Tasmania could reintroduce death duties among reforms to make the state tax system fairer and more efficient, a leading economist has suggested.
Saul Eslake has floated the idea of levying death duties – abolished in Tasmania in the late 1970s and widely seen as political poison – for estates with a gross value of more than $1 million.
He estimated that would mean death duties, also known as estate duties and inheritance taxes, would apply to 9 per cent of Tasmanian estates.
Mr Eslake suggested a provision allowing people whose estates would be liable to estate duties to offset their liability by making donations to Tasmanian-based deductible gift recipients, such as charities and other institutions with deductible gift recipient status.
“This would provide a powerful incentive for affluent Tasmanians to make donations to charities and eligible not for profits …,” Mr Eslake wrote in a report looking at options for reforming the state tax system commissioned by the left-leaning Australia Institute Tasmania.
Mr Eslake was mindful the idea would likely be opposed.
“It could easily be an object of scare campaigns, especially by those who are willing to overlook the specifics of what is proposed in order to inveigle against what they would excoriate as a death tax,” he said.
“But it can be embraced by those who believe that equity, as well as efficiency, is a legitimate objective of any taxation system.”
The other tax reform options he proposed were:
- replacing stamp duty (taxes on the transfer of land) with a broadly based land tax which would include owner-occupied homes and shacks, which were currently zero-rated or exempt from land tax; and
- extending the payroll tax threshold down to an amount equivalent to annual average earnings of five employees.
Mr Eslake suggested using the extra revenue from lowering the land tax threshold to lower the rate of payroll tax and to provide an exemption for new businesses.
MILK SACRED COW
Such a move would extend payroll tax to many small and medium-sized businesses, while cutting the rate larger businesses paid.
” … Tasmania’s payroll tax system imposes a high rate of tax over a narrow base – the opposite of good tax design – rather than a low rate of tax over a broad base,” he said.
“Tasmania’s divergence from well established principles of good tax design when it comes to payroll tax would be defensible if it brought significant benefits in terms of employment creation.
“But there is absolutely no evidence that it has.”
Mr Eslake said small businesses’ share of private sector employment fell by 10.2 percentage points in Tasmania between June 2007 and June 2019, while employment at small businesses fell by 11.6 per cent.
Employment at medium-sized businesses (between five and 199 employees) increased by 43.8 per cent in that time, and employment at businesses with 200 or more employees increased by 39.3 per cent despite those companies paying the second highest rate of payroll tax in Australia..
“It’s hard to think of any other tax which is so widely regarded as a bad tax as stamp duties on the transfer of property,” Mr Eslake wrote.
He quoted a 2017 Productivity Commission report which said: “Stamp duties on residential properties add to the price of houses and can discourage people from moving to locations that may be closer to preferred jobs, family networks and schools.”
“Stamp duties on commercial property further discourage businesses from investing in land and capital and stamp duties on residential property can discourage people from downsizing and encourage over-investment in upgrading property.
“All of these factors result in the retention of land for unproductive purposes.”
Mr Eslake said family homes were exempt from land tax in Tasmania, along with primary production land, land used for religious purposes or owned by charitable institutions, retirement villages and some other land types.
He said state Treasury estimated exemptions from land tax cost the state government $232 million in foregone revenue in 2018-19, while $108 million was collected.
Mr Eslake said state and territory governments were limited in how they could raise revenue by the constitution and its interpretation by the High Court and by conditions attached to federal grants.
” … successive previous Tasmanian governments have made that problem worse by their own decisions with regard to the taxes which they are allowed to impose,” he said.
“As a result, Tasmania derives a higher proportion of the revenues it is able to collect in state taxes from what have long been recognised in both official inquiries and academic studies as bad taxes – stamp duties on property transfers … and taxes on insurance – than any other state or territory except Victoria.”
He said reforms such as those he suggested would make the tax system fairer and more efficient.
“This report does not advocate that the overall level of state taxation should be either raised or lowered,” he said.
“Either of those options would be open to a government which, alternatively, wished to fund the provision of more public goods and services, or to lower the burden of taxation on households or businesses, either of which are inherently political choices.”
He wrote he did not intend to advocate for reform now.
“Apart from the obvious difficulties of doing so during a pandemic and a recession, this report argues that wide-ranging taxation reform shouldn’t be undertaken without a mandate from the Tasmanian people at an election, a mandate by which those who do form the government after an election should feel emboldened; and a mandate which those who do not form the government should feel under an obligation to respect,” he said.
“On the contrary, the purpose of this report is to encourage and assist Tasmanians and their political, business and community leaders to participate in a wide-ranging discussion about our state tax system of the sort that we haven’t had for almost a decade, so that a mandate for reform can be an outcome of the next state election due in March 2022.”
The last big tax reforms in Tasmania were 20 years ago as part of the federal-state deal that brought in the GST.
In the 2010 budget, then Labor treasurer Michael Aird set up a state taxation review process to look at all aspects of state taxation, that included himself, Peter Gutwein as Opposition treasury spokesman, Tim Morris from the Greens and independent MLC Ruth Forrest.
However, it was abandoned just over a year later when Tasmania was in recession.
Australia Institute Tasmanian director Leanne Minshull said: “Like other states, Tasmania is limited in the types of taxes it can levy to raise revenue to pay for the services its citizens rely on.”
She said the economic downturn meant the “narrow base of taxes” needed more than ever to be as efficient and fair as possible.