working paper are those of the authors and do not
necessarily represent the views of Grattan Institute’s founding members,
affiliates, individual board members, reference group members or reviewers.
Any remaining errors or omissions are the responsibility of the authors.
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This working paper may be cited as: Daley, J. and Coates, B., 2015, Property
taxes, Grattan Institute
ISBN: 978-1-925015-70-6
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Property taxes
Grattan Institute 2015 1
Summary
Grattan Institute’s working paper, Fiscal Challenges for Australia,
published in July 2015, shows how Commonwealth and state
government budgets are under pressure.
The Commonwealth
Government has run deficits for six years, largely because its
spending on older households has increased rapidly.
State government spending on health and education and other
vital areas is also growing faster than GDP. State revenues are
threatened by the Commonwealth’s decision in the 2014-15
Budget to ease some of its own budget pressures by substantially
reducing promised funding to the states for hospitals and schools.
Recent state government budgets provide no insight into how they
will respond to the looming funding gap.
In a series of papers over the next two months, Grattan Institute
will set out four priority reforms for repairing Commonwealth and
state revenues. This paper shows how a broad-based property
levy could help repair state government revenues without
damaging the economy or the most vulnerable in our society.
Property taxes – which are levied on the value of property
holdings – are the most efficient taxes available to the states. If
they are designed well and applied broadly, property taxes do little
to change incentives to work, save and invest. Unlike capital,
property is immobile – it cannot shift offshore to avoid higher
taxes. Concerns about the risks of multinational tax avoidance,
the increasing mobility of capital around the world, and the
increasing value of residential property relative to incomes, should
make property taxes a priority in any tax reform.
The property tax base is large and growing fast. A low-rate, broad
based property levy using the council rates base could raise about
$7 billion a year for state and territory governments through an
annual levy of just $2 for every $1000 of unimproved land value,
or $1 for every $1000 of capital improved property value.
The costs to property owners would be manageable. A
homeowner would pay a levy of $772 a year on the median-priced
Sydney home, valued at $772,000, or $560 a year on the median-
priced Melbourne home valued at $560,000. People with low
incomes and no wealth would pay nothing. Low-income retirees
with high value houses could defer paying the levy until their
house is sold.
Higher property taxes could also be used to fund the reduction
and eventual abolition of state stamp duties on property. Stamp
duties are among the most inefficient and inequitable taxes
available to states, and their revenues are inherently volatile.
Although abolishing stamp duties is not the focus of this report,
shifting from stamp duty to a broad-based property tax would
provide a more stable tax base for states, spread the tax burden
more fairly, and add up to $9 billion annually to GDP.
Calls to reform property taxes are not new. Property taxes are
often unpopular precisely because they are highly visible and
difficult to avoid. Yet they are also efficient and fair, and don’t
distort behaviour. Greater use of property taxes would be the best
way for state governments to meet the growing pressures on their
budgets.
Property taxes
Grattan Institute 2015 2
Table of contents
Summary ............................................................................................ 1!
1! State government budgets face growing pressures ...................... 3!
2! Property tax reform should be the states’ priority ......................... 4!
3! Property taxes can generate substantial revenues ....................... 5!
4! Property taxes are relatively efficient .......................................... 11!
5! Legislative basis for property tax reform ..................................... 15!
6! Key design choices for a property levy ....................................... 18!
7! The levy would not impose unreasonable burdens ..................... 23!
Appendix: State tax revenue growth and revenue volatility .............. 27!
References ....................................................................................... 33!
Property taxes
Grattan Institute 2015 3
1 State government budgets face growing pressures
The Commonwealth is not the only government under significant
budgetary pressure. Grattan Institute’s Fiscal Challenges for
Australia report, published in July 2015, shows that all state
governments face growing budget pressures beyond the four-year
forward estimates.
State government spending on health and education and other
vital areas is growing faster than GDP. Most states significantly
increased infrastructure spending over the last few years, and
largely funded this through borrowing, so that future budgets must
spend more to service the debt and depreciation.
Other pressures are threatening state revenues. Relatively
constant revenues over the last decade may have masked
increased vulnerabilities in individual revenue sources. In
particular, untied revenues from the GST fell over the decade.
1
These falls were offset by rises in mining royalties and small
increases in property and payroll taxes. Yet state royalties are
now falling as commodity price falls outweigh volume increases.
2
As a result of GST distributions, all states effectively benefited
from the rise in royalties, and all will suffer if they fall.
State revenues are also threatened because the Commonwealth
has eased some of its own budget pressures by substantially
reducing promised transfers to the states for hospitals and
schools. The Commonwealth’s decision to no longer contribute to
growth in real spending per person in these areas beyond 2017-
1
Daley and Wood (2015), p.19
2
State royalties are typically value-based; they are not simply charges based on
volume.
18 presents the states with a potential $16 billion revenue shortfall
by 2024-25, and a big problem.
3
If spending per person continues
to grow faster than inflation, then it is unlikely that other areas can
be cut enough to make up the difference.
Recent budgets provide no insight into how state governments
will respond to the looming funding gap. Most have shown a lack
of enthusiasm for new revenue measures or substantive tax
reforms.
4
Hoping for the best is not a budget management strategy: it
simply shifts the costs and risk of budget repair onto future
generations. More active policy measures to achieve budget
repair are required. While containing spending will be important,
both the politics of budget repair and the sheer size of the budget
gap mean that governments are unlikely to be able to restore
budgets to balance without also boosting revenues.
Sustainable budgets depend on tough choices, not hope. To
ensure that future generations do not have to foot the bill for
today’s inaction, these choices must be made.
3
Daley and Wood (2015), p.18
4
While South Australia has announced the abolition of stamp duties on
commercial property following the release of a comprehensive discussion paper
on State Tax Reform (DTF SA (2015)), it hopes to fund this largely through an
increased share of GST revenues (Government of South Australia (2015b)).
Property taxes
Grattan Institute 2015 4
2 Property tax reform should be the states’ priority
Greater use of property taxes is the best way for the states to
meet their budget challenges. Property taxes – which are levied
on the value of property holdings – are the most efficient taxes
available to the states. If they are designed well and applied
broadly, they do little to change incentives to work, save and
invest.
The property tax base is large and growing fast. A low rate broad
property levy using the council rates base could raise about
$7 billion a year for state and territory governments through an
annual levy of just $2 for every $1000 in unimproved land value,
or $1 for every $1000 in capital improved values. Although it
would have marginally more impact on economic decisions, a levy
on capital improved values would still have low economic costs,
and may be simpler to implement since capital improved property
values are easier to track.
A broad-based property levy might provide a path to longer-term
reform of taxation on property, by funding the reduction and
eventual abolition of state stamp duties for property. The
Commonwealth Treasury nominates stamp duty as Australia’s
least efficient tax.
5
Stamp duties deter people from buying and
selling property, and therefore can prevent them moving closer to
jobs or upsizing and downsizing homes as their needs change.
Stamp duties raised $16 billion for the states in 2013-14.
6
Their
costs to the economy and jobs are large.
5
Treasury (2015)
6
ABS (2015b).
The ACT is phasing out stamp duty over 20 years, and replacing
the revenues with higher municipal rates.
7
South Australia plans
to abolish stamp duties on commercial property, but has ruled out
extending land taxes to owner-occupied housing. The government
seems to be relying on higher GST revenues in order to abolish
stamp duty, rather than relying more on efficient state taxes.
8
Once a broad-based property levy becomes large enough, it
might also be possible to phase out land taxes as currently
designed. The states raised $6.4 billion from land taxes in 2013-
14, but carve outs from the land tax base (via exemptions for
owner-occupied housing), thresholds, and progressive rates make
them much less efficient taxes than they should be.
Property tax reform would also support reforms to the fiscal
arrangements of the Australian federation. These reforms are
under consideration through the Commonwealth’s White Paper on
the Reform of the Federation process. A broad-based property
levy would boost states’ revenues and give them greater control
over their own destinies, with minimal drag on their economies.
