“If stamp duty were abolished and replaced with an annual land tax, of course, over a 15-year period – or whatever it is – they’ll end up paying the same amount. But they don’t have to come up with all the cash up front.”
Dr Henry’s successor at Treasury, Dr Parkinson, also backed the call to abolish stamp duty.
“I’m already on the record as suggesting we do that, with a switch to land tax, preferably,” he said.
Dr Henry helmed a landmark tax review a decade ago which also recommended abolishing stamp duty in favour of an annual land tax. Doing so would not only remove many “distortions” created by stamp duties, Dr Henry said, but also put state finances on a more sustainable footing.
“Ten years ago, when we looked at the various taxes in the federation, stamp duty stood out then as being the worst, for a whole host of reasons,” he said.
“It doesn’t make sense to tax transactions per se – and that is, of course, what stamp duty does. So it creates all sorts of economic and social distortions: people being reluctant to sell their property and buy a property that makes more sense for them because they’re in a new stage of their lives, for example.
“But the other thing about stamp duty is that for some jurisdictions, and NSW is one, it’s just a very, very big revenue item in the budget and because of the volatility in property cycles, it exposes the budget to extreme volatility and that’s just not very smart.”
Dr Henry said abolishing stamp duty was worth doing whether the property market was booming or not.
“It’s just a bad tax. I think the economic argument for making the investment is going to be strong no matter what time of the cycle. Best just to get on and do it.”
As for design, Dr Henry said the new land tax should apply to a broad base of properties, but designed such that low value land would be exempt, and tax rates applied incrementally on higher valued land.
“Like the income tax system, there would be a progressive rate scale and that would mean that most if not all farming land, for example, would not actually pay any land tax because the value of the farming land per square metre would be too low to attract a tax,” he said.
Dr Henry said the tax switch should be phased in, so that existing property owners – who had already paid stamp duty – were exempt from paying the new land tax until their next purchase.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.