Our population is growing and our economy is changing. As the Australian Infrastructure Audit1 and the Australian Infrastructure Plan2 showed, these changes present challenges for governments. Our infrastructure must be transformed to support Australians’ needs in the 21st century, and we must find a way to pay for this transformation.
In this search for additional dollars, value capture is often raised as a solution. Value capture can help to stretch public funding further to deliver more of the infrastructure Australia needs. It can also help to make the infrastructure funding mix fairer, by seeking more from those who benefit most from new infrastructure, and reducing the burden on other taxpayers.
As Infrastructure Australia argued in a recent reform paper, value capture presents great opportunities for governments – however caution is required.3 Governments need to understand what value capture can and cannot do. Each mechanism for capturing value comes with benefits, risks and challenges for the governments seeking to implement them, and the communities in which they are used.
Value capture presents clear benefits, but also comes with risks and challenges
Value capture is a powerful tool for governments to raise funds for infrastructure. That is why Infrastructure Australia have argued for routine consideration of value capture as part of all infrastructure project development processes.
But value capture cannot simply be about collecting as much revenue as possible. Poorly designed or implemented value capture runs the risk of taking more than a fair share, unnecessarily increasing project financing and administration costs, or introducing inefficiencies in the housing, employment and investment markets.
Mechanisms based on proximity (for example, betterment levies) may be inaccurate and unfair. Rather than proximity, it is accessibility that matters most to locals. And far from a simple measure of distance from infrastructure, accessibility is influenced by many natural and built local and network features, including station entrances and exits, noise or pollution, as well as the quality and frequency of services provided by the infrastructure itself.
Mechanisms based on property prices (for example, stamp duties, capital gains tax
and some betterment levies) are subject to volatile market forces and may provide
unreliable revenue to governments. A variety of local and wider economic factors can influence the impact a project has on local property prices. These pose considerable challenges for forecasting at a project’s outset, and could lead governments to capture more than what is fair or efficient from properties around infrastructure developments, or cause a shortfall in forecast project revenue.
Stamp duties can capture value, but at what cost?
Stamp duties, currently levied by all state and territory governments across the country are one the most inefficient and blunt forms of value capture used in Australia. As a one-off charge, stamp duties may collect part of any uplift in value from corresponding infrastructure investments. However, stamp duties are not a true form of value capture because the charge does not reflect the net uplift since the property was last sold.
Stamp duties also have a distortionary impact on housing markets. As a tax on transactions, a stamp duty can reduce housing market liquidity by increasing barriers and reducing incentives for moving to housing that best meets a household’s needs. Those looking to downsize or move out of inner urban areas are discouraged from doing so by the considerable one-off impost.
Consequently, stamp duties make it harder for those wishing to move closer to employment opportunities to find appropriate housing, and increase the costs of available properties by restricting supply – in addition to the range of other factors influencing housing affordability. For businesses, this reduces the pool of talent from which they can hire, since it limits the eligible part of the workforce within commuting distance of their offices. For first homebuyers, stamp duty represents another barrier to market entry, on top of fast-rising capital costs, that must be paid for through savings.
Overcoming the issues caused by stamp duties and creating a sustainable source of funding for infrastructure is becoming increasingly critical for governments. While recent strong property price growth has seen burgeoning stamp duty revenues, a weakening property market could substantially reduce the value that could be captured from local properties.
Australia’s population is ageing, and a generation of Australians aged between 55 and 70, the vast majority of whom own their homes,4 will retire over coming years. Governments must act now to ensure that housing with access to jobs is affordable and accessible for younger generations of workers who will increasingly bear the burden of supporting the broader population.
A broad-based land tax provides an efficient and sustainable approach to value capture
The most efficient approach to capturing value already exists. Land tax applies across each state and territory except the Northern Territory. However, the present system includes significant exemptions, including on owner-occupied properties. This exemption alone reduces the total value of the land tax base by 60%.5
Broadening the land tax system, in addition to the removal of other inefficient charges such as stamp duties, could provide a fairer, more efficient way of capturing land value uplift. The potential benefits of land tax reform are wide-reaching, with positive impacts on housing availability and affordability, transport network efficiency, infrastructure funding sustainability and long-term land-use planning. Land tax reform is supported by the Bureau of Infrastructure, Transport and Regional Economics,6 and the Henry Tax Review.7
This approach is already underway in the ACT. In 2012, the ACT Government commenced a 20-year period of phasing out residential property transaction taxes, while phasing in a broad-based land tax. The effect of this reform process has been to reduce the volatility of government revenues from duties to a more reliable and stable land tax revenue stream,8 while also providing greater incentives for private investment in buildings, improving property market liquidity and reducing barriers to mobility.
Now is the time for other states to get on board. There could be a role for the Australian Government to provide incentives to these states and territories, and initiate a long-term transition towards a broad-based land tax, alongside other beneficiary pays funding streams. The impact and administrative burden of this reform could be streamlined by broadening state-based charges and aligning payments with property rates cycles. By introducing this reform alongside the removal of inefficient charges such as stamp duties, governments have an opportunity to improve how we raise funding for infrastructure and other services, and provide a better way to pay for the infrastructure needed to support Australia’s growth and change.
This article originally appeared in New Planner (March, 2017) – the journal of the New South Wales planning profession – published by the Planning Institute of Australia.
1. Infrastructure Australia (2015) Australian infrastructure audit, available at: http://infrastructureaustralia.gov.au/policypublications/publication/AustralianInfrastructure-Audit.aspx
2. Infrastructure Australia (2016) Australian infrastructure plan, available at: http://infrastructureaustralia.gov.au/policypublications/
3. Infrastructure Australia (2016) Capturing value: Advice on making value capture
work in Australia, available at: http://infrastructureaustralia.gov.au/policypublications/
4. Reserve Bank of Australia (2015) Home ownership rates, available at: http://www.rba.gov.au/publications/submissions/housing-andhousing-finance/inquiry-into-home-ownership/home-ownership-rates.html
5. Henry, K. (2009) Australia’s future tax system:Report to the Treasurer, available at: http://taxreview.treasury.gov.au/
6. Bureau of Infrastructure, Transport and Regional Economics (2015) Transport infrastructure and land value uplift, available at: https://bitre.gov.au/publications/2015/
7. Henry, K. (2009) Australia’s future tax system: Report to the Treasurer, available at: http://taxreview.treasury.gov.au/
8. Daley, J. & Coates, B. (2016) Following the ACT land tax approach boosts growth and state
budgets, available at: https://grattan.edu.au/news/following-the-act-land-tax-approach-boosts-growth-and-state-budgets/