Other options to increase revenues include sharing in
Commonwealth income tax receipts, or broadening or increasing
the GST. Relative to these options, a broad-based property levy
would do more to increase state government responsibility for
funding their own spending.
7
Treasury ACT (2012), p.21; Treasury ACT (2014), p.229.
8
Government of South Australia (2015a); DTF SA (2015).
Property taxes
Grattan Institute 2015 5
3 Property taxes can generate substantial revenues
3.1 Australian property taxes are relatively low
Australian governments derive far less revenue from property
taxes as a share of GDP than they should. Australia’s property tax
take is far below that of some comparable countries (Figure 1).
Figure 1: Some countries raise more from property taxes than
Australia does
Tax revenues from property as a percentage of GDP, 2012
Note: Immobile property includes both land and buildings; recurrent taxes on immovable
property includes taxes levied regularly in respect to use or ownership of immovable
property, and excludes transaction taxes on property such as stamp duty.
Source: OECD (2014); Grattan analysis.
3.2 The property tax base is large and growing fast
Property is potentially a very large tax base, worth $8.3 trillion in
June 2014. All Australian land was valued at $4.3 trillion, and
buildings and other improvements to land are worth $4 trillion,
with residential land and improvements worth about two-thirds of
the total (Figure 2).
Figure 2: Australian property values grew quickly this past decade
Real market value of Australian property, $2014, trillions
Notes: ‘Residential improvements’ consists of the value of the stock of dwelling
construction, ‘Non-residential improvements’ consists of non-dwelling construction;
historical figures are inflated by the Consumer Price Index to $2014.
Source: ABS (2014b); ABS (2014d); Grattan analysis.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
OECD-10 average
OECD average
0
1
2
3
4
5
6
7
8
9
1989
1995
2001
2007
2013
Residential land
Residential
improvements
Commercial land
Rural land
Other land
Non-residential
improvements
Property taxes
Grattan Institute 2015 6
Figure 3: Property taxes are one of the few ‘growth taxes’
Percentage change in tax revenue for each 10 per cent increase in
national GDP, 1990-91 to 2013-14, per cent
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place since
1990-91; GST is for the period since its introduction in 2000-01 to 2013-14.
Source: ABS (multiple years); Grattan analysis.
Land values tend to rise at least as fast as GDP. Over the past 25
years land values almost tripled, growing much faster than GDP
(Figure 2).
9
Over the last 25 years, property taxes grew faster
9
RBA (2014), p.6
than other state taxes, and faster than the GST since it was
introduced in 2000 (Figure 3).
10
Over the longer term, property values are likely to keep rising,
even if the pace of growth is slower than over the past two
decades. Some of the growth over the last two decades resulted
from the long-term decline in interest rates. In future, property
values, and therefore revenues from property taxes, may grow
more slowly.
11
In the long run, property prices are likely to at least
keep pace with incomes, and may well rise faster, depending on
population growth, household size and whether supply of new
properties keeps pace with the growth in demand.
12
Revenues from property taxes tend to be less volatile than stamp
duties on property sales (Figure 4). State Treasurers dislike
volatility because it makes budgeting more complex. Volatility in
property tax revenues can be reduced by levying taxes on the
average of recent property valuations.
13
10
For more detailed analysis of historical trends in individual state tax revenue
growth and revenue volatility, see Appendix A.
11
RBA (2014), p.7
12
Ibid. p.6
13
Some states already use this approach to smooth land taxes and council
rates.
0%
5%
10%
15%
20%
Gambling
GST
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
Revenues
grew slower
than economy
Revenues
grew faster
than economy
Taxes on property and
property transactions
Property taxes
Grattan Institute 2015 7
Figure 4: A broad based property tax would generate more stable
revenues than other property taxes
Standard deviation between annual revenue growth and long run
average growth in Australia, (1990-91 to 2013-14), per cent
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place since
1990-91; GST is for the period 2000-01 to 2013-14 only, but displays similar volatility
compared to state taxes assessed over this shorter period.
Source: ABS (multiple years); Grattan analysis.
3.3 Potential revenue from a broad-based property levy
A levy applied to the existing council rates base would generate
substantial extra revenues for states. A relatively modest property
levy, charged at a rate of $2 for every $1000 of unimproved land
value, could raise about $7 billion a year from 2015-16 (Figure 5).
A similar amount would be raised by a property levy charged at $1
for every $1000 of capital improved property value.
14
In
comparison, state land taxes raised $6.4 billion in 2013-14.
15
Figure 5: A property-based levy could generate significant
revenues from a modest rate
Forecast annual levy revenue and 2013-14 actual collections, $ billions
Notes: Property levy revenue forecasts are for 2015-16, whereas land tax, council rates,
and stamp duty revenues reflect 2013-14 collections. ABS land values for each state in the
national accounts may differ, albeit not materially, from state Valuer-General figures due to
different approaches, especially for residential land: see ABS (2014c), p. 419.
Source: ABS (2014b); ABS (2014e); ATO (2014); Grattan analysis.
14
Capital improvements on land are investments made which increase the value
of the property, particularly buildings, as well as drainage and other works. In this
report, the term ‘improved value’ is used to refer to any land value definition that
includes the value of improvements when assessing the value of a property.
15
ABS (2015b).
0%
5%
10%
15%
20%
25%
Gambling
GST
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
Taxes on property and
property transactions
Revenues are
more volatile
than average
Revenues are
less volatile
than average
0
4
8
12
16
20
State govt.
revenues
from
property
levy
Less lower
CW govt.
income tax
Net
combined
revenue
gain for CW
and State
govts.
Land taxes Council
rates
Stamp duty
Broad-based property levy of
0.2 percent of unimproved land
value (2015-16)
Current property-related
revenues (2012-13)
Property taxes
Grattan Institute 2015 8
However, the property levy would reduce Commonwealth
revenues by about $0.5 billion, since property investors and firms
would deduct the levy as an expense against their incomes.
16
3.4 GST redistribution due to a property levy would not
excessively reduce any state’s revenue
The Commonwealth Grants Commission (CGC) distributes GST
revenues among the states to achieve what is known as
horizontal fiscal equalisation. The goal is to enable each state to
deliver the same level of government services and infrastructure
to its residents as other states.
17
The CGC assesses the funds
that each state would need to spend to provide the average level
of services and the revenue each state would collect if it applied
the average tax settings of all states. Each state then receives
GST revenues to fill the gap, after accounting for other transfers it
receives from the Commonwealth.
When state governments lift their spending, it usually alters the
redistribution of GST revenues. Increases in state government
spending, however funded, tend to shift GST revenues towards
those states and territories, such as Queensland, SA, Tasmania
and the NT, where it costs more to deliver services because
populations are more remote or tend to use more public
services.
18
As a result, when total spending increases across all
states, net donors such as New South Wales and Victoria tend to
receive a smaller share of GST revenues, while the share of the
smaller states and territories grows. The precise GST impacts
depend upon how states allocate their additional spending.
16
Grattan analysis of ABS (2013); ATO (multiple years); ABS (2014e)
17
Commonwealth Grants Commission (2015a), p.1
18
For example, hospital services are used more intensively by some age groups
and by indigenous people.
GST distributions would be altered if states raised revenues
through a property levy. If all States implement a property levy,
then NSW, Victoria, and WA would in effect give up some of their
revenues through GST redistribution, while other states and
territories would receive additional GST revenues. This
redistribution reflects how property levies would raise more per
person in NSW, Victoria and WA, as the value of property in these
states is higher.
However, for a given scale of expenditure (and therefore
revenue), a property levy would result in relatively less extreme
GST redistribution than other state taxes, as Figure 6 shows. A
property levy would distribute less GST money away from NSW
than an increase in stamp duties would. Victoria would give up
about the same percentage of new revenue, whether it raised the
revenue through a property levy or through land taxes. Relative to
increases in either land or payroll tax, a property levy would
distribute much less GST money away from WA.
