Like most Australian states, the South Australian government’s tax base is relatively narrow. Its main taxes are collected from:
- Stamp duty on property transactions
- Land taxes
- Payroll tax
- Motor vehicle taxes
- Insurance taxes
- Gambling taxes
These taxes contribute $4,442m to the 2015-16 state budget and make up about 27% of state government revenue. The SA share of GST revenue [which is collected by the Commonwealth and then redistributed] contributes $5,518m or 32% of state revenue. The the remaining 41% of revenue is made up other Commonwealth grants and a variety of small income streams (Figures from SA Budget Paper, No. 3).
This narrow state tax base is even more problematic because it relies on unstable, inefficient or unfair taxes. For instance, land taxes get passed on to poor renters, home sales stamp duties are unstable and not based on ability to pay, and payroll tax is economically inefficient and does nothing to secure work for South Australians. And most importantly, SACOSS remains concerned that, while state revenues have recovered a little from the historic lows of 2013/14, the revenue base is not adequate to pay for the vital services that our community requires from the state government.
In 2015 SACOSS put in a major submission to the SA government’s State Tax Review and proposed a number of key changes to make state taxes fairer and to raise the revenue needed to provide vital services.
The key proposals were:
- Swapping conveyance duties for annual land taxes (provided certain fairness measures are built in)
- Inheritance taxes
- Disused building taxes
- Congestion tax/car park levy
In its State Tax Review in early 2015 the South Australian government floated the idea of replacing conveyance duties on real estate transactions with a broad-based land tax. Almost all economists view conveyance duties as being inefficient taxes and an impediment to economic activity, and the ACT government has moved to phase them out in favour of increased land taxes over the long term. While the SA proposal was welcomed by business and the housing industry, there was an immediate negative public reaction (most notably in the Advertiser the day the story broke and before any details could be considered). The state government has now backed away from the proposal.
However, the current system of real property taxes remains grossly unfair. Land taxes can and should be a stable, progressive tax on accumulated wealth. However, currently land taxes are paid by investors who pass the costs on to renters (who are often less well-off than home owners who pay no land tax). Similarly, conveyances duties are based on transactions rather than capacity to pay. Thus, people who need to move house because of employment, family growth, relationship break-down or other reasons, pay more tax than sedentary households with potentially greater capacity to pay. The amount of tax collected from conveyance duties also varies greatly from year to year depending on the state of the property market, so it is an unstable base for government revenue.
SACOSS continues to believe that, if properly implemented, a broad based land tax would be more economically efficient, fairer and provide a more stable tax base for government than the current system. However, there are a number of protections that would need to be built into such a tax to protect the interests of vulnerable and disadvantaged people, namely:
- Ease of payment – monthly (or at least quarterly) billing to avoid a large annual “bill shock” which could cause hardship for those with tight household budgets;
- Protection for low income earners through:
- adequate concessions available for, at a minimum, Centrelink benefit recipients and Commonwealth Seniors Health Card holders (as per the current Emergency Services Levy concessions);
- provision for deferred payment until sale or death, and/or the establishment of reverse mortgage/caveat arrangements for those who cannot pay.
The bottom line must be that nobody is forced out of a home or put into hardship because of an annual land tax;
- Fair transition arrangements that do not leave householders out of pocket;
- Maintenance of progressive land tax rates as a flat tax would impact disproportionately on low-mid income/wealth residential property owners;
- Protection for community housing providers as the significant stocks of land held by these community organisations are held for the benefit of vulnerable and disadvantaged people who would in their own right qualify for concessions, but this is not available to the housing provider. (If community housing providers are not exempted or compensated for a broad based land tax, many will simply cease to operate which will increase the risk of homelessness for those who rely on those housing organisations).
If these conditions were met, SACOSS would support the replacement of conveyance duties with a broad based land tax. We note that this position accords with the national statement on housing affordability published by a range of community welfare organisations.
In his ground-breaking book, Capital in the Twenty-First Century, Thomas Piketty argues that inheritance is increasingly becoming an important economic flow in Europe (around 12-14% of annual income and potentially rising to 16-24% over the course of this century)(p 399). Piketty also argues that such inheritances are a key driver of inequality over time, and notes the historically important role that estate duties had in the middle of the last century.
In this context it is significant that all Australian states had inheritance taxes until they were removed as a result of destructive interstate competition in the 1970s, leaving Australia as one of the few places in the world without any estate taxes.
The Henry Review of Australia’s tax system noted that inheritance duties are generally considered to be efficient taxes and recommended further study and community discussion of options. The Australia Institute has estimated an inheritance tax of the nature previously applied in Australia, would yield approximately $5b p.a. nationally (that is roughly equivalent to raising the GST by 1 percentage point). However, it should be noted that the Henry Review stressed that consideration of a bequest tax should be limited only to the largest estates or inheritances. This would mean that the large majority of estates or inheritances would not be subject to tax, and would therefore limit the amount of revenue collected.
Even with a limited revenue-take, SACOSS believes that inheritance taxes could be an important part of a fairer tax mix as they would fall on those who could most afford to pay, and could balance other regressive taxes. However, given the experience of the “Queensland-led” dissolution of the previous estate tax regime, SACOSS believes that such a tax could not be introduced unilaterally by any one state government, but would require the agreement of all states, territories and the Commonwealth.
