Australians are paying up to twice as much in stamp duty today as they were a decade ago, thanks to rocketing house prices and stamp duty bracket creep.

The big winners from this are state governments, which receive more revenue, and the banks, which lend more to cover the stamp duty and take more interest repayments.

However, while some state governments have seen their receipts surge, one expert told The New Daily the current system is leaving the governments dangerously vulnerable to a downturn in the housing market – with Western Australia currently suffering from exactly this problem.

Analysis of ABS data by CoreLogic found most states across Australia had recorded a surge in stamp duty and land tax receipts that far outpaced the rise in incomes.

Increases were most pronounced in New South Wales and Victoria, the states that have recorded the biggest growth in house prices.

The NSW government saw its stamp duty revenue increase from $4.17 billion in 2007 to $8.96 billion in 2017.

In the same period in Victoria, stamp duty receipts went from $2.96 billion to $6.35 billion.

But receipts through stamp duty, land taxes and rates rose in most states.

However in Western Australia, where residential property prices have plummeted in recent years, stamp duty tax receipts have fallen from $2.04 billion in 2007 to $1.5 billion last year.

This, together with plummeting mining royalties, has put a major strain on the WA government’s finances.

House price growth and bracket creep

The New Daily spoke to two economists – Melbourne University’s Professor John Freebairn and the Grattan Institute’s John Daley – to get their take on why Australians are paying so much more in stamp duty.

Both agreed that two key issues were at play: rising house prices and stamp duty bracket creep.

While much has been said on the former, the issue of bracket creep is less well understood. Stamp duty and land taxes are, in Dr Daley’s words, “extremely progressive” in that the percentage of tax you pay increases as the value of the property increases.

State governments set the various thresholds when property prices were much lower than they are today. But both Dr Daley and Professor Freebairn said states had generally failed to adjust them to take into account rising prices.

That’s no accident. Bracket creep, which is normally associated with income tax, is a famously convenient way for governments to essentially raise taxes by stealth.

In the context of stamp duty, it means people on lower incomes are taxed more, simply because house prices are higher – even though they are barely any more able to afford it than they were when the thresholds were set.

Professor Freebairn said the increased revenue as a result was “massive”.

Why this is a bad thing

While it’s true that Australians are paying much more in stamp duty, neither economist actually suggested reducing stamp duty. Instead, both strongly argued for stamp duty to be replaced by a land tax.

Rather than being a one-off tax on house purchases – basically a tax on moving house – this would be an annual tax worked out as a percentage of the value of the property. So would this leave state government’s worse off? According to Professor Freebairn, not necessarily.

“It depends on the design, but it could be designed to be revenue neutral,” he said.

“The other advantage would be the revenue flow would be much more stable year in, year out.”

Dr Daley agreed that a land tax would provide much more stability, allowing state governments to plan their budgets with more certainty. And while it would mean households having to pay tax more regularly, he said this would not have an effect on cashflow because mortgage repayments would be reduced.

So why don’t state governments implement it?

The official reason given by state governments is because the transition from stamp duty would be too complicated. But Dr Daley dismissed this argument, saying the ACT has shown a workable way to do it – by a staggered introduction.

He said the real reason was political.

“A new tax is always a bad tax [in the eyes of the public]. People will notice the new property tax before they notice the absence of stamp duty.”

Which means any state government that had the guts to implement such a policy would face a major voter backlash – even though the policy has near universal support from experts.