Property taxes
Grattan Institute 2015 9
Figure 6: A property levy generates less extreme GST redistribution
than other major state taxes
GST redistribution as a percentage of revenue raised, 2015-16, per cent
Note: Assumes all states introduce the property levy; excludes any expenditure side
impacts on GST revenues from states spending any extra revenues raised
Source: Commonwealth Grants Commission (2015b); Grattan analysis.
For all states, the GST amounts redistributed would be small
relative to the amount collected by a property levy. Figure 7
shows the combined effect on GST redistributions of increased
spending (assuming current spending patterns), funded by a
property levy imposed by all states. NSW and Victoria, with low
service delivery costs and high property values, could lose at
most 15 per cent of the revenues they raise via the levy to other
states. These extra revenues would mostly flow to Queensland,
Tasmania, and the NT.
Figure 7: A property levy would raise slightly more per person in
NSW and Victoria, but CGC redistribution would lead to similar
outcomes in all States
Simulated per capita annual property levy revenue, GST redistribution
and net revenue impact, 2015-16, $ per capita
Note: Assumes a levy of 0.2 per cent applied uniformly to unimproved land values in each
state and territory; levy is fully captured by the CGC’s methodology, and applied in 2015-
16; states spend the revenues proportionate to their current expenditures; CGC assesses
property levy revenues separately from state land taxes (if property levy revenues are
incorporated into existing land tax assessment, this could have flow on impacts by altering
the assessed land tax base). Source: ABS (2014a); ABS (2014b); Commonwealth Grants
Commission (2015b); Grattan analysis.
Because of the CGC’s methodology, GST impacts would be much
smaller if only one state or a subset of states introduced the levy.
For example, if NSW alone funded higher spending via the levy, it
would forego about 5 per cent of the revenues it raised. If the
-60%
-40%
-20%
0%
20%
40%
60%
NSW Vic Qld WA SA Tas ACT NT
Property levy
Land tax
Payroll tax
Stamp duty
Insurance taxes
Motor vehicle taxes
-100
0
100
200
300
400
500
600
700
800
NSW Vic Qld WA SA Tas ACT NT AUS
GST redistribution
Property levy revenues
Net impact
Property taxes
Grattan Institute 2015 10
property levy revenues were used to fund the abolition of state
stamp duties in a revenue neutral way, the GST impacts would be
even smaller. NSW would replace one tax where it can raise more
revenue per head (stamp duty) with another (property levy), while
there would be no redistribution that reflected higher spending.
State tax policy changes normally have a delayed effect on GST
distributions. The 2015-16 GST distributions, for example, are
based on data from the 2011-12, 2012-13 and 2013-14 financial
years. A state property levy introduced in 2015-16 would not
begin to affect GST distributions until 2017-18, and the full impact
would only be incorporated in 2019-2020.
However, if all states introduce the levy, the CGC may instead
treat the new levy as if it had been in place for all of the three
years of historical data used by the CGC. The CGC used this
approach in 2006 when the states agreed to abolish certain state
taxes.
19
19
Commonwealth Grants Commission (2015b), p.23
Property taxes
Grattan Institute 2015 11
4 Property taxes are relatively efficient
Property taxes – which are levied on the value of property
holdings – are the most efficient taxes available to the states.
Governments that want to increase the amount of revenue they
raise will harm growth less with property taxes than with most
other taxes. Unlike capital, property is immobile – it cannot shift
offshore to avoid higher taxes. The risks of multinational tax
avoidance, the increasing mobility of capital, and the increasing
value of residential property relative to incomes, should make
property taxes a priority in any tax reform.
4.1 Broad-based land taxes are the most efficient taxes
All taxes drag on economic growth. But some taxes do so less
than others (Box 1). Broad land taxes are the most economically
efficient taxes because they do not discourage working or
investing. Unlike capital or labour, the supply of land is fixed.
Someone must use the land: it cannot be moved away.
Land taxes do not distort decisions about land use, provided they
apply in a way that the landowner can’t avoid.
20
For example, a
constant rate land tax applied to the unimproved value of all land
prevents landowners from reducing their liability to such a tax by
changing how they use their land. An empty block of land would
pay the same tax even after it was developed.
Broad-based land taxes are much more efficient than stamp
duties (Box 1). Given estimates of the inefficiency costs of stamp
duties, abolishing stamp duties in all states and replacing them
with a broad-based land tax could add $9 billion a year to GDP.
21
20
Treasury (2010), p.247
21
Grattan analysis of KPMG Econotech (2011) and ABS (2015b).
Land is typically valued in its unimproved state.
22
The unimproved
value of a parcel of land does not include the value of
improvements, such as the construction of buildings on it. Instead,
it depends on the most valuable use of the land that would
generate the highest return – as residential housing, farmland, an
office tower, an industrial site, and so on – subject to the land
uses permitted under planning laws.
23
Economic theory predicts that a tax on unimproved values –
applied equally to all land – would result in land prices being lower
than otherwise.
24
Yet rents should remain constant as the land tax
doesn’t affect how land is used (see Section 7.1).
25
Land taxes can also capture some of the value created by public
investment such as transport infrastructure. These gains are
today taxed very lightly. Owner occupied housing is exempt from
the two taxes that would capture some of the value of these gains:
capital gains tax and land tax.
22
In this working paper, the term ‘unimproved value’ is used to capture a range
of land value definitions, such as unimproved value, and site value, among
others. Although there are differences in the definitions, they all capture the
value of land separate from the value of major capital improvements, such as
buildings. For example, see Hefferan and Boyd (2010), p.153
23
Land use restrictions tend to reduce land values where they prevent land
being used for its’ first and best use. For example, Kulish, et al. (2011) find that
residential building height restrictions result in lower land prices closer to the
CBD where the height restriction is binding (p.11). However land use restrictions
also tend to increase land values for land approved for certain uses by
increasing the scarcity of that type of land. See Brueckner (2007) for a
theoretical overview of the impact of land usage policies on land prices.
24
Land taxes are capitalised into land values (Treasury (2010), p.247).
25
Ibid., p.248
Property taxes
Grattan Institute 2015 12
Box 1: Taxes and economic growth
All taxes reduce growth because they distort decision making by
households and firms.
Taxes influence household decisions about how much to save
and spend, how many hours to work and what to invest in.
Similarly, taxes affect the decisions of companies about how
much and what to produce, how much labour and capital to
employ and where to locate.
Welfare is reduced when people and firms make decisions
different to the ones they would have made if taxes were not in
place. This is measurable as a loss in economic output. Taxes
also generate an administrative burden and encourage people to
expend effort trying to avoid them. The diversion of resources to
these unproductive activities reduces economic growth.
But some taxes drag on growth more than others. As a general
rule, taxes on more mobile assets such as foreign financial
capital are more likely to change behaviour and therefore harm
growth compared to the taxation of less mobile assets such as
land. Taxes on transactions, such as stamp duties, are
particularly inefficient taxes. They distort the decision to buy and
sell assets and so distort the optimal allocation of resources.
Economic models have been used to estimate the loss of
efficiency from a range of taxes. Figure 8 shows the estimated
loss of economic activity, or marginal excess burden, from each
dollar increase in each tax.
There are potentially sizeable gains to productivity and economic
growth if governments shift some of the tax burden towards more
efficient taxes.
