Axing stamp duty in favour of property tax is a hot debate, but if we look to the United States, the picture may not be as rosy as it seems.
With Victoria recently moving to increase land tax while also introducing a 'premium' stamp duty for properties above $2 million, the question has reared its head again - is a property tax really any better?
- Why property tax is worse than stamp duty
- A look to the United States
- Property taxes for the unemployed and seniors
- The effect of property taxes on speculation
- What about first home buyers?
- What's next for Australia?
I used to be in favour of axing stamp duty for a property tax. If you look at what I’ve previously written, this is probably evident. However, my opinion has gradually changed. In an ideal world, we wouldn’t have any such tax - stamp duty or property tax - as it can amount to one third of buyers' property costs. If we have to have one, I’m going to side with the lesser of two evils - maintaining stamp duty.
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Why property tax is worse than stamp duty
Way back in 1999 when the goods and services tax (GST) came to fruition, it was said that it would replace stamp duty. Hah, yeah right. Stamp duty sits right up there with the luxury car tax for unpopular taxes, as it is punitive and not broad-based, and is an arrow to the knee for both investors and owner-occupiers. Nonetheless it’s still the lesser of two evils.
The unpopular tax, implemented by the states, is generally a percentage of the property price, required to be paid upfront, and can amount to a hit of $30,000 to $40,000 or more. This is money that could otherwise be put towards a bigger house deposit, and ultimately, a nicer house. Scrapping this bumbling oaf of a tax sounds perfect in theory, so what’s the catch?
As the basic law of physics goes, every action has an equal and opposite reaction - and we only need to look at the relative basket case that is the United States to see how a property tax might actually look here.
Property taxes: United States case studies
Let’s look at our dear friends the United States. Over there, all 50 states are essentially their own countries, exacting their own state taxes - both property and income. Very broadly speaking, the higher the state income tax, the lower the property tax and vice versa. And given Australian states don’t charge their own personal income taxes, what do you think they’ll raise to compensate?
We’ll look at property taxes in the United States, as per WalletHub’s calculations (all of the following dollar values are in USD):
High Property Taxes - Texas: $2,922 annual property tax on median home value of $161,700. Effective rate of 1.81%.
Low Property Taxes - Hawaii: $1,607 annual property tax on median home value of $587,700. Effective rate 0.27%.
To compensate, Hawaii has a relatively high marginal income tax rate of 8.25% on an annual income of $70,000, while Texas has no state income tax. Swings and roundabouts.
However, some states like to double dip. Take New Jersey, for example. On an income of $70,000, the marginal income tax rate is 5.525%. The property taxes are also the highest in the country, with an effective rate of 2.47%. On the state’s median home value of $327,900, that’s a massive $8,100 a year just to live in your home.
And the closer to New York City your home in New Jersey is, the higher the cost of property. A $700,000 home in Hoboken, New Jersey - just over the river from the city - would cost more than $16,000 in property taxes per year.
This has attracted the criticism of many interested in property in the area. Owner of Rossmann Repair Group - a computer repair company in New York City - Louis Rossmann has long been critical of the real estate market in the area. His thoughts are detailed in the video below.
In the video, Rossmann cites a 2016 paper (Here - PDF) from the New Jersey Policy Perspective that highlights how property taxes in New Jersey have skyrocketed over the past 20-30 years.
“The 2014 median tax bill of $7,452 per year was far ahead of second place Connecticut ($5,369) and the national average ($2,139),” the paper’s authors said.
The paper also cited “reckless spending” since 1997 as reason for the state increasing property taxes, and axing many exemptions. It also said both major political parties, and all three government branches, “contributed to the failure”. So, the problem seems to be apolitical, or at least bipartisan.
Property taxes punish older people, and vulnerable groups
It’s a no brainer that property taxes would need to be grandfathered in. After all, most present home owners have paid stamp duty already, and it would be unfair to lump another tax on them.
A property tax sounds fine for income earners, but what if you’re not earning an income anymore? Whether that’s because you’re retired and relying on your super or a pension to get you through, or down on your luck and unemployed. Paying an extra $3,000 or so per year to live in your own place hardly seems fair.
There would have to be exemptions, but they would be so plentiful, the land tax hardly seems worth the administration required. Speaking of admin, who’s going to value your property every year? Are they trustworthy? What metrics do they use? This opens it up to all kinds of conjecture and debate.
In a podcast (below) Property Investment Professionals of Australia chairperson Peter Koulizos highlighted a few of these issues.
“We have pensioners and the single age pension is about $24,000 a year … who are living in relatively expensive homes, say in our larger capital cities like Sydney and Melbourne. [Property tax] is going to provide some heartache I would imagine for those people because that’s going to be a relatively large expenditure,” he said.
“Fair consideration needs to be given to those people who may not be able to afford it - in particular, people on social welfare or pensions.”
This goes beyond the culture wars of Millennials versus cashed up Boomers in their large homes on Sydney’s North Shore they paid $10 for. We all get older.
While present day retirees could be exempt, the same issue will be the case 40 or 50 years from now if not addressed. If a 30 year old purchased a property now for $500,000, then retires 40 years later with a home worth $700,000 (for example), they’re still going to have no employment income yet a regular, heightened tax to pay.
