economic priorities - yoursay · • to provide independent economic modelling and advice to...

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Economic priorities Priority

1 Unlocking the full potential of South Australia’s resources, energy and renewable assets

2 Premium food and wine produced in our clean environment and exported to the world

3 A globally recognised leader in health research, ageing and related services and products

4 The Knowledge State – attracting a diverse student body and commercialising our research

5 South Australia – a growing destination choice for international and domestic travellers

6 Growth through innovation

7 South Australia – the best place to do business 8 Adelaide, the heart of the vibrant state

9 Promoting South Australia’s international connections and engagement

10 South Australia’s small businesses have access to capital and global markets

Why review our taxes?

• Need sufficient revenues to provide high quality services now and in the future to ensure the State remains a great place to live

• We want business to thrive

- The tax system needs to support those trying to create new business opportunities that will provide jobs for South Australians

• There are challenges facing our economy

- Change to the manufacturing sector and demographic change over the medium to longer term, increasing demand for services

• Everything is on the table – taxes, levies and concessions

• Government has commissioned Deloitte Access Economics to provide it with independent economic

advice and modelling to inform Government on reform options

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Demographic changes

• South Australia has a relatively older population than other States • Ratio of working aged population to dependents is projected to fall from

1.9 to 1 in 2014, to: • 1.5 to 1 in 2031, and • by 2061, there will only be 1.4 working aged persons for each dependant

• This is likely to lead to reduced tax revenues but increased demand for services • Growth in health spending has averaged over 7 per cent each year, growing from

$2.5 billion to $5.0 billion • Commonwealth funding annual indexation will reduce to 2.5 per cent plus

population growth from 2017-18

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Objectives of the review Revenue Our tax system needs to provide enough revenue to deliver high quality services and

infrastructure to the community, now and into the future

Business Our tax system must support entrepreneurship, investment and job creation. Business must pay its fair share of State taxes, but the taxes paid by the business sector should not stand in the way of those who are actively investing in creating new opportunities. The way in which taxes are applied, and when they are paid, is just as important as the overall amount of tax paid

Households The tax system should be fair and have regard to people’s ability to pay

Efficiency Our tax system should collect revenue as efficiently as possible

Stability Our tax system should be as stable and predictable as possible

State Government revenues – 2014-15 ($m)

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4,410 4,955 3,162 2,312 1,619

27%

30%

19%

14% 10%

0

1,000

2,000

3,000

4,000

5,000

6,000

Who pays State taxes and when?

Businesses pay when they: • pay their staff payroll (payroll tax) • buy and hold property (duty, land tax, ESL, River Murray levy etc) • take out insurance • register a motor vehicle • operate a gambling business in the State

Households pay when they:

• buy and hold property (duty, ESL, River Murray levy etc and land tax (if non-principal place of residence))

• take out insurance (except for health) • register a motor vehicle

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The State tax system

• State is expected to raise about $4.4 billion in taxes in 2014-15 (around 27 per cent of total State revenue).

State tax revenue estimates for 2014-15 ($m)

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Volatility of State taxes

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-30%

-20%

-10%

0%

10%

20%

30%

40%

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

Total taxation Payroll tax Conveyance duty

GFC Post GST introduction

The efficiency of State taxes

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Most efficient / least efficient

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Tax as a percentage of GSP Tax per capita CGC tax effort ratio

2013-14 2013-14 2012-13 NSW 8 6 7 Vic 7 5 6 Qld =5 4 2 WA 2 8 4 SA =5 3 8 Tas 4 1 3 ACT 3 7 5 NT 1 2 1 A ranking of 1 means most competitive.

How do we compare?