Figure 8: Some taxes drag less on economic growth than others
Loss of economic activity (cents) for each $ increase in tax
Notes: All marginal excess burden estimates are from KPMG Econotech (2011) other than
council rates that come from the KPMG modelling for Treasury (2010). These estimates are
broadly consistent with Treasury estimates which evaluated a smaller range of taxes (Liangue
Cao et al. (2015)). This more recent work suggests that the economic burden of broad based
land taxes may be even lower, with a marginal excess burden of negative 10 cents, since the
revenue from foreign owners of land would exceed the economic costs imposed on Australian
residents
Source: Treasury (2010); KPMG Econotech (2011)
0 20 40 60 80 100
Council rates
Land tax
GST
Personal income tax
Insurance duty
Payroll tax
Company tax
Commercial stamp duty
Residential stamp duty
Commonwealth
State
Local
cents per dollar of revenue
Property taxes
Grattan Institute 2015 13
Property prices in major Australian cities have risen faster in
suburbs closer to the CBD than in those located further out, which
mainly reflects increases in the price of land, not what has been
built on it.
26
Faster growth in land values in inner-city locations in
Australian cities reflect, in part, the value of public transport,
government-funded schools, parks and other public amenities, as
well as proximity to employment opportunities.
27
4.2 Property taxes at low rates are a little less efficient than
taxes on land, but are still attractive
Although they are less efficient than land taxes, property taxes -
which include the value of capital improvements such as buildings
- are still very efficient taxes. An OECD report found that reducing
income taxes by 1 per cent of GDP, and increasing taxes on
immobile property (both land and buildings) by the same rate
would improve long run GDP per head by 2.5 percentage points.
28
Property taxes are a little less efficient than land taxes because
property taxes also tax the returns on capital invested to improve
the property. This results in fewer improvements being made to
land, such as fewer buildings, than would otherwise be the case.
In the longer term, a portion of the property tax will be passed on
to property users through higher rents for rental housing or for
firms leasing premises, for example. The effect will flow on to
other prices.
4.3 Economic costs are particularly small with low tax rates
Under the low property tax rate we propose, any economic costs
are likely to be very small. The economic costs of a tax tend to be
26
Kulish, et al. (2011), p.22
27
Kelly and Donegan (2015), p.87
28
Johansson, et al. (2008), p.58
much lower for low tax rates.
29
On plausible assumptions, a
property tax of 0.1 per cent of property value would tax the return
on capital improvements at about 0.8 per cent.
30
To put this in
context, a landlord doing capital improvements of $100,000 would
need to collect a mere $8 extra a month in rent to recoup the
costs of the tax.
31
Unlike many other forms of capital investment, which can move to
avoid higher taxes, most existing capital improvements to land,
such as buildings, cannot be moved. Therefore taxing
improvements on land would be unlikely to affect the existing
stock of capital improvements. Along with the low tax rate we
propose, this means that the effect of a property tax on new
capital invested would be modest, as Box 2 illustrates.
While there are no estimates from Australia, several overseas
studies have found that property taxes have relatively low
economic costs. A survey of US property taxes found that every
dollar collected reduced economic output by just six to 16 cents.
On these estimates, property taxes are efficient relative to other
state taxes such as payroll tax and stamp duty, as Figure 8
shows. Since taxes tend to be more efficient when levied at low
rates, even these estimates overstate the economic costs of a
proposed property tax of 0.1 per cent of property value – a tax
rate 16 times smaller than those investigated in the US studies.
32
29
See KPMG Econtech (2010), p.18
30
Assuming an average nominal pre-tax rate of return on capital of 12 per cent.
The tax rate on capital improvements would rise to 1.4 per cent for an
investment with a pre-tax rate of return on capital of only 7 per cent.
31
This figure is independent of the rental return rate adopted.
32
The weighted average of U.S. state property taxes in the year 2000
investigated by these studies is equivalent to an annual tax rate of 1.56 per cent
of property values.
Property taxes
Grattan Institute 2015 14
Box 2: A modest property tax has a similar impact on
property development returns as a land tax
To understand how a property tax would affect returns on property
development compared to a land tax, we consider a hypothetical
investment.
We compare a property tax of 0.1 per cent on improved value with
a land tax of 0.2 per cent on unimproved value. These taxes would
raise about the same revenue each year.
We consider an investor who buys land intending to develop it by
investing in new capital improvements. We calculate the rate of
return on the total investment given various levels of new capital
improvement. Figure 9 shows that returns are very similar under
the alternative regimes, even in cases where improvements
account for most of the property value after redevelopment.
The differences only become material at much higher rates of tax.
For example, comparing a property tax rate of 1 per cent to a land
tax rate of 2 per cent (which would each raise about $70 billion),
the annual rate of return on new improvements worth twice the
value of the land would be 0.3 percentage points lower. The
difference in the rates of return would be greater – about 0.8
percentage points – for capital investment typical for apartments,
where the building cost can be 10 times the land value.
Figure 9: A low rate tax on improvements has little impact on returns on
the total investment
Annual rates of return after taxes on property for redeveloped property,
per cent
Notes: Based on a property tax rate of 0.1 per cent, and a land tax rate of 0.2 per cent. Assumes
a pre-tax rate of return on the total investment of 12 per cent.
Source: Grattan analysis.
0
4
8
12
16
1 2 3 4 5 6 7 8 9 10
Detached
homes
Land tax
Property tax
Medium Density
Housing
Capital improvements as a multiple of land value
Apartments
Property taxes
Grattan Institute 2015 15
5 Legislative basis for property tax reform
Additional property taxes should build upon existing tax bases.
State and local governments already levy two types of property
taxes: land tax and council rates.
All states and territories except the Northern Territory levy land
taxes. They base the taxes on the value of the land without capital
improvements such as buildings. Land taxes exempt owner-
occupied housing and most agricultural land – more than half of
all land by value (Figure 2).
The other property tax base is the municipal rates levied by local
councils, usually based on improved values. Because very few
properties are exempt from this tax it is a much better base from
which to charge a property levy.
33
Some States have already
levied emergency services levies on this municipal rate base.
5.1 State land taxes are a compromised tax base
Existing state land taxes generate much less revenue than a
broader-based land tax would. States raised $6.4 billion from land
taxes in 2013-14.
34
Exempting the family home from land tax
excludes about 75 per cent of the value of residential land, and
state government budgets forgo about $5 billion in revenue.
35
33
Land taxes also usually exempt much Commonwealth and State-owned land,
and land used by public hospitals, libraries, cemeteries, charities, religious
organisations, universities, schools and foreign embassies. See Productivity
Commission (2008), p.105
34
ABS (2015b).
35
Treasury (2010), p. 261; Kelly, et al. (2013), p.24. Even though owner
occupied housing accounts for 75 per cent of all residential land, imposing land
tax on it would only raise $5 billion as it would be taxed at comparatively low
rates under the highly progressive rates of land tax currently in force.
Exemptions for agricultural land remove almost a further 10 per
cent of land by value from the land tax base (Figure 2).
36
States also apply substantial tax-free thresholds based on total
landholdings before any tax is levied. These thresholds range
from $25,000 in Tasmania to $600,000 in Queensland and further
reduce state revenues from land taxes.
37
Land taxes are also levied on a progressive scale so that people
with larger land holdings pay a higher rate of land tax per dollar
value of land owned. Progressive rates reduce the efficiency of
the ideal land taxes that were discussed in Section 4. They
discourage larger landholdings and partly explain why small
investors dominate Australia’s rental housing market, with
relatively few landlords owning a large number of properties.
38
For example, a small investor with a single investment property in
Sydney built on land valued at $750,000 pays land tax of $5,508
in 2014. By comparison, a large investor owning ten such
properties pays $133,432 in land tax, or $13,343 per property.
39
Land tax exemptions also make the system more difficult to
administer and for landowners to comply with.
40
Tax-free
thresholds and progressive rate structures provide landowners
with incentives to break up their land holdings and adopt complex
ownership structures in order to reduce their land tax payments.
36
Treasury (2010), p.260
37
Treasury NSW (2014), pp.31-33
38
See Berry (2000); Wood, et al. (2010); Treasury (2010) p.261
39
Treasury NSW (2014), pp.31-33
40
Treasury (2010), p.261
Property taxes
Grattan Institute 2015 16
Time and resources spent by firms to manage more complex
structures are a burden on productivity.
