Could a tax swap help rebuild our state’s economy?

A reduction in stamp duty on land sales offset by a rise in rates on land could lure business investment from other states and help rebuild South Australia’s economy, argues Richard Blandy.

Aug 16, 2016, updated Aug 16, 2016
Photo: Tony Lewis

Photo: Tony Lewis

The Families SA fiasco documented in Justice Margaret Nyland’s excoriating Child Protection Systems Royal Commission Report is the latest example of the mess that the State Government is making of things. Other examples include:

  • Skyrocketing power prices and unreliable power thanks to an obsession with leading the world in renewable energy;
  • An expensive hospital which appears unlikely to be workable and which is associated with massive disruption elsewhere in the hospital system;
  • Selling Government assets and treating the cash as income in a pretence at balancing the books;
  • Incurring massive increases in debt to fund its capital initiatives rather than cutting its recurrent spending;
  • The Gilman land sale without tender to a consortium promising to develop an oil and gas hub which has not made a lot of progress;
  • Having the highest unemployment and under-employment rates in Australia, with no strategy to turn this around except to subsidise wages.

The Weatherill Government is strong on intent and intervention, but not on responsibility for outcomes. Futuristic plans are favoured because these sound good but will not be evaluated any time soon.

Unfortunately for the Government, its renewable energy push has come to be evaluated in terms of its impact on the price and reliability of electricity sooner than had been anticipated.

Similarly, the new Royal Adelaide Hospital is likely to be evaluated by the people of South Australia before the next state election. The signs are ominous, according to an endless stream of senior medicos who have no obvious political axe to grind.

The Government is also pushing Adelaide as a driverless-car city. Driverless cars may be able to operate technically in restricted environments within a decade, but who will be responsible when an accident occurs? No one knows. What will insurance cost? How will courts assess liability and damages? What about their performance on country roads and interstate? It is unlikely that I will live long enough to experience the driverless car era in South Australia.

Another proposal is the nuclear dump project, promising hundreds of billions of dollars in profits for very little effort. Unfortunately, the prices, costs and quantities on which this bonanza is predicated are based on speculation that assumes high prices, low costs and huge quantities. The dump could easily make losses in the likely event these predictions do not materialise.

The nuclear proposal could even be a disaster if construction was to be halted mid-way through the project, or if spills occurred, as happened with the US dump in New Mexico in early 2014. In that case, the dump was closed and is not expected to re-open until at least December of this year or possibly later.

On a more positive note, the Local Government Association is now looking closely at means of supporting and growing businesses. Last week, I participated in an LGA Economic Development Think Tank exploring this matter. Maybe local government can show leadership and improve the state’s economic growth rate.

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Economically, the state has to substantially reinvent itself. It is always having to reinvent itself, of course, because that is how progress works – economic growth is never about every sector and business growing at the same rate. Fast growth is achieved by having many businesses growing very fast while some grow slowly and others decline and die.

That is why a tax on change (like stamp duty on land sales) is a bad tax, because it slows the rate at which new activities come into being and expand, while it does not slow the rate at which existing businesses die.

Stamp duty on land sales is a bad tax because it penalises expanding businesses that need space to expand their activities. It penalises economic reinvention.

If councils were to raise their rates by 50 per cent and hand that extra money to the State Government, it could cut stamp duty in half

On the other hand, council rates on the capital value of land are good taxes (if it makes sense to describe any tax as “good”), because they do not discriminate between new and old uses of land. Council rates do not induce people not to buy and sell land like stamp duty does; they do not tax economic reinvention.

If it were possible to organise a swap of a reduction in stamp duty on land sales monetarily offset by a rise in rates on land, this would be a change that supported economic reinvention and economic (and employment) growth without worsening the overall revenue position of the public sector.

The amount of stamp duty on land sales collected by the State Government is about $1 billion, which is also about the amount of rate income collected by all the councils. Hence, if councils were to raise their rates by 50 per cent and hand that extra money to the State Government, the State Government could cut stamp duty in half.

This would have a powerful effect on economic and jobs growth in South Australia. It would attract business investment away from other states.

Politically, this could be managed if the State Government progressively cut its spending by $100 million per year over a period of five years, giving the money saved back to each council at the rate of 20 per cent of each council’s contribution of rate revenue to the State Government. Over five years, council rates would be reduced to what they would have been in the absence of the rate revenue gift by councils to the State Government.

So here is a way that the people of the state, through their local government representatives, could help rebuild South Australia’s economy from the dreadful pickle that our State Government has got it into.

Richard Blandy is an Adjunct Professor in the Business School at the University of South Australia and writes a weekly column for InDaily.

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