New South Wales could soon become the first state to axe stamp duty. Here's why – and what it could be replaced with.

Stamp duty could be thrown on the scrap heap in NSW. (BuildPix, Getty Images)

Stamp duty may become the latest casualty of the COVID-19 crisis, as state governments reevaluate the golden goose of taxation.

The New South Wales government is considering phasing out the tax in favour of a land tax as part of a broad taxation review to be handed down this week, according to the AFR.

Victoria could also follow suit according to the report, in what would constitute the largest shakeup of state taxes in many years as the COVID-19 crisis puts large-scale reforms on the table.

In what’s shaping up to be a week for property reform, the news comes as the federal government is finalising a scheme that could hand homebuyers more than $20,000 in grants.

The case against stamp duty

Stamp duty, paid on top of a home’s purchase price, represents an extra cost of tens of thousands of dollars. In Sydney and Melbourne, the country’s most expensive capitals, the median house price attracts stamp duties in excess of $40,000, having tripled since 2004, according to Domain.

Homebuyers are paying tens of thousands more in taxes

Under the current system, those duties have come to be worth some $20 billion a year to state government coffers, entrenching them despite a growing army of critics.

While that money has proven useful for funding state projects including schools, hospitals, and roads, state budgets quickly become dependent on rising property prices, as well as healthy buying and selling activity.

Just as significantly, the sheer quantum of tax has had major implications on residents. With most people understandably reluctant to shell out $40,000 any more frequently than absolutely necessary, the large one-off tax produces economists’ pet hate: inefficiency.

For average punters, the translation is simple enough. The tax stops them from freely buying, selling, moving and chasing their preferred jobs if and when they desire.

Land tax has often been touted as a substitute, but the transition is as important as the replacement

Instead, economists, think tanks and other groups have long-advocated for stamp duty to be replaced by a broad-based land tax that would be paid over a number of years, under a more flexible arrangement.

Such a tax wouldn’t disincentivise movement, and would help free up housing stock, as people become more willing to upsize, downsize and move, advocates argue.

Despite the evidence supporting such a reform, only the ACT government has actually made a move on it, waiving the tax for buyers with a combined income of less than $160,000.

The reason no state government has ever had the appetite has been two-fold. Firstly, they fear losing votes by upsetting those residents who have already paid stamp duty. Secondly, such a transition would take longer than the three-year election cycle which most governments are inextricably bound to.

“That’s why it hasn’t happened — the politics have been too hard,” Domain economist Trent Wiltshire told Business Insider Australia last year, estimating the reform could provide a $17 billion boost to the economy.

“It’s not a reform that will offer a short-term boost. It’s a difficult reform that will take a long time for the payoff to eventuate. That’s the payoff which has really been missing and the kind we really need to give the economy a boost.”

Therein lies the challenge now facing New South Wales, and perhaps Victoria. Both governments will be closely scrutinised on what they do next.

One way forward reportedly on the cards for NSW would involve giving buyers a choice to either pay stamp duty in one lump sum or pay an annual land tax. Under the plan, those who have already paid stamp duty would be exempt from the land tax as long as they remain in the property on which they paid it.

If successful, the transition could open the door for other states to abolish stamp duty for good.

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