Land tax debate: wholesale reform needed

The report, released today by the South Australian Centre for Economic Studies (SACES) at the University of Adelaide, says land tax makes an important contribution to the State’s coffers but the structure of the tax needs improvement.

"What is needed is a root and branch review of land tax. Getting the structure of land tax right can help to promote the prosperity of South Australia and enhance the government’s capacity to achieve its social objectives."Associate Professor O’Neil

“Amid the raging political debate about land tax, the fact remains that the State Government has an ongoing need to raise revenue. And land tax is one of the most efficient tax mechanisms that the government has,” SACES Executive Director and co-author of the report, Associate Professor Michael O’Neil.

“If structured properly, land tax can be more efficient, and more supportive of growth and employment, than other revenue mechanisms such as payroll taxes and stamp duties. But the current structure of South Australia’s land tax is far from ideal.

“What is needed is a root and branch review of land tax. Getting the structure of land tax right can help to promote the prosperity of South Australia and enhance the government’s capacity to achieve its social objectives,” Associate Professor O’Neil says.

Associate Professor O’Neil says the problem with South Australia’s land tax is that “the tax base is riddled with exemptions, exclusions and concessional treatments”.

“In addition, South Australia presently has the most sharply rising land tax rate scale in Australia.

“These features of the land tax distort land use, land ownership and the timing of land development and transactions in land,” he says.

He says the most substantial exemption in the current system is the exemption of land used for owner-occupier housing.

“At present, owner-occupied housing is land tax exempt, while large industrial and commercial land uses are taxed.

“If South Australian retailers have land tax passed into their cost structure, their competitive position relative to online retailers is undermined. Equally, if the land tax is passed into the rents on large commercial offices, this undermines South Australia’s ability to compete for office-based activity,” he says.

Associate Professor O’Neil also pointed to adverse consequences from the sliding rate scale: “The problem with the sliding rate scale is that it tends to encourage the use of land in small holdings at the expense of larger holdings.

“One implication of this, as the Henry Review has said, is that it becomes less viable to offer multi-unit medium density housing, even though some households would probably like that. It also makes it harder for larger corporate landlords to enter housing markets, even though they might be able to offer more secure tenures to renters than small landlords.”

It is often argued that the exemptions and concessions in the land tax serve useful equity grounds, but Associate Professor O’Neil says he’s sceptical.

“While access to housing is a fundamentally important equity objective, the exemptions and concessions in the land tax don’t make a very useful contribution. Indeed in some respects they are quite perverse,” he says.

“For instance, an owner-occupier household is exempt from land tax but some part of the land tax paid by landlords is likely to be passed on to renters of housing. Yet low-income households are over-represented in the rental market, so a low-income household is more likely to carry the cost of land tax than a high-income household.”

Associate Professor O’Neil says the changes to aggregation arrangements announced by the State Government are a step in the right direction, and the flattening out of South Australia’s steeply rising rate scale is a “useful reform”.

“But more can be done,” he says. “For instance, Government could commit to revenue-neutral reforms in which exemptions are reduced and the resulting revenue is used to reduce land tax rates.”

The report identifies a number of aspects of the land tax that should be reconsidered.

“The biggest issues are housing and the tax rates themselves,” Associate Professor O’Neil says.

“One possibility is to bring all housing into the land tax at a flat rate. But if the exemption of owner-occupier housing is untouchable, the government should consider measures to extend that treatment to renters.

“The rising rate schedule on taxable land should be replaced with a flat rate. A broad-based flat rate land tax has a lot going for it. But even if that is not feasible politically it would still be worthwhile to consider constructive reforms to our current land tax,” he says.

“There are also questions about how land under development should be treated and whether there are improvements on the current approach of levying a full year tax bill on the basis of 30 June ownership.

“And then there are questions about where land tax sits in the bigger State tax picture, which includes payroll taxes, stamp duties, insurance taxes and the Emergency Services Levy.”

The SACES report on land tax was commissioned by the Urban Development Institute of Australia (SA).