NSW will lead the way on tax reform with its plan to make the transition from stamp duty on property purchases to a land tax, as part of a suite of measures designed to stimulate the economy as it recovers from the coronavirus recession.
Businesses and economists have praised Tuesday’s 2020-21 state budget, which is splashing nearly $30 billion on infrastructure projects, stimulus measures and payroll tax relief.
Debt will soar to nearly $105 billion by 2023-24, and NSW Treasurer Dominic Perrottet has seized on record low cash rates from the central bank as he promises not to drive the state into “structural deficit”.
Acting on recommendations from the Thodey review into federal-state financial relations, Mr Perrottet has proposed an optional move away from stamp duty to an annual property tax based on land value, with all future owners locked into the levy.
“When it comes to our economy and the biggest impediment on economic growth, the number one area for states are taxes,” Mr Perrottet said.
“The worst which we’ve been speaking about for some time is stamp duty; it is an impediment to home ownership.”
Buyers will get the choice of paying the transfer duty or the property tax, and the rates will differ for owner-occupiers, investors and commercial tenants.
The Thodey report noted that numerous inquiries, including the Henry review and the 2015 Commonwealth Treasury tax review, had found stamp duty was one of the most inefficient and damaging taxes, with costs ranging from 34¢ to $1.07 for every extra dollar of revenue raised.
Mr Perrottet has dubbed it a “response and reform” budget to drive the state’s post-pandemic recovery and plug its $16 billion deficit, predicting a return to surplus by 2024-25.
“There are a lot of numbers but ultimately this budget is about people,” he said. “It is not just about dealing with the pandemic today.”
Like the federal government, Mr Perrottet is hedging his bets on a coronavirus vaccine being available by mid-2021 and international borders reopening by December next year.
Measures in Tuesday’s budget include vouchers for people to spend on hospitality and entertainment, higher payroll tax thresholds for businesses and big spending on shovel-ready projects.
NSW’s economy is projected to shrink by 0.75 per cent before growing by 2.5 per cent in 2021-22, with $25 billion in revenue to be wiped out over four years.
Population growth will effectively hit zero over the next two years, shrinking the state’s revenue pool.
First home buyers could receive grants of up to $25,000 to help cover stamp duty, and the change is expected to bring in the same amount of revenue as the transfer charge.
Despite the proposed switch to land tax, budget documents show stamp duty revenue will grow 11 per cent over the next four years and land tax will grow at a sluggish 0.9 per cent over the same period.
Economist Saul Eslake praised Mr Perrottet for pursuing the politically challenging issue of stamp duty reform.
“I give him kudos for pressing on with this because no other state Treasurer has had the cojones to do it,” Mr Eslake said.
But he warned that the Treasurer risked undermining his own reform by giving people an option to choose between the annual levy or the transfer charge.
“In theory that should make the property tax system fairer. The reality is people who are unlikely to move very often will opt to stay with the present system,” Mr Eslake said.
Steve Mann, NSW chief executive of the Urban Development Institute of Australia, said new builds could be delayed if the move to the annual tax took too long.
“With reforms slated for late 2021, homebuyers could hold off on purchasing until they have more certainty, which could effectively stall the industry completely,” he said.
Business Council of Australia chief executive Jennifer Westacott said NSW was “building a strong business-led recovery”, pointing to the budget’s stamp duty and payroll tax changes.
“While some jurisdictions are talking about reform, NSW is acting,” she said.
“Critically, the NSW budget puts business at the centre of the recovery by unleashing the job-creating power of the private sector.”
Payroll taxes for companies creating 30 new jobs in NSW will be axed for four years, the payroll tax threshold will rise from $1 million to $1.2 million, and small businesses will be given $1500 vouchers to help cover government fees and charges.
The government will trial its $500 million “Out and About” initiative in Sydney’s central business district next month before rolling it out statewide next year, with households receiving $100 in vouchers to spend on hospitality and entertainment.
People will get only one shot to spend the $25 vouchers, and any leftover cash will be forfeited. They will not be able to be used for alcohol, cigarettes or gambling.
Moody’s warned that NSW’s high debt levels, which will more than double over the next four years, would put it at risk of future shocks.
“This will test institutional capacity as it targets fiscal repair,” Moody’s vice-president John Manning said.
Mr Perrottet said NSW had an “obligation to future generations” to use the opportunity of low borrowing rates.
Coal mining royalties will be diverted to the NSW Generations Fund, while the government floats a securitisation of the state’s lotteries tax revenue.
Public servant pay increases have been frozen at 1.5 per cent over the next four years, and Mr Perrottet told departments to cut back spending on travel, events and contractors.
He used his budget speech to describe a horror year for NSW, as Tuesday’s budget marked a year since the first known case of the coronavirus.
“We look to the far horizon, because we have a long road to tread,” he said.
NSW Labor has dismissed the budget, saying it failed to account for the looming economic crisis when JobKeeper ends next year. It also criticised a lack of start dates for proposed new schools and hospitals.
“It’s a tired, flat budget from a tired, 10-year-old government,” Opposition Leader Jodi McKay said.