Rising values and subsequent rising taxes also present an obvious set of problems for certain groups such as those escaping failed marriages or toxic relationships. And if a property rises in value - which is at no fault of the homeowner - the increased tax burden could make living there unaffordable. As suburbs are gentrified, in theory, a property tax would push out old demographics faster, as new wealthier groups can afford the land taxes, while old groups are forced to sell.
Director of Atlas Property Group Lachlan Vidler proposed a few workarounds if property taxes were introduced.
“An alternative to this approach could see the property tax only levied against properties after a certain date and governments cap the lifetime payments of the tax,” he said.
“This could then open doors to early repayment options which give more money to the government 'today' and homeowners then a receive a commensurate discount to the total lifetime payment.”
Stopping property taxes at retirement age or capping it would be a sensible option, however this still does not wholly account for marginalised groups.
Additionally, a property tax is essentially a fee for no service. “But what about council rates?” you scream. After all, they don’t stop, either. However, council rates provide a service - maintaining gardens and median strips, garbage collection, hard waste disposal and more. Council rates are also often discounted for pensioners.
Mr Koulizos labelled property tax “another impost for all property owners … on top of the council rates, the water rates, the insurance, the repairs and maintenance.”
Property taxes could heighten speculation
In the above podcast, Mr Koulizos said removing stamp duty could increase speculation.
“Property investors don’t want to buy, sell, buy, sell, because it is so costly. And what that does is if we have less speculators in the market, the market is more stable,” he said.
“About 70% of properties [are] bought as a home, not as an investment.”
The less cost associated with property transactions encourages a ‘flipping’ culture, according to Mr Koulizos, who also referenced the sharemarket, which is an investment vehicle that can experience large day-to-day fluctuations. ‘Flipping’ property can also quickly price out the middle class, and gentrify suburbs a lot faster, which was touched on earlier.
First home buyers are exempt from stamp duty in many cases anyway
With current framework in place, if faced with a stamp duty or land tax, a first home buyer would obviously choose the stamp duty option, because in many cases it doesn’t apply to them. It is explained succinctly here.
Most of the time, stamp duty doesn’t apply to first home buyers up to a certain dollar amount. In New South Wales, that figure is $650,000, with discounts on stamp duty for properties between $650,000-$800,000. This is a saving of around $30,000 in stamp duty. The only state with no concessions is South Australia.
While first homes might not be considered ‘forever' homes, when faced with an ongoing land tax for any subsequent purchases, first home buyers might be even more reluctant to move house. This is especially after enjoying the 'golden goose' of paying no stamp duty.
The long-term penalty of land tax can be a greater imposition than a lump sum stamp duty. This would make certain suburbs an even hotter commodity, thus raising prices. First home buyers would scramble to ‘buy right, buy once’.
There could ultimately be a divide between stamp duty and property tax suburbs, with no guesses as to which suburbs would be 'stamp duty' suburbs - blue ribbon suburbs with low turnover. It would be like the Capulets and the Montagues.
"the distribution of home ownership is not driven by housing need, but primarily by wealth. Reducing the cost of redistributing housing by wealth will not suddenly make housing ownership less unequal."— Cameron Murray (@DrCameronMurray) November 17, 2020
What about property taxes in Australia?
Australia should learn from the United States when it comes to property taxes.
Australia could limit spiralling property taxes, index them at inflation and not annual valuations, and ideally make them federalised, with exemptions for retirees. This has not been the case so far.
There could also be a sunset clause on the property taxes, ending after 20 years of home ownership, for example.
It could be enacted similar to GST and revenue would be dispersed proportionally throughout the states to limit state governments rorting and using it to make up for budget blowouts.
Nevertheless, it’s still a bad tax - stamp duty is still not ideal, either, and both are subject to government tinkering.
“While there may be little in the way of legislation to restrict a government from raising land tax, the voters will ultimately enforce common sense,” Atlas' Mr Vidler said.
“If a government begins to increase a property/land tax by a disproportionate amount, the voters of the state or local government area will almost certainly respond by changing the government at the next election.”
However, when was the last time a political party totally repealed a personal tax the other party introduced? Governments are addicted to the crack cocaine of taxes.
Very rarely are taxes repealed or reduced, without making up for the shortfall in other areas. Take the 1999 GST example I mentioned earlier. Additionally, as we’ve seen in the United States' case study with New Jersey, the property tax problem is bipartisan.
“Bipartisan usually means that a larger-than-usual deception is being carried out.” - George Carlin
The Australian Capital Territory was one of the first places in Australia to introduce a ‘land tax’. However, primary places of residences are exempt, and payments are usually bundled up with council rates.
“Unlike stamp duty, rates and land tax are predictable and not subject to major swings in the housing market,” the ACT’s Revenue Office says on its website.
However, property tax would presumably be based on annual valuations, which can fluctuate wildly.
New South Wales has also recently moved to axe stamp duty in favour of a land or property tax.
Property taxes are a long-term game, especially if they are grandfathered. It would realistically take upwards of 20 years for the effects to filter through to all new home buyers from inception. Additionally, stamp duty provides an instant sugar hit to state governments. With home buyers forking out upwards of $30,000 at a time, that’s hard for a government to shy away from.
With all tiers of government only seemingly concerned with the next election cycle, doing anything drastic about stamp duty seems unlikely for the near term, though some state governments have made moves - so, watch this space.
The opinions in this article do not necessarily reflect those of Savings.com.au or the wider group.
Article first published 18 November 2020, last updated 17 May 2021.
Photo by Christian Erfurt on Unsplash