Infrastructure Victoria has unveiled a draft 30-year plan that outlines a sustainable growth strategy for the state. The plan focuses on crucial areas such as transportation, housing, energy, and public services, aiming to support the growing population and enhance liveability. Additionally, the plan suggests measures to make the state’s infrastructure and tax system fairer, more efficient, and more sustainable.
The estimated cost of implementing the plan’s recommendations ranges from A$60 billion to $75 billion, with most of the expenditure expected to occur before 2035. This amounts to approximately 10% of Victoria’s annual economic output in 2023-24, spread over the next decade. However, funding these social housing, transportation, and other projects poses a significant challenge, considering Victoria’s already record-breaking infrastructure spending and projected budget deficits until 2025-26.
According to our estimates, the implementation of Infrastructure Victoria’s proposals would increase Victorian government expenditure by approximately $4 billion to $5 billion annually. Interestingly, one of the proposals put forth by the plan involves replacing stamp duty with an annual land tax. While the implementation cost of this proposal is relatively low, ranging from $1 million to $5 million, it has the potential to generate substantial benefits for Victorian households.
Stamp duty has long been identified as a major obstacle to property transactions in Victoria and other Australian states. This tax, paid by individuals when purchasing property, significantly adds to the overall cost of moving. In fact, Victorians paid around $12 billion in stamp duty when moving houses in 2022-23. Out of this amount, $3 billion accounted for actual moving costs, while a staggering $9 billion constituted stamp duty. This translates to an effective tax rate of 300% on the true cost of moving, adding approximately $40,000 or 5.3% to the average Victorian home’s purchase price in 2023.
The high stamp duty discourages people from relocating, even when their circumstances change, such as finding a new job, needing a larger home for a growing family, or downsizing after retirement. Consequently, this leads to longer commutes, traffic congestion, and an inefficient housing market. By replacing stamp duty with an annual land tax, the burden of taxation would be spread more fairly, making it easier for individuals to move while also contributing to sustainable funding for schools, hospitals, and other infrastructure.
We can draw valuable insights from the Australian Capital Territory’s (ACT) experience, where stamp duty has been gradually phased out since 2012 and replaced with higher general rates, a form of land tax. The ACT government sets an annual target for revenue generation, and landowners pay a share of that total based on their land’s value. This approach has proven to be more efficient in raising funds, as land taxes do not discourage investment or economic activity. The removal of stamp duty had a significant positive impact on the ACT’s economy, with approximately 80% of the economic boost attributed to this reform.
Replacing stamp duty with land tax also has the potential to improve housing affordability. Economists widely agree that land taxes reduce land values, ultimately making housing more affordable. However, the impact on house prices after removing stamp duty can vary depending on the frequency of property transactions. Apartments, for example, tend to change hands more frequently than houses, resulting in a greater impact on apartment prices. Nevertheless, the overall effect of this reform is a reduction in property prices. Ensuring that this price reduction is evenly distributed across different housing types remains a challenge.
To create a fairer tax system, policymakers could consider adjusting how land tax is applied. One option is to introduce a fixed-rate component, as proposed in New South Wales. Another suggestion, put forth by the Henry Tax Review 15 years ago, is to base the tax on the per-square-meter value of land. Additionally, housing supply plays a crucial role in managing price changes. By allowing more high-density housing in inner suburbs through appropriate planning laws, the impact of these reforms on housing prices can be better managed.
While replacing stamp duty with land tax is a long-term reform that requires years to fully implement, there are short-term solutions that can improve housing affordability. These include increasing Commonwealth Rent Assistance and reevaluating first-home buyer support. These measures can complement broader tax, infrastructure, and housing supply reforms.
The draft plan released by Infrastructure Victoria is currently open for public feedback, providing an opportunity for Victorians to contribute their ideas and shape the state’s future. It is crucial to ensure that the infrastructure and tax system work for everyone, and this feedback will help in achieving that goal.