41
Tax authorities use
grouping provisions to overcome incentives to fragment land
holdings, but impose additional costs in administering them.
Exempting owner-occupied housing is also very regressive. The
exemption for the family home benefits households in the top
income quintile by almost $2000, but benefits households in the
bottom income quintile by just $400.
42
State land taxes could be an efficient tax base provided that
exemptions, thresholds and progressive tax rates were abolished.
Yet extending the existing land tax base to cover owner occupied
residential property and agricultural land would be politically
difficult, and is likely to be portrayed as favouring businesses at
the expense of consumers.
Similarly, removing tax free thresholds and shifting to a single flat
land tax rate assessed at the property level would result in much
lower tax liabilities for large landholders. Again, such a reform
could well be portrayed as unfair: favouring a small number of
wealthy landlords while increasing land tax liabilities for smaller
landholders.
5.2 Council rates are a better taxation base than state land
taxes.
Local councils levy rates on the value of unimproved land, and in
some states, on capital improved values. Rates are applied to all
properties within a council area with few exemptions. There are
no exemptions for owner-occupied housing or agricultural land
41
Gabbitas and Eldridge (1998), p.157
42
Kelly, et al. (2013), p.27
and constant rates apply from the first dollar of property value with
no minimum threshold. The largest exemption from council rates
is for some non-profit, non-government organisations such as
charities, schools and public hospitals.
43
Council rates are levied at the same rate per dollar of land value
of a property, regardless of the overall size of ratepayers’ total
property holdings, and so do not discriminate against large
property investors.
44
Municipal rates regimes vary across councils. Councils may levy a
fixed charge, a variable rate based on property values, or a
combination of the two. In some states, councils determine the tax
base for rates by choosing between measures of unimproved or
capital improved property values (Table 1).
45
Despite these
differences, a state government levy added to council rates would
be relatively simple to administer. In practice a government could
set a state-wide rate, with the council rate as an additional charge
that varies by council.
43
For example, the City of Gosnells estimated the value of the rates revenue
foregone by WA councils from exemptions to charities in WA at $6.5 million, or
0.7 per cent of total state-wide council rates revenue for 2005-06. See
Productivity Commission (2008), p.107
44
In Victoria, for example, most councils determine rates on the basis of the
assessed capital value of the property. See Hefferan and Boyd (2010), p.154
45
Productivity Commission (2008), p.198
Property taxes
Grattan Institute 2015 17
Table 1: Approaches to valuing properties for council rates vary
Property value bases that can be used to set council rates in each state
State
Basis for council rates
NSW
Unimproved
QLD
Unimproved
VIC
Either unimproved or capital improved
WA
Capital improved
SA
Either unimproved or capital improved
TAS
Either unimproved or capital improved
NT
Unimproved
ACT
Unimproved
Notes: ‘Unimproved’ refers to a set of land valuations that capture the value of the land
only. ‘Capital improved’ refers to valuations that capture the value of the land and
significant capital improvements made to that land, such as buildings.
Sources: Productivity Commission (2008); Mangioni and Warren (2014); Treasury NSW
(2014).
There are no constitutional barriers to states adopting the council
rates base to raise revenues. Although councils set and often
collect rates, they are ultimately levied under the authority of state
government legislation.
Table 2: Property-based emergency services levies are a template
for property tax reform
Structure of state property-based emergency services levies
State
Property value
used
Levy structure
Collection
authority
Land
only
Land and
buildings
Fixed
charge
Variable
rate
VIC
!
Councils
WA rural
!
Councils
WA metro
!
Councils
SA
!
State govt.
ACT
!
!
State govt.
Notes: The ACT funds fire services via a levy based on unimproved property values for
commercial property only, with a fixed charge for residential and rural land. The ACT also
uses the average of unimproved land values over the past 3 years; WA sets minimum
charges for the total levy collected on each property, which act as a de facto fixed charge
for some ratepayers. Sources: Government of Victoria (2014); Revenue SA (2015); Rates
Act (ACT) (2004); Government of Western Australia (2015).
Governments in Victoria, South Australia, Western Australia and
the ACT already use the council rates base for state-wide
property-based levies to fund fire and emergency services. These
levies provide a template for reform. They are charged as a share
of land or property values. The levy rates are set at the state level.
In Victoria and Western Australia (but not South Australia),
notices of liability are issued as part of council rates notices, and
levies are collected by councils and passed on to state
governments (Table 2). Over time a large state property levy
might lead to centralised collection of both property levy and
council rates through state revenue offices.
Property taxes
Grattan Institute 2015 18
6 Key design choices for a property levy
A modest levy on property values could generate significant
revenues for states and territories, with less drag on economic
activity than other available state taxes.
6.1 A flat rate levy on property values, with no fixed charge,
is the simplest approach
The levy could be designed in a number of ways. A flat tax rate on
property values would be the simplest. The levy would consist of a
flat rate charged per dollar of property value, with no fixed charge
per property. It would apply equally to all land, regardless of land
use, and from the first dollar of property value with no minimum
threshold. It would be assessed separately on each property
owned, as currently occurs with council rates, using existing
Valuer-General valuations.
A flat rate with no fixed charge would be more equitable than
council rates and the existing state emergency services levies
which both include a fixed or minimum charge. These reflect the
fee-for-service implicit in charges for council services and
emergency services. Yet these levies are inherently regressive as
they fall more heavily on the less well off.
46
A state property levy
aimed at raising general revenue should have no fixed charge.
Recent Commonwealth and state tax reviews have considered
levying land tax with higher tax rates for land with a higher value
46
Productivity Commission (2008) notes that ‘other things equal, imposing a
minimum (or fixed) charge makes rates regressive (or less progressive) than
otherwise’ (p.139).
per square metre.
47
Yet the problems with progressive rates
probably outweigh the benefits.
On the plus side, a progressive rate structure captures more of
the spill-over benefits of public investments in infrastructure, such
as transport infrastructure, parks, schools, and libraries that
increase nearby property values. Higher taxes on vacant property
in expensive inner-city locations might also speed development as
higher property taxes increase holding costs.
48
A progressive tax
rate would also be popular with politically powerful farming
lobbies, since most farmland would be taxed at a low rate.
The progressive rate also reflects – albeit very approximately –
the progressive nature of state stamp duties. If a property levy
aims not only to raise additional revenue but to replace existing
stamp duties, a progressive rate on the levy might provide less of
a bonus to the owners of highly priced properties that currently
incur high stamp duties when purchased.
However, a progressive rate property levy would still lead to
different tax treatments for properties that at present incur the
same stamp duty. For example, with tax calculated on the price of
land per square metre, the owners of small inner city apartments
would pay much more than they do under the replaced stamp
duties. The owners of similarly priced outer suburban houses
would pay much less.
47
Treasury (2010), p.265; Government of South Australia (2015c) p.41
48
Wood, et al. (2012).
Property taxes
Grattan Institute 2015 19
To the extent that a property levy is a tax on wealth, a levy
charged at a progressive rate would treat people with similar
wealth differently.
An increasing marginal tax rate based on the value of land per
square metre would make a property levy more complex to
administer. It would require more accurate and reliable land
valuations since higher levy rates would compound any errors in
the land valuation process.
A progressive tax rate should only be applied to unimproved land
values, as otherwise it would significantly discourage investing in
improvements. However, a progressive rate compounds the
administrative complexities of taxing unimproved values:
unimproved values are hardest to determine accurately where
land values are highest, and hence the consequences of disputed
valuations are worth more.
6.2 A levy rebate would reduce the burden on low wealth
property holders, but would significantly reduce
revenue
Providing an exemption, or rebate, for the first portion of property
tax liability would make the levy more progressive with respect to
household wealth.
49
Households with lower wealth tend to own
lower value homes, so the rebate would reduce the average
property tax rate applied to low wealth property owners.
