Taxation and the distribution of funding in Australia could drastically change depending on the outcome of the Tax White Paper, currently being developed in allignment with the Reform of the Federation White Paper.
The consultation period on the Tax White Paper closed on 24 July 2015, with submissions made by several representatives for local government including the Western Australian Local Government Association (WALGA), the Local Government Association of Queensland (LGAQ), and the Australian Local Government Association (ALGA).
ALGA President Mayor Troy Pickard said ALGA would like recognition that rates are local government’s only form of taxation revenue and the integrity of the local government rates system maintained.
“In a broader sense, local government seeks both greater funding levels and a more appropriate indexation to better align revenue with roles and responsibilities, as well as the retention of the current direct funding relationship between the Commonwealth and local government through the system of financial assistance grants.”
President of Local Government Managers Australia (LGMA) Dr Shayne Silcox said that LGMA’s focus on the Tax White Paper is to try to have a true dialogue on the role and value of local government.
“There is a need to investigate more equitable or innovative distribution of taxes and ensure local government receives a fair share to ensure it meets community needs, especially as Local Government has some 11 percent of the Nations Assets but receives about 3 percent in GST.
“In the context of the White Paper we will be focusing on gathering feedback from our members on broad issues affecting the sector – and the sector’s contribution to – education, health, housing and homelessness, which we understand are the specific issues being explored by the Federal Government.
“The role and the potential of local government in these areas need to be understood and acknowledged if all three tiers of Government are to deliver cost effective outcomes to our community.”
A range of other recommendations for taxation reform have also been floated.
A report released by the Grattan Institute has suggested that a broad-based property levy calculated from council rates bases could address federal and state level funding shortfalls.
The second in a series of Grattan institute working papers, ‘Property Taxes’, found that a levy of $2 for every $1000 of unimproved land value would raise $7 billion a year with an annual charge of $772 on the median-priced Sydney home, $560 on the median-priced Melbourne home, and lower average rates in other cities and the regions.
Another Grattan working paper found that pressure is being placed on state budgets due to spending on health, education and other areas growing faster than Gross Domestic Product.
It also noted that reduced funding from the Federal Government has also contributed to the shortfall.
Grattan CEO John Daley said that states and territories have provided little insight into how they plan to fill the funding gap.
“While property taxes can be unpopular because they are highly visible and hard to avoid, they are also efficient and fair, and don’t change incentives to work, save and invest.
“Unlike capital, property is immobile – it cannot shift offshore to avoid taxes.
“Over the last 25 years, taxes on property and property transactions have been the only significant ‘growth taxes’ for States, with revenues keeping pace with the economy.
“Our proposal is manageable for property landowners, and protects low-income people.
“Low-income retirees with high-value houses could defer paying the levy until their house is sold.”
The paper also argues that this could result in the eventual abolition of stamp duty.
Mayor Pickard said that local government would face challenges if this were introduced.
“At a general level, given the importance of rates to local government, there is a grave concern that any ‘property tax’, as either additional charges or land taxes imposed on property, will impact negatively on local government revenues.
“This is because any additional land tax is likely to be unpopular in the absence of appropriate compensation as residents generally have a limited capacity to pay taxes.
“If they are asked to pay more in land tax, then they may well resist paying rates.
“Inevitably this would put pressure on council rate revenues and restrict the ability of councils to increase rates which are essential to meet the needs of their local community.
“Tax reform is much more complex that the Grattan Institute might suggest.
“There are around 125 taxes in Australia and rates and land tax are just two.
“It is important to recognise that changes in one part of the tax system can have adverse impacts on another.
“So tax reform must be seen as a complete package.”
WALGA recommended in its submission to the White Paper on Taxation the WA State Government could phase out stamp duty and replace it with a broad land tax, but would only support the measure if Local Governments were assured they could maintain their sovereignty over the rate setting process.
At the recent Council of Australian Governments (COAG) meeting, an in-principal understanding was made to increase taxation to fill funding gaps, potentially through an increase to the GST or Medicare levy.
The Urban Development Institute of Australia (UDIA) welcomed the proposal of a reformed GST, but cautioned against increasing its rate.
UDIA National President Cameron Shephard said that a broader based GST, and a broad, low rate land tax could form part of a package to improve the efficiency of the tax system.
“Broadening the GST base would improve its efficiency, and raise additional revenue that could be used to both provide relief to low income earners, as well as assist in the phase out of economically damaging taxes such as stamp duty.
“Land taxes are another efficient revenue source, and lower rate, broader based land taxes could help provide a stable source of revenue to replace stamp duty, and reduce the reliance of state governments on up front housing charges.
“However because the GST is levied on new housing but not existing housing, increasing the rate of the GST from its current level would have major implications for housing affordability, and the supply of new housing.
“At the current 10 percent GST rate, a new house sold at Australia’s median house price of $658,608 already includes a GST component of $59,873.
“Were the rate increased to 15 percent, that amount would rise to $89,810, an increase of almost $30,000.
“The impact would be even greater for cities like Sydney and Melbourne which have higher house prices.
“Given the affordability pressures that already exist in our major capital cities, new home buyers simply cannot afford to pay a higher rate of GST.”
Mayor Pickard said that raising the rate of the GST will increase state and territory revenues and, so should increase the capacity of state and territory governments to fund their services including appropriate financial support for the local government sector.