In proposing this option, SACOSS is not oblivious to the political difficulties and the public resistance. Any proposal would clearly need good communication and the choice and understanding of a significant tax-free threshold would also be important. Any proposal would also be best in the context of a broader tax review. People may not initially support the establishment of a new tax on inheritances, but if the choice was between paying higher taxes now or after death the choice may be different – particularly if there was a clear off-setting tax cut.
Legacy Fund proposal
Another option for the introduction of an inheritance tax would be to establish an endowment or trust fund to which all inheritance taxes were paid (rather than going into the consolidated revenue). The funds could then be invested in secure non-government investments with only the income generated from the bequest capital going to the government as an annual revenue stream. This would make clear that people’s inheritances were going to leave a lasting legacy for the community in the form of a revenue stream which would build over time.
To ensure public confidence that this money would be wisely used there would need to be strict rules around investment (for instance, investment only in blue-ribbon companies, and prohibiting government use/“raiding” of the fund’s capital [no matter how ‘good’ the reason appears at the time]). The purpose of the fund would be solely to act as a rentier to generate a future revenue stream. This is essentially the model that many charities successfully use to attract bequests and the same model could be applied at the state level. While it would initially make a minimal contribution to revenue as the revenue-earning capital would only build over time, the model may be more popular than a straight taxation into consolidated revenue and would be an important step to addressing long term revenue issues for the state.
For a snapshot of estate taxes in selected OECD countries, see: http://www.theguardian.com/money/ng-interactive/2015/sep/17/how-does-uk-inheritance-tax-compare-with-that-in-other-countries
SACOSS will be doing more work to develop proposals for inheritance duties over the coming period.
It is an outrage that South Australia has homeless people and unaffordable house while there are housing properties sitting empty. Similarly, in some areas we have empty shops and commercial premises which undermine the wealth and development of local communities. The tax system can be part of addressing this issue, but the current tax arrangements are counter-productive.
In SACOSS’ submission to the State Tax Review we put forward the idea of an increased rate of land tax and council rates on land and buildings that were not being utlisied after a set period (perhaps two years). We acknowledged that the impacts needed to be modelled and details worked out, but the aim was to provide a disincentive to leave productive resources idle (as well as providing some extra revenue to government that would not need to be levied from more productive sources). But the current system is in fact worse than simply failing to provide a development incentive. Where a property is awaiting development the owners pay no land tax, but the moment they lodge a development application they are liable to pay land tax. This is a disincentive to investment and development, and is completely the wrong way around: there should be higher taxes for leaving property idle and potentially a tax concession for the period of development.
There is a lot of devil in the detail that would need to be worked through, and SACOSS’ earlier proposal was designed as a conversation starter, but it remains unacceptable when there is a clear community need that we are not utilising the resources we have and that the tax system promotes this waste.
Motor vehicle taxation – principally through vehicle registration charges and stamp duty on vehicle sales is a significant revenue source for the South Australian government, but a problematic tax base as transport is a basic necessity in a modern society and vehicle expenses are a significant part of household consumption. South Australia does not have a comprehensive public transport system (or almost any public transport in many parts of the state) and not having a car could lead to social isolation and lack of capacity to deal with emergencies or even more mundane activities. In this context SACOSS is concerned that both stamp duties and annual registration fees add to the cost of purchasing and owning vehicles. This can make it harder for low income households to afford a car and have access to transport.
However, SACOSS also recognises that for health, environmental, safety, congestion and infrastructure-demand reasons, there is also a public benefit in people using cars less – yet the tax system does not do this well either. State vehicle taxes are taxes on ownership rather than use (as registration costs the same whether you use the vehicle or not). Such upfront “ownership” taxes can alternatively either encourage more and inefficient journeys because much of the transport cost has already been paid in purchase and upfront taxes, or such taxes may discourage ownership completely in cases where a vehicle is ‘under-utilised’ and is costing the owner too much to leave it ‘sitting in the garage’.
SACOSS believes that it should be possible to encourage ownership (access) with less use, although for state governments this is made difficult given that the current federal arrangements: the Federal government levies fuel excise duties (a tax on use), leaving the state to tax ownership. However, even at the state level there are some possibilities which better recognise environmental and infrastructure costs – especially where there are particular problems such as congestion or heavy road usage.
Many cities around the world have congestion taxes to put a price on the most problematic or inefficient vehicle use in city centres. There are many ways to levy such a tax, but a simple low-tech solution would be a tax on car parking space in the centre of Adelaide. In 2013 the State government attempted to introduce such a car park tax and to use the revenue to develop alternative transport infrastructure. This was defeated in the Legislative Council, but a potentially more popular solution might be to replace some part of the stamp duty on vehicle sales or the annual registration fee with a (non-hypothecated) congestion tax (e.g. a city car park tax). This would make car ownership cheaper for all South Australians, while taxing car transport usage where it causes particular congestion and urban amenity problems and where there are greater public transport options.
In the submission to the State Tax Review in 2015, SACOSS calculated that a car park tax levied at the level of the previously proposed Transport Development Levy (which was slated to raise about $30m p.a. in revenue) could allow for a reduction in vehicle registration of approximately $22 per vehicle per year.
The socio-economic impacts of such a proposal would need to be modelled, and it is obviously an offset not a total replacement for one of the other vehicle taxes. However, the politics of using a car park/congestion tax to replace or reduce another tax is very different to the introduction of a new tax and SACOSS believes that the state government should again look at a car park tax as a better targeted state transport tax.