Stamp duties, land tax and housing affordability: the case for reform

Abstract

House prices and rents have increased ahead of average earnings over the last 25 years tipping more and more Australian households into housing affordability stress. The deterioration in housing affordability is in part due to a set of Federal and State tax arrangements that distort the use of land and buildings in ways that impair the efficient operation of housing markets. State government taxation of residential land and buildings in the form of stamp duties and land taxes are an important influence because they offer preferential treatment to land and buildings that are owner occupied. This paper analyses the case for reform, and assesses what impact their introduction would have upon land prices based on modelling of the Melbourne housing market. We argue that there is a compelling case for the abolition of stamp duties and their replacement by a broad-based land tax. Furthermore transitional arrangements are put forward that would gradually introduce the reforms such that no existing home owner would pay land tax if they had already paid stamp duty when purchasing their home. These arrangements would aid the introduction of reform by ensuring that no property owner must meet an additional tax.