BCA wants your home taxed – and it's actually a good idea

Housing affordability is an issue that perennially haunts political discourse. It rarely becomes the target of actual policy because the overwhelming majority of politicians refuse to face up to the real causes and are terrified of the few effective solutions. However, the truth is that introducing a broad-based land tax would take us a long way towards resolving concerns about housing affordability, urban sprawl, and falling government revenue.

If there are so many good reasons why we should increase our use of land taxes, why don't we do it? The real estate lobby is obviously one well-resourced reason that land tax reform is difficult but there are about six million other reasons and they're called home-owners.

The problem with land taxes is that explaining why they are good is complex and requires time, whereas the arguments that can be used by political opponents against them are simple, compelling and strike at the heart of modern consumerist security. In the age of the focus group and political sound bite, that stacks the odds firmly against land taxes despite overwhelming economic and social justice arguments for them.

An illustration of this has occurred just in the last few days with the Business Council of Australia including land taxes in their Action Plan for Enduring Prosperity and the activist group GetUp taking out full page newspaper ads, setting up a website spoofing the BCA plan and writing to members to take action, warning them that:

"Homebuyers would be invited to pay even more, by introducing a new land tax on home owner-occupiers."

GetUp may be right to question the motives of the BCA and it may seem reasonable to assume that recommendations made by the big business lobby are going to have a questionable social justice impact. However, I'd be willing to bet GetUp didn't really do their homework on this one. If they did, they'd probably conclude that broadly applied land taxes would be well aligned with their progressive agenda.

Every significant taxation review carried out by independent experts in Australia has recommended making greater use of land taxes. The most recent, Australia's Future Tax System, often referred to as the Henry Tax Review, was no exception, citing land tax as a potential efficient source of revenue for states and territories, concluding:

"The future Australian tax system should increasingly rely on land values as a tax base."

The fact that an overwhelming majority of tax economists advocate for increased land taxes doesn't automatically mean we should agree. The overwhelming majority of economists are wrong about an alarming number of issues, some of them fundamental to our wellbeing.

However, in this case there are many good reasons that so many tax economists are keen on land taxes: they improve housing affordability and increase housing supply; they're very difficult to avoid; and they are relatively easy to administer (we pretty much already do this everywhere for local government rates). They encourage the efficient use of land; they do not distort markets; they reduce rent-seeking behaviour by investors; they discourage land price bubbles caused by speculative investing and they can recoup government expenditure on services and infrastructure such as public transport, libraries, parks, schools and hospitals.

In fact, the reasons are so compelling that there are some who believe we should only have one tax and that should be a land tax. I wouldn't go that far but I certainly include myself in the group of tax economists who believe land taxes should play a much greater role in our tax mix.

Fundamental in understanding all of these arguments is that we are talking about taxes on the unimproved value of the land only, not the land plus buildings and other infrastructure.

The capacity for the judicious use of land taxes to pay for infrastructure expenditure is potentially revolutionary. The amount that new infrastructure increases land values is a very good proxy for how useful and valued by the community that infrastructure is.

If we prioritised infrastructure projects based on projected land value increases and then taxed enough of that windfall gain to pay for the infrastructure, we could have rolling investment in major projects that pay for themselves. This was the essence of the point being made by the BCA report.

Prompted by the Henry Tax Review, the ACT is leading the way in state and territory tax reform. The ACT government has recently begun a transition away from inefficient stamp duties and insurance taxes towards land taxes. They are dealing with the tricky transition by rolling it out very slowly over 20 years, thus spreading the impact on land prices broadly enough to make it negligible in any particular year.

Other states and territories should follow suit as soon as they can. Even if they are reluctant, I expect the success of the ACT system will force them to eventually follow because those states and territories that get rid of insurance taxes, payroll taxes and stamp duties and replace them with land taxes will create a more attractive operating environment for business, more affordable housing and have a stronger more sustainable revenue base. Who could argue with that?

Warwick Smith, Postdoctoral research fellow in Environmental Economics, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.