by Ross Womersley
However long the economic recovery from COVID-19 takes, there is no doubt that the state government finances will be a challenge.
Low interest rates mean access to finance is as cost effective as it has ever been and therefore we can, and should, run budget deficits to enable us to rebuild the economy post COVID-19.
Although we will need to carry the state debt created by this stimulus spending into the future, not doing so will almost certainly damage the possibility of medium to long term recovery. Moreover, it would see cuts to the many of the same services helped us all get through the crisis.
But, in the medium term, we will need to address the state’s revenue base. State taxes have been decimated by the necessary responses to coronavirus.
GST revenue will be significantly reduced by the contraction of the national economy (and yet another decrease in SA’s share), while the state government’s jobs package waived payroll taxes for many businesses for six months and deferred some land taxes.
Social isolation measures are also costing government revenue with decreased public transport patronage, lower stamp duties on property sales impacted by restrictions on auctions and house inspections, and the closure of pubs and clubs resulting in a loss of around $5m per week in poker machine taxes.
In response, one option would be for the Marshall government to do nothing and simply hope that economic recovery will rebuild current taxes. That might be fine if the existing taxes were fit for purpose, but it is a problem if (as most economists suggest) some of these taxes are inefficient, unfair and are actually an impediment to growth.
Given this, we should expect our government to be making bold moves to change the structure of our state taxes and build a fairer and more efficient long-term revenue base.
This could involve taxing things we want to discourage such as traffic congestion, pollution, vacant property and land speculation, or applying existing taxes more broadly to stop avoidance, for instance where people are deemed contractors rather than employees on the taxable payroll.
However, the biggest single reform the state government should look at is the replacement of stamp duties on property sales with an annual land tax.
When this idea was floated in the previous government’s 2015 State Tax Review, there were howls about a “tax on the family home” – forgetting that stamp duties are also a tax on the family home.
But stamp duties are an inefficient tax in that they add to the cost of purchasing property and discourage transactions. The stamp duty payable on the purchase of a median value Adelaide house is around $20,000. This creates a considerable barrier to people moving house for employment or personal reasons. In effect, it’s also a tax on new couples wanting to live together, a tax on marriage break-ups and as importantly, it’s a tax on older people wanting to downsize.