However, such a rebate could easily halve the revenue raised
from the levy. A $500 rebate on a property levy applied to
unimproved land values would mean that no landowner would pay
the property levy on landholdings worth less than $250,000. Such
49
For example, see Slack and Bird (2014), p.8.
a rebate would exclude about half of all residential properties in
NSW, even if property owners could only claim the rebate in
respect of one property.
50
A rebate would also provide incentives for landowners to fragment
holdings across different legal entities in order to make use of
multiple rebates, as currently occurs with state land taxes.
6.3 The levy should be applied to land values, but a levy on
capital improved property values is a good alternative
The property levy could be applied to only the unimproved value
of land, or to the combined value of land and buildings. Although a
tax on unimproved value is theoretically better, it increases
implementation problems, and the practical impacts on investment
of a levy on capital improved values would be small.
A levy on unimproved land values is preferable because it does
not discourage investing in improvements. While many councils
levy rates on capital improved values, state Valuer-Generals
maintain comprehensive registers of unimproved land values to
determine state land tax liabilities.
51
A levy on unimproved land
values could be applied universally, with the levy listed as a
separate item on ratepayers’ council rates notices.
A levy on unimproved values would also make it easier to use
increased levies to replace stamp duties over time. Replacing
stamp duties would require higher rates of tax – potentially about
0.4 per cent of unimproved values.
50
Based on a property levy 0.2 per cent of unimproved land value, and median
residential land values supplied by NSW Treasury.
51
Councils in all states except WA currently have the option to levy rates based
on land values (Table 1).
Property taxes
Grattan Institute 2015 20
While it is less economically efficient, a levy based on property
values is easier to administer and would be a good alternative. A
tax on improved values would still be much more efficient than a
stamp duty, and most other state taxes. Capital improved property
values are easier to determine since market sales and rental data
are more readily available. Effective property taxes require up-to-
date, transparent and accurate property valuations. The recent
shift towards capital improved values for council rates in some
states reflects difficulties in determining the unimproved value of
land, especially in dense urban areas where there are few, if any,
market sales of unimproved land.
52
6.4 An annual charge is simpler than a capitalised charge
collected on sale
Some have suggested capitalising the property tax for all
landowners, and collecting the capitalised charge (potentially
including accrued interest) only when the property is sold.
53
This
would mimic the political advantages of current stamp duties: they
are paid less often, and only when the vendor is cashed up from a
recent sale. Because the amount payable depends on how long
the vendor has owned the property, a capitalised charge would
reduce the problems of the current stamp duty regime, which
discourages more frequent property turnover.
Yet this design has a number of problems. Above all, it would be
complex to explain, and therefore unattractive to politicians.
A capitalised charge would also lead to significant increases in
state gross debt as governments would collect promises of future
payment rather than cash, unless interest was charged.
52
NSW Ombudsman (2005), p.24; Hefferan and Boyd (2010), p.153
53
For example, see Slack and Bird (2014), p.8.
The approach also presents problems similar to those that arise
with capital gains tax. Unless there is an interest charge on
accrued tax then the property holder receives an interest free loan
until the property is sold. The investor has large incentives not to
sell, which locks people into holding properties – the precise
problem that makes stamp duties so inefficient.
6.5 Levy deferral for pensioners: managing the impact for
income-poor, asset-rich owner occupiers
However, capitalising the charge may be a good option to
manage the impact on the relatively small number of income-poor,
asset-rich owner-occupiers.
A property levy would pose difficulties for people who are asset-
rich but income-poor, especially retirees who have limited
incomes but own their own home. Retirees who want to stay in
their homes should be able to do so. Many are emotionally
attached to them. They provide continued access to social
networks, and leaving them often carries large financial and
emotional costs.
One option is to provide concessions to property owners with low
incomes. State governments typically provide rebates on council
rates to pensioners and other concession cardholders.
54
Similar
concessions also apply in those states that charge property-based
fire services levies.
54
In most cases, states provide a fixed rebate on council rates, and reimburse
councils for the foregone rates revenues. Many councils also offer an additional
fixed rebate on municipal rates for pensioners and concession card holders. In
most cases, property-owning pensioners still have some residual rates liability
after these concessions are applied.
Property taxes
Grattan Institute 2015 21
Yet exempting or providing concessions to asset-rich, cash-poor
landowners would be unfair to younger taxpayers. It also ignores
the substantial resources of some retirees. Concessions based on
pension eligibility are already poorly targeted: many wealthier
Australians receive the Age Pension. Of mature age households
with a million dollars of net assets, about 80 per cent receive
welfare benefits.
55
A fairer approach would be for state governments to allow asset-
rich, income-poor households to defer paying the levy until they
sell their property. Deferral arrangements are already available for
seniors paying council rates in South Australia, Western Australia
and the ACT (Box 3).
56
The amount could accrue as a debt against the property, with an
appropriate caveat registered at the Land Title Office. Interest
should be charged on the balance to reflect the cost of deferral. A
safety net might be provided by a stipulation that the debt cannot
account for more than 20 per cent of the value of the property,
and would be non-recourse.
57
This would protect ratepayers from
longevity risks – where individuals live longer than expected and
the debt comes to exceed the value of the property as interest
charges continue to compound over time.
55
Daley, et al. (2013b), p.37
56
Brownfield (2014), p.10
57
Under a non-recourse loan, the creditor cannot claim any other assets of the
borrower if the borrower defaults and the collateral is insufficient to repay the
debt.
Box 3: The South Australian Postponement of Rates
Scheme
The Postponement of Rates Scheme, operated by South
Australian councils, allows retirees to postpone payment of
council rates. Similar schemes operate in Western Australia and
the ACT. The scheme is designed to help elderly ratepayers to
finance their rates payments by unlocking the value of home
equity. Such households may own their own homes and are
therefore asset-rich, but on low incomes.
Eligible ratepayers can postpone a portion of the rates applied to
their principal place of residence. Any rates after the first $500
each year can be postponed. The scheme is only available to
ratepayers that own their property alone, or with their spouse.
Ratepayers incur interest on the outstanding debt, which
compounds monthly. The interest rate is set at the average
borrowing costs for councils in that year, which was 6 per cent in
2013-14. Ratepayers receive an update on their postponed rates
debt, and any accrued interest, as part of their rates notices each
year. The accrued debt is payable when the property is sold or
transferred to someone else and no surviving spouse remains
living in the house.
To be eligible, a ratepayer must be over 60 years of age and work
less than 20 hours a week in paid employment. Ratepayers must
also have at least 50 per cent equity in their property after
accounting for any outstanding mortgage debt if the mortgage
was registered before 25 January 2007.
Property taxes
Grattan Institute 2015 22
In reality, very few retirees would use this safety net. At the tax
rates proposed, 30 years of deferred levy and the accumulated
interest would still only be 5 per cent of the property value.
58
Yet the safety net could become more important if the levy rate
were raised in future - to fund the abolition of stamp duty, for
example.
Levy deferral schemes should be statewide since state
governments would ultimately receive the revenues. A statewide
scheme could also incorporate existing council rate deferral
schemes and be extended to state-based emergency services
levies.
59
58
A 0.1 per cent levy on property value, with payment deferred for 30 years
would result in a deferred charge equivalent to 4 per cent of the property value,
including deferred interest. This assumes a 7 per cent nominal interest rate and
3 per cent annual growth in nominal house prices. With a 10 per cent nominal
interest rate, the deferred charge would be equivalent to 7 per cent of the
property value.
59
State governments typically reimburse councils for the rate revenue foregone
under council rate deferral programs.
Property taxes
Grattan Institute 2015 23
7 The levy would not impose unreasonable burdens
7.1 The levy would reduce property values, but would have
little impact on rents
An increase in property taxes usually reduces property values, all
else being equal, with little impact on rents. Potential buyers of
property will reduce how much they are willing to pay by the future
cost of property tax payments.
60
Therefore the tax liability is
capitalised into the property value. For example, a 0.2 per cent
levy on unimproved land values would be expected to reduce land
values by between 3 and 6 per cent.
