Taxation reform at the state level has largely proven more elusive than federal reform.
Only in the ACT has there been a genuine effort to undertake a reform – the replacement of stamp duties on land transfers with higher municipal rates.
Here in Tasmania, the state government raises less from its resources (taxes, royalties, user charges and GBE dividends) – and gets relatively more from the GST – than any other jurisdiction except the Northern Territory. There has been no serious conversation about our state tax system since a tri-partisan parliamentary inquiry was terminated almost nine years ago.
There has been no serious conversation about our state tax system since a tri-partisan parliamentary inquiry was terminated almost nine years ago.
That complacency is likely to be challenged by the abrupt decline in revenue from the GST as a result of the recession.
My report for the Australia Institute notes that Tasmania raises a higher proportion of its total state tax take from bad taxes – stamp duty on land transfers, and taxes on insurance premiums – than any state or territory except Victoria; and raises a smaller proportion of its total tax take from what it argues should be seen as good taxes – payroll tax and land tax – than any state or territory except Queensland.
It proposes three reforms which can be implemented by a future state government without falling foul of the words of the Australian Constitution; without Commonwealth financial assistance; and without requiring a lead from the larger states.
The first is replacing existing stamp duties with a land tax which includes exempt owner-occupied homes and shacks, and which would be levied on individual landholdings at progressive rates on the per-square-metre value of each holding. There would need to be a transitional provision – such as a credit for stamp duty paid on recently-acquired property, to be set against the land tax that would become payable – to avoid double taxation of recent purchasers. And there would need to be a deferral provision for asset rich but income poor homeowners, such as pensioners. The most the average residential landowner would have to pay by way of land tax would be the equivalent of 90 per cent of what the average landowner pays in municipal rates – and that it would be nine years before an average home-owner had paid more inland tax than they would have paid in stamp duty.
The second proposed reform is a reduction in the threshold for payroll tax to the equivalent of the average annual earnings of five Tasmanian employees (from the level of 36) and using the resulting revenue gain to lower the rate of payroll tax from what is the second-highest in Australia to what would likely be the second-lowest, and to exempt new businesses from payroll tax altogether for the first X years of their existence, where X could be, for example, three or five.
I show that small business is not the engine room of Tasmania’s economy and that exempting small business from payroll tax has not done anything to enhance job creation, innovation or any of the other blessings commonly attributed to preferencing small businesses.
Over the four years to 2018-19, during which time Tasmania’s economy in many respects out-performed that of Australia as a whole, small business created only 13 per cent of the net increase in private sector employment in Tasmania, while 34 per cent of private-sector jobs growth was at large businesses, and 52 per cent was at medium-sized businesses. Whereas preferencing new businesses would help create jobs; would boost innovation; wouldn’t cost as much (or could be more generous); and doesn’t set up perverse incentives to continue accessing preferences.
The third, and probably most controversial, proposed reform is the re-introduction of death duties: specifically, duties on estates valued at over $1 million (which would exclude 91 per cent of the estates granted probate over the past three years), at rates ranging from 5 per cent on amounts between $1m and $5m, 10 per cent on the next $5m, and 20 per cent on anything over $10m (which in Tasmania would have affected just 10 estates, 0.1 per cent of the total, over the past three years).
I also propose that people whose estates would be liable to such a tax could obtain a credit against the tax that would be payable out of their estates, for donations to Tasmanian-based Deductible Gift Recipients – up to the point where, if they wished, their liability was completely extinguished.
I am not suggesting that any of this should be attempted before the next election – or without a mandate from the people. What I am suggesting is that our political leaders – and the rest of us – should have an adult conversation between now and the next election – so Tasmanians can be offered an opportunity to vote for a tax system which is fairer and more efficient.
- Saul Eslake, Tasmanian economist