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Development levies, stamp duties, and housing affordability

By Gavin Putland - posted Friday, 3 November 2006


While the present stamp duties are payable by the buyer, the SWT would be payable by the seller (because the seller knows, or should know, the taxable site value at the time of acquisition, and is therefore able to work out the tax bill in advance, without relying on anyone else's honesty).

This does not mean that the replacement of a stamp duty by the SWT would be a one-off windfall for prospective buyers at the expense of prospective sellers. If the stamp duty on the sale of a home is legally payable by the seller, the seller will try to add it to the price. If it is legally payable by the buyer, the buyer will try to subtract it from the price. In the end, the cost will be shared between the buyer and the seller in inverse proportion to their bargaining power, regardless of who actually remits the tax to the revenue office. And as the final burden is partly borne by the buyer, it damages affordability.

Buyers bear part of the stamp duty because vendors can refuse to sell and can thereby avoid any part of the burden. So it is by discouraging turnover that the stamp duty affects affordability.

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With the existing stamp duty, a higher frequency of transfers over the same time frame means a larger total tax bill, and each transfer creates an additional liability; but with the SWT, a higher frequency of transfers merely divides the taxable capital gain into a larger number of smaller steps, and each transaction merely realises an already accumulated tax liability.

Furthermore the SWT, by definition, cannot cause a property investor to make a capital loss, but merely reduces capital gains (and, if allowed to be negative, reduces capital losses), whereas the existing stamp duty can cause or increase a capital loss. Thus the SWT does not discourage turnover as the present stamp duty does, and therefore does not damage affordability to the same degree.

If the SWT were calculated on the total property value instead of the site value alone, it would discourage site owners from adding to that total value by building, rebuilding, extending, or renovating, and would therefore restrict the supply of accommodation and push up prices and rents. The use of the site value avoids this problem.

A vital economic question remains to be addressed: would the SWT cover the cost of infrastructure headworks and incidental works?

The market cannot value the benefit of infrastructure except through the price of access to the infrastructure: market value equals price of access. But the price of access has two components: the obvious one, namely the charges (fares, tolls, and so on) payable for actual use of the infrastructure; and the hidden one, namely the price of living or doing business in a location when the service provided by the infrastructure is available, as opposed to a location where it is not available. "Location, location ..."

The "hidden" component of the price of access to infrastructure is none other than the uplift in site values caused by provision of the infrastructure. Moreover, the benefit of the infrastructure to the public (as opposed to the provider) is net of charges for actual use; that is, it is equal to the "hidden" component of the price of access:

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The net benefit of infrastructure is the total uplift in site values caused by the infrastructure.

It follows that the cost-benefit ratio of an infrastructure project is simply the cost-uplift ratio, which in turn is the fraction of the uplift that must be recovered through the tax system in order to pay for the project. If the infrastructure passes a cost-benefit test, this fraction is less than 100 per cent. If the necessary fraction is reclaimed through the SWT, the infrastructure is funded.

More generally, if a certain fraction of every uplift is reclaimed through the tax system (for example, via the SWT), infrastructure projects whose cost-benefit ratios are equal to that fraction will be self-funding, while projects with lower cost-benefit ratios will be more than self-funding, yielding a net contribution to revenue which may be used for, for example, tax cuts, while the remainder of the uplifts accrues to the property owners. Thus the property owners make gains that they would not otherwise make, due to infrastructure projects that would not otherwise proceed.

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About the Author

Gavin R. Putland is the director of the Land Values Research Group at Prosper Australia.

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