Cassandra Winzar: Time to axe inefficient stamp duty with much-needed tax reform

The recent WA Budget was big on ambition for our infrastructure build but showed little ambition for much-needed tax reform.

With Federal Treasurer Jim Chalmers increasingly talking up his desire for bold tax reform at his August productivity roundtable, the States will need to get on board, and that includes us here in the West.

Chalmers wants any tax changes coming out of this roundtable to boost productivity. That means State-based taxes — primarily stamp duty and payroll tax — will need to be part of the conversation. They are two of our most inefficient taxes, meaning that for the amount of money they raise, they cause a fair degree of economic harm.

WA is not alone on this. All States and Territories face the same challenge. That’s why we must use this moment to engage with the reform agenda and come up with proposals that serve both the State’s interests and the broader national interest.

All taxes distort economic activity to some extent. Stamp duty and payroll tax are particularly inefficient because they significantly change how people and companies act relative to the amount of revenue they raise.

Stamp duty does this by discouraging property transactions, and payroll tax reduces the incentive to hire employees. In contrast, taxes like the GST and land tax are more efficient, as they have a much smaller impact on economic decisions and activity.

Stamp duty, which you pay when buying a home, adds to the dysfunction of our housing markets, making it more expensive for homeowners to move house even if they want to.

The cost of paying stamp duty on a home purchase can mean that people are staying in houses that no longer meet their needs, such as older Australians and empty nesters staying in homes that are too big for them — even if they would prefer to move. It also can make people reluctant to move to access better employment opportunities.

Economists are in furious agreement that States should remove stamp duty and change to a broad-based land tax. Importantly for State governments, this shift could be revenue neutral over the longer term but would require a long transition period to give households and markets time to adjust.

Careful planning is also needed to ensure recent purchasers aren’t unfairly hit with land tax just after paying stamp duty. If we get it right, this change could improve our housing system and boost productivity at the same time.

Payroll tax is another important revenue source for States that needs to change. While it’s not inherently a bad tax, it has been implemented in a complex and inefficient manner.

Exemptions for small businesses encourage even successful businesses to stay small. There is evidence of firms “bunching” just under the thresholds for this tax. That’s where firms deliberately limit hiring new staff to stay under the exempt threshold. This can stop productive firms from investing and taking up opportunities to grow.

There are also vast differences in rules and implementation across the states, making it difficult for business operating nationally. A good starting point in reform would be to harmonise payroll tax arrangements across the states and simplify the system.

It’s easy to see why states are hesitant to change. Payroll tax and stamp duty are their main sources of revenue to fund vital services like health and education, which are their responsibility to fund. They simply don’t have as many options to raise revenue as the Federal Government has.

And with rising house prices and employment rates in recent years, state governments have benefited through higher stamp duty and payroll tax takes.

Here in WA, we benefit from a slightly different revenue mix, with substantial royalty revenues that have been particularly high in recent years. But stamp duty and payroll tax still make a large contribution, meaning reform has so far been off the table.

It’s disappointing the State Government hasn’t used our recent run of surpluses to set us up for the longer term with some much-needed reform. But there’s no longer any excuse.

With a national conversation about to start, and all States and Territories likely to come to the party, WA must play its part and seize this moment.

With this in mind, there is a real role for the Federal Government to help the states with the transition. Smoothing the path of tax reform is an ideal use of its new $900 million National Productivity Fund, although it will arguably need more than $900 million to tackle reform at this scale.

To do this right, Federal and State governments will need to have a comprehensive look at the tax-and-transfer system and resolve questions over who pays for what. Demand for largely State-funded government services is rising, and this will only become more acute as the population ages.

Real reform requires co-ordination and compromise between multiple levels of government.

With everyone coming together in August, we now have a rare opportunity to get this right. It won’t be easy, but we must have ambition.

Cassandra Winzar is chief economist at the Committee for Economic Development of Australia.