61
A levy on unimproved land values would have no impact on rents.
If a landowner tried to pass on the tax by charging higher rents,
some people would decide not to rent, thereby lowering rental
demand and causing rents to fall back again.
A levy on capital improved property values might lead to small
rent rises, since it would discourage some investment in new
improvements and therefore affect the supply of housing. Over
time, landlords are likely to pass on to renters some of the
additional costs that the levy imposes on improvements. Yet as
Figure 9 shows, the impact on rents is likely to be small as the
levy would have only a very small impact on the returns that
accrue from investing in new improvements. For example, if a
60
There is considerable literature documenting the capitalisation of property
taxes into land values. For example see Wallace E. Oates and Schwab (2009).
Wood, et al. (2012) adopt a similar approach to estimate the impact of the Henry
Review recommendations on land values in Victoria (p.22).
61
The impact of the tax on land values depends upon the discount rate adopted.
For example, a property levy would lower land values by 6 per cent with a
discount rate of 2 per cent, but by only 3 per cent if a 6 per cent discount rate is
adopted. This analysis assumes a levy of 0.2 per cent on land values only.
landlord sought to pass through the full cost of the levy after
investing $500,000 in developing improved land priced at
$500,000, it would increase the annual rent by 1 per cent, or $10
a week.
62
In reality the impact would be smaller as only a small
share of the levy would be passed through because new
improvements are a small share of the total housing stock.
7.2 Costs for property owners would be manageable
A homeowner would pay a levy of $772 a year on the median
Sydney house valued at $772,000, or $560 a year on the median
Melbourne home valued at $560,000. The average levy burdens
on households in other major Australian cities would be lower
(since property prices are lower), and lower still in regional areas
(Table 3).
The average burden of the levy on each property owner would be
smaller than existing council rates for most owners (Figure 10).
63
Property holders with higher incomes would pay more in absolute
terms than those with lower incomes. Those with higher incomes
tend to own more valuable homes, and are more likely to own an
investment property.
64
62
Rents would rise by 1.3 per cent for a real rental yield (excluding any capital
gains) of 4 per cent. For a rental yield of 7 per cent, the percentage increase in
rents drops to 0.7 per cent. Both examples reflect a property levy of 0.1 per cent
of capital improved property values.
63
This analysis assumes a levy of 0.2 per cent on land values only. The results
would be broadly similar for a levy on capital improved property values of around
0.1 per cent.
64
Grattan analysis of ABS (2013)
Property taxes
Grattan Institute 2015 24
Table 3: Costs for property owners would be manageable
Property levy payable on the average home by capital city, $2015-16
City
Median dwelling price
Property levy per year
Sydney
$772,200
$772
Melbourne
$560,000
$560
Brisbane
$455,000
$455
Perth
$510,000
$510
Adelaide
$405,000
$405
Hobart
$315,500
$316
Darwin
$515,000
$515
Canberra
$535,000
$535
Notes: Based on a 0.1 per cent levy on capital improved property values, applied to the
median prices of homes in major Australian cities, as at June 30, 2015.
Sources: RP Data Core Logic (2015); Grattan analysis.
Figure 10: The property levy would be less than council rates for
most property owners
Property taxes payable by property owners in each income decile,
$2011-12
Note: Simulated impact of applying a 0.2 per cent levy to unimproved land values; average
rates and levy costs are calculated based only on those households within the disposable
income decile that would pay the levy; households reporting negative household
disposable income and negative net wealth are excluded from the analysis; council rates
include all charges, net of rebates, but exclude water charges; deciles are grouped by
equivalised disposable (i.e. post tax) income of each household.
Source: ABS (2013); Grattan analysis.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Lowest 3rd 5th 7th 9th
Household income decile
Property
tax
Council
rates
Property taxes
Grattan Institute 2015 25
7.2.1 Impact on those worst off
The impact of revenue measures on the poorest households is a
particular concern.
65
While measures of inequality traditionally
focus on income, material wellbeing depends upon both income
and accumulated wealth. Assessing taxpayers’ capacity to pay
should consider the ability of households to draw on their net
wealth, or generate income from their assets.
66
This approach is
especially important when considering wealth taxes such as a
property levy. Consequently the distribution of both wealth and
income are relevant in assessing the impact of a property levy. A
particular concern is households that are in the bottom 20 per
cent of the income distribution and have low net worth.
67
A property-based levy would fall largely on households with
higher net worth, reflecting their greater property holdings (Figure
11). Households that are both income and asset poor would, on
average, pay almost no levy. By contrast, households ranked
among the top 20 per cent by net worth – of at least $640,000 –
would pay an average of $1933 annually.
68
About a quarter of all
revenues raised by the levy would come from the 7.5 per cent of
households that are in both the top disposable income quintile
and top net worth quintile.
65
Daley, et al. (2013a), p.21
66
OECD (2013), p.180
67
The ABS adopts the concept of household net worth, rather than household
wealth, in the Survey of Income and Housing. See ABS (2014f), p.19 for a
detailed discussion on this issue.
68
The equivalent net worth figure for a two adult household in the top income net
worth quintile would be $960,000. For a two adult family with two children aged
under 15, this rises to $1.34 million. Grattan analysis of ABS (2013); ABS
(2014b)
Figure 11: A property-based levy would be targeted towards those
with greater means to pay
Average levy and total levy paid within each income and net worth
quintile, $2011-12
Note: 2011-12 dollars; Simulated impact of applying a 0.2 per cent levy to land values only;
Households that have reported negative household disposable income and negative net
wealth have been excluded from the analysis; quintiles are grouped by equivalised
disposable (i.e. post tax) income and net worth of each household.
Source: ABS (2013); Grattan analysis.
Within each wealth quintile, households with higher disposable
incomes would pay a higher property levy. Yet given the nature of
a property levy, liability depends more on wealth than income.
Some households in the bottom 20 per cent of the income
distribution but with significant net assets would pay a significant
levy. For example, low-income households in the top 20 per cent
$0.0
$0.5
$1.0
$1.5
$0
$1,000
$2,000
$3,000
$4,000
Average levy
paid by each
household
within each
income and
net worth
quintile
Total levy paid
by all
households
within each
income and net
worth quintile
($ billions)
2
nd
3
rd
4
th
Highest Lowest
Net worth quintile
Income quintile:
3rd
Lowest
Highest
2nd
4th
Property taxes
Grattan Institute 2015 26
of households by wealth would pay about $1250 a year.
69
This
category includes a significant number of retirees.
70
The proposed
levy deferral schemes would support such asset-rich, income-
poor households by allowing them to use their property assets to
finance the levy.
The impact of the levy on households with low net worth would be
minimal (Figure 12). For households in the lowest net worth
decile, the average levy is equivalent to 0.03 per cent of their net
worth, or just 30 cents for every $1000 of net worth.
71
Households in the fourth and fifth net worth deciles would pay the
highest percentage share of their household net worth through the
levy. There are two reasons why.
First, many of these middle-wealth households may be young
homeowners who have recently purchased residential property.
They are likely to have relatively high levels of gross property
assets, on which the levy is calculated. Since these assets are
financed largely by debt, these households would have
comparatively low net worth, but large levy liabilities.
Second, while property holdings increase with household net
worth, property tends to account for a lower share of net worth
among the wealthy. Instead wealthier households tend to hold a
greater share of their net worth in financial assets, such as
equities, bonds and superannuation funds. Since the levy does
not apply to these assets, these wealthy households on average
would incur lower levy charges as a share of their net worth.
69
Grattan analysis of ABS (2013); ABS (2014b)
70
For earlier commentary on this issue see Harding and Warren (1999), p.11;
Productivity Commission (2008), pp.156-158
71
Grattan analysis of ABS (2013); ABS (2014b)
Nevertheless, high net worth households may pay more than our
analysis indicates. Well-off households are more likely to hold
their residential property assets in trusts, or other legal entities.
