Victoria embraces nasty, narrow tax rises

Victoria’s State Budget threw into stark relief what happens when you combine increased spending, increased debt and a very narrow tax base.

Somebody ends up copping it in the neck, with some extraordinarily high tax increases on relatively few people.

So, a range of regressive, employment sapping taxes are raised and some new, narrow taxes are introduced – the very opposite of what was meant to happen when the GST was first introduced.

Payroll tax should be gone but it is growing

Payroll tax is a great example of the sort of tax that ideally would have been eradicated by now but instead is on the rise, with businesses with a “national” payroll of more than $10 million directly funding a $3.8 billion spend on mental health.

Exactly why a business that employs a lot of people in Queensland and some in Victoria should fund a worthy push to improve mental health in Victoria is never really spelt out.

But it does suggest an easy way out of the conundrum for that business – reduce your Victorian workforce to zero to avoid paying the tax.

The fact that this “payroll surcharge” will double for businesses with wage bills of over $100 million and that it will “only’’ apply to 9000 companies or less than 5% of businesses actually points out how very narrow and unfair this tax is.

We all pay through higher prices

It also creates an illusion that the rest of us don’t have to pay for it – although we all instinctively know that increasing costs of business leads to higher prices.

Payroll taxes in general make it more difficult to employ and retain workers so they are the very opposite of supporting employment.

It is particularly unwelcome given it will impact labour-intensive businesses such as retail and hospitality, many of which have been hit hard by COVID-19 lockdowns.

Stamp duty increases mobility friction

It is a similar situation with the specific rises in stamp duty – another narrow tax that stops people from making rational decisions about getting the right size property to suit their needs.

The stamp duty scales – and land tax for that matter – long ago left reality behind due to a lack of indexation.

They were originally designed for an era when a $1 million house was only found in Toorak or Brighton rather than almost all of Melbourne but instead of acknowledging that, these taxes have been increased further to hit those buying properties above $2 million.

That might be a smaller cohort of people but again, that is the point.

Taxes ideally should be broad based to increase fairness and reduce their distorting effects on rational economic decisions.

Soak the “rich” by hitting downsizers

Exactly why someone who wants to downsize by selling their house and buying a smaller dwelling that costs more than $2 million should be hit with even higher “luxury” stamp duty is something of a mystery.

The only answer seems to be that they are relatively “wealthy” compared to many others so they can stand being soaked even harder by a narrow and inequitable tax.

But how rich are these people really and why are they being singled out for an extra belting with an already unfair and antiquated tax?

You don’t have to look too hard to find baby boomers who are sitting on massive gains after buying what was a fairly humble house decades ago.

Should they be taxed extra hard just because they want to downsize into a smaller property, even one that costs more than $2 million?

After all, while a $2 million property might sound grand, at today’s prices it may not be nearly as flash as it sounds, particularly if the boomers want to stay in a desirable area.

Windfall tax shows how states are encroaching on federal government taxes

If you are looking for a really interesting tax change though, the so called “windfall tax’’ on land rezoning is a great example of an opportunistic and super hefty tax that is being introduced just because the government think they can get away with it.

In reality, this is really a form of capital gains tax but one applied at the state rather than the federal level – a model that state governments have been chipping away at to try to divert federal tax revenues to their own balance sheets.

Another nasty example is Victoria’s clumsy electric car tax, which is diverting what used to be federal fuel taxes to itself in the sort of grubby revenue grab that harks back to the bad old days of state bank account taxes.

By applying the “windfall tax” to all rezoned land that appreciates by more than $100,000 and at a punishing rate of 50%, the state government is really applying its own more onerous form of capital gains tax.

It is fine to say that these gains have previously not been previously “captured” but it is not true – all such gains are covered either by the existing federal capital gains tax or company tax but in a more realistic and concessional way that takes account of actual overall profits.

Consumers will pay this tax in the form of higher property prices

By applying this “windfall tax” in such a blunt way, the state government risks passing on quite significant extra costs to end consumers – in this case, usually those buying house and land packages.

Developers are just like any other business and by reducing rezoning profits through a tax, their margins will need to rise in other areas.

All of which feeds back into keeping upward pressure on property prices – something that might be logical if you are a state government that gets a cut on higher prices through land tax and stamp duty but doesn’t really make sense to anyone else.

Why do we need constantly rising house prices?

Why do Australians need to suffer some of the highest property prices in the world relative to income?

Because we consistently add regulatory, labour and tax costs to real estate both new and existing and we seem not to care at all about affordability issues and their impact on those seeking shelter.

And also, because rising house prices have become a form of long-term investment lottery designed to lead to inter-generational conflict.

In saying all of this, I am not really taking a direct pot shot at the Andrews Government in particular.

Their Budget is responding to raising more revenue the only way it can – through the narrow, inequitable tax base that is has available to pay for services – although I am sure there could be more rigour applied in reducing the cost of such services.

What this Budget does illustrate starkly is that unfortunately the GST reforms did not go quite far enough in providing state governments with a broad tax base, leading to large deficits and hefty increases in narrow taxes on payrolls and property.

What is required is another round of meaningful tax reform but given the number of detailed and worthy tax reform reports gathering dust and the continual duck-shoving that goes on between state and federal governments, I wouldn’t hold your breath.