Submission to the Developing Northern Australia White Paper
The high cost of living is one of the barriers to growth in Northern Australia. In particular, the artificially high cost of housing and insurance discourages people moving or working in Northern Australia.
This submission calls for the States to reform taxes that currently drive up the cost of housing and insurance. It also calls for the Federal Government to support the States in this reform journey by lending funds to the States where there is a temporary shortfall in revenue during the transition.
Unnecessarily expensive housing
Darwin is the second most expensive capital city in Australia to buy a home, second only to Sydney. Prices are driven up artificially by high stamp duties imposed by the Northern Territory Government as well as slow building approvals.
Stamp duty on the transfer of property adds almost $30,000 to median home in Darwin. This discourages anyone wanting to move or put down permanent roots in the North Territory by buying a home. This cost is also passed onto renters – housing costs around $82 a week more than the national average.
Stamp duty rates in the Northern Territory are around 5 per cent. Because this is imposed on the transfer of ownership, people are more likely to stay in homes rather than moving with their family needs. This puts an unnecessary burden on State infrastructure.
Stamp duty also distorts the type of housing built. On one hand, people and businesses are less likely to invest in housing because stamp duty is imposed on the value of the building as well as the land. But once they are in a home, people build bigger houses rather than moving as their families grow. And they remain in them too long once their nest empty.
As a result, despite the housing shortfall, Australians now live in houses larger than the average American. Over-weighting in housing may also lead to macroeconomic instability, as demonstrated by the GFC.
Abolishing stamp duty would effectively increase the supply of housing overnight simply by allowing people to move into houses more consistent with their needs. In area with rapid and fluid growth, the region would benefit from greater labour mobility.
Unnecessarily expensive insurance premiums
Insurance premiums in the north are higher (particularly in northern Queensland). In part, this is because of the higher risk of floods and cyclones. But stamp duty on insurance premiums compound this and increases the costs of taking out insurance.
Insurance is already subject to informational market failures suggesting people are not insured as much as they should be, so it’s almost the last thing you would want to tax.
Stamp duty on insurance is unfair because it hits those who insure, favouring those who do not. Similarly, the Northern Territory has one of the most mobile workforces in Australia – a tax on property transfers is really a tax on mobility.
Potential reform direction
Stamp duties on property and insurance are an impediment for both people and businesses.
The Northern Territory is a good area to pilot State tax reform.
It has one of the worst tax bases in Australia and is heavily reliant on the redistribution of GST revenues from other states. It also relies heavily on revenue from slow bureaucratic land releases.
It is important that the Northern Territory reforms its tax base now to allow people and business to help the north the reach make the most of being Australia’s gateway to Asia.
One reform option is to abolish insurance duties and reforming the stamp duty on property through two simple changes: removing the value of the home from assessment and abolishing upfront tax payment. Instead, following a sale (or bequest) tax would be paid annually, but at a fraction of the current rate and only on the value of the unimproved land. Darwin already has such a tax base for rates.
Every other State already has a land tax and the ACT is in the middle of a similar bold and substantial reform, but over 20 years. Such a reform could be revenue neutral since land tax can raise more revenue at less cost, although there is a cash flow deficit for government as they wait for houses to come into the base upon first sale. The Commonwealth would therefore need to loan the Northern Territory bridging finance.
Such a reform would raise the quality of life in the Northern Territory. The cost of living would fall, particularly for insurance and housing. Business costs should also fall, reducing the cost of goods and services more widely. People could move and buy a house without upfront taxes.
Unlike stamp duty, land tax does not rise with property improvements, so investment in housing and construction should increase.
The Henry Review found that stamp duties are amongst the most inefficient taxes in Australia, with every dollar of revenue from insurance duties paid reducing incomes by a further 70 cents and property duty around 35 cents, compared to less than 10 cents for land tax. A large reason why is that the economic burden of land tax falls on economic rent, whereas stamp duties fall on investor returns and on consumers.
The proposed reform option would be pro-growth tax reform because it replaces two of the very worst taxes in Australia with one of the most efficient.
The Northern Territory would have an immediate boost from a Commonwealth loan but would also benefit from a more secure revenue source.
By automatically capturing some of the gains in land values, the Northern Territory would need fewer regulations on land use. Importantly, by providing a base linked to economic growth, such a reform would ensure the Northern Territory shares in the gains of a fast growing region.