Commonwealth Grants Commission comparisons

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2012-13 NSW Vic Qld WA SA Tas ACT NT Conveyance duty 1.01 1.06 0.83 0.95 1.36 0.99 1.14 1.18

Payroll tax 1.03 0.98 0.93 1.06 0.92 1.09 0.98 1.03

Land tax 1.16 1.06 0.80 0.72 1.31 1.31 1.17 —

Insurance tax* 0.76 1.19 0.88 1.43 1.24 1.02 0.79 1.21

Motor taxes* 1.15 0.86 1.06 0.94 0.93 0.71 1.06 0.69

Total tax 1.07 1.01 0.89 0.95 1.10 0.92 0.99 0.84

Mining revenue 0.96 0.57 0.98 1.05 0.64 0.61 1.00 0.98

* Adjusted to reclassify $64.1 million of stamp duty revenue from insurance tax to motor taxes.

• Competitive payroll tax and mining revenue effort • Conveyance duty, including on business assets high

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Pitcher Partners (large

business) Institute of Public Affairs (average size business) KPMG (tax)

2013-14 2012 2014 NSW 5 5 4 Vic 2 2 2 Qld 3 4 3 WA 4 3 na SA 1 7 1 Tas na 6 na ACT na 8 na NT na 1 na A ranking of 1 means most competitive.

How do we compare for businesses?

Importantly, once broader business costs are taken into account, KPMG finds Adelaide as being the 2nd most competitive business environment of 4 Australia cities surveyed

Key concepts of the Review

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• The State Tax Review is about meaningful and sustainable tax reform • Tax reform will be difficult. The Government hopes that releasing this

Discussion Paper will stimulate an informed debate within the community • The Discussion Paper contains a range of information not normally

released publicly • This is intended to assist interested parties in better understanding the

implications of their proposed reforms • The Discussion Paper canvasses a number of options for tax reform • Our focus will be on what we can do individually as a State

Consultation process

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Timeframe Task 11 February 2015 Discussion Paper released on the YourSAy website

February to April 2015 Government to engage with key industry and peak groups

10 April 2015 Receive public submissions

March to April 2015 Information sessions on tax reform matters

Tax reform in South Australia Business taxes seminar

Chris Richardson Monday 16 March

Deloitte Access Economics Pty Ltd © 2015 - Tax reform - Business taxes seminar

DAE and our experience

• Deloitte Access Economics has been modelling tax reform scenarios for over two decades.

• In-house computable general equilibrium (CGE) model tailored to modelling tax reform.

Our role in the project

• To provide independent economic modelling and advice to government about tax reform options.

• Business tax seminar today, as well as residential tax seminar next week.

The backdrop

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The economic case for reform


Why tax reform? Australia has a productivity problem

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-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1980s 1990s 2000s to 2013 Decade to 2023

Productivity & other Participation

Terms of trade Total living standards

Contribution to annual income growth


Why tax reform? Tax reform is something this State can do to give itself a boost

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5%

6%

7%

8%

9%

1987-88 1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12

SA - shares of national totals

Output

Population


• While they’re dwarfed by those available to the Federal Government from the perspective of scale, the States have levers to address productivity, including:

− Investment in better education and skills development.

− Infrastructure investment.

− Greater private sector involvement in some markets.

− Planning reform.

− Contestability of public services.

Why tax reform? Tax reform is an important part of solving the productivity problem

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• Tax reform is an important part of the mix:

− It is a ‘free kick’ – as it can improve the productivity of the Australian and State economies.

− First mover advantage for the first State to change.

− And lingering – permanent – benefits from any efficiency gains.

− Current tax mix is as much based on history as it is on a well thought out plan for the State.

− Given the large dispersion of relative efficiencies between taxes, shifting the revenue burden from inefficient taxes to relatively efficient taxes could provide large dividends to the State relative to the size of its tax take.

Why tax reform? Tax reform is an important part of solving the productivity problem

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Welfare and efficiency effects of South Australia’s taxes


• Welfare can loosely be thought of as the economic wellbeing of a population.

• For the purposes of modelling we take real household consumption as being the best measure of this – the ability of families to buy more of what they want than they could previously.

• If we can change the tax mix such that the same amount of revenue is raised, but real consumption is higher, then this indicates a welfare gain.

• Doesn’t distribution matter? It surely does. Different taxes will have different impacts on sections of the business and household sectors:

− But sometimes you can improve