These would pay the levy, but cannot be captured by statistical
analysis at the household level.
Figure 12: The burden would be lowest for low wealth households
Average levy and levy paid as a share of net worth within each net worth
decile, $2011-12
Note: Simulated impact of applying a 0.2 per cent levy to land values only; excludes
households that report negative household disposable income or negative net worth;
deciles grouped by equivalised net worth of each household.
Source: ABS (2013); Grattan analysis.
0.00
0.05
0.10
0.15
1
2
3
4
5
6
7
8
9
10
0
1,000
2,000
3,000
Net worth decile
Average
annual levy
as a share of
net worth
(per cent)
Average
annual levy
per
household in
each net
worth decile
Property taxes
Grattan Institute 2015 27
Appendix: State tax revenue growth and revenue volatility
Section 3.2 analyses trends in growth in revenues from major
state taxes, and the volatility of those revenues for the period
1990-91 to 2013-14, for all states combined. The aggregate
trends over 25 years were:
• State property taxes such as land tax and stamp duty grew
faster than other state taxes;
• State property taxes revenues were more volatile than other
state taxes;
• Our proposed broad-based property levy would have been
less volatile than other property taxes, especially stamp duty.
However, trends in state tax revenues varied across states, and
across different time periods. State-specific economic
developments affected the growth in state tax bases, and the
volatility of state tax revenue streams. Meanwhile explicit tax
policy changes by state governments also affected revenues.
This appendix breaks down in more detail the trends in revenue
growth and revenue volatility among major state taxes for the five
largest states: New South Wales, Victoria, Queensland, Western
Australia and South Australia. Trends in revenue growth and
revenue volatility for each of these states are presented over
three time periods: 1990-91 to 2013-14, 1990-91 to 1999-2000,
and 2000-01 to 2013-14. Trends in revenue growth and volatility
for all states combined are also presented for two sub-periods:
1990-91 to 1999-2000; and 2000-2001 to 2013-14.
The trends in revenue growth and revenue volatility in individual
States are generally consistent with the national averages.
Compared to other property taxes, a broad based property levy
would have produced faster growing, more stable revenues for
most states, across most time periods.
However, there are some exceptions.
Over the period 2000-01 to 2013-14, stamp duty revenues grew
slower than Gross State Product (GSP) in New South Wales,
Queensland and Western Australia (Figure 17). Weaker than
average property markets in this period caused a significant fall in
stamp duty revenue for these states over these periods,
particularly during the Global Financial Crisis.
In New South Wales, the property market was particularly weak
between 2002-03 and 2008-09, with a fall in the number of
property transfers leading to lower revenues from stamp duties on
conveyances.
72
The median price of houses transacted in Sydney
grew by only 21.4 per cent over this period, while the total number
of property transfers fell by more than 30 per cent.
73
In Queensland, the state government lifted the exemption
threshold on stamp duty for first-home buyers from $320,000 to
$500,000 in 2008-09, eroding the tax base.
74
The Queensland
property market also declined after the Global Financial Crisis.
The median price of houses transacted in Brisbane fell by an
72
Commonwealth Grants Commission (2009), p.18.
73
Grattan analysis of ABS (2015a)
74
Treasury and Trade Qld (2014)
Property taxes
Grattan Institute 2015 28
average of 5 per cent between 2008 and 2012, whereas GSP
increased by 23 per cent over the same period.
Queensland revenues from a broad-based property levy would
have grown slower than GSP over the period 1990 to 1999. In this
period, total land value increased by only 60 per cent, compared
to the approximately 300 per cent increase in total land value over
the period 2000 to 2013.
75
In Western Australia, stamp duties fell from 15.4 per cent of state
revenues in 2005-06 to 10.6 per cent in 2008-09, due to a similar
decline in the property market.
76
The median price of houses
transacted in Perth fell by 10 per cent between 2008 and 2012,
whereas GSP rose by 56 per cent over the same period.
Moreover, the Western Australian State Government doubled the
exemption threshold on stamp duties for first-home buyers in
2007-08, lifting the threshold for residential properties to
$500,000.
77
In 2008-09, stamp duties for residential properties
were also lowered, with a 15 per cent cut to stamp duty on a
median price house.
78
This further eroded the tax base, where
residential land value accounted for over 75 per cent of total land
value in Western Australia.
75
Grattan analysis of ABS (2014b)
76
Commonwealth Grants Commission (2010), p.13.
77
Treasury WA (2007)
78
Treasury WA (2008)
Property taxes
Grattan Institute 2015 29
Figure 13: Revenues from property taxes grew faster than the
economy in all states except WA
Percentage change in tax revenue for a 10 per cent increase in Gross
State Product, 1990-91 to 2013-14
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
Figure 14: A broad based property levy would generate more stable
revenues than other property taxes in all states except WA
Standard deviation between annual revenue growth and long run
average growth, 1990-91 to 2013-14
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
-10%
0%
10%
20%
30%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Revenues
grew faster
than economy
Revenues
grew slower
than economy
Taxes on property
and property
transactions
0%
10%
20%
30%
40%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Taxes on property
and property
transactions
Revenues are
more volatile
than average
Revenues are
less volatile
than average
Property taxes
Grattan Institute 2015 30
Figure 15: Revenue from property taxes grew slower than many
other taxes between 1990 and 2000
Percentage change in tax revenue for a 10 per cent increase in Gross
State Product, 1990-91 to 1999-2000
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
Figure 16: Revenue from property taxes grew faster than many
other taxes since 2000
Percentage change in tax revenue for a 10 per cent increase in Gross
State Product, 2000-01 to 2013-14
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
-10%
0%
10%
20%
30%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Revenues
grew faster
than economy
Revenues
grew slower
than economy
Taxes on property
and property
transactions
-10%
0%
10%
20%
30%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Revenues
grew faster
than economy
Revenues
grew slower
than economy
Taxes on property and
property transactions
Property taxes
Grattan Institute 2015 31
Figure 17: A broad-based property levy would have been less
volatile than other property taxes, and many other taxes between
1990 and 2000
Standard deviation between annual revenue growth and long run
average growth, 1990-91 to 1999-2000
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
Figure 18: A broad-based property levy would have been
less volatile than other property taxes except in WA
since 2000
Standard deviation between annual revenue growth and long run
average growth, 2000-01 to 2013-14
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
0%
10%
20%
30%
40%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Revenues are
more volatile
than average
Revenues are
less volatile
than average
Taxes on property and
property transactions
0%
10%
20%
30%
40%
Gambling
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
NSW
Vic
Qld
WA
SA
Revenues are
more volatile
than average
Revenues are
less volatile
than average
Taxes on property
and property
transactions
Property taxes
Grattan Institute 2015 32
Figure 19: Unlike most other taxes, a broad-based property levy
would have grown faster than GDP between 1990 and 2000, and
between 2000 and 2014
Percentage change in tax revenue for a 10 per cent increase in national
GDP, all states
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
Figure 20: A broad-based property levy would have been less
volatile than other property taxes between 1990 and 2000, and
between 2000 and 2014
Standard deviation between annual revenue growth and long run
average growth, all states
Note: ‘Property levy’ shows the revenues that would have been raised with a broad-based
property levy of 0.2 per cent applied to unimproved land values had it been in place over
the period.
Source: ABS (multiple years); ABS (2014b);Grattan analysis.
-10%
0%
10%
20%
30%
Gambling
GST
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
Revenues
grew faster
than economy
Revenues
grew slower
than economy
1990-91 to 1999-2000
2000-01 to 2013-14
Taxes on property
and property
transactions
0%
10%
20%
30%
40%
Gambling
GST
Motor vehicles
Payroll
Insurance
All taxes
Stamp duty
Land
Property levy
Revenues are
more volatile
than average
Revenues are
less volatile
than average
1990-91 to 1999-2000
2000-01 to 2013-14
Taxes on property
and property
transactions
Property taxes
Grattan Institute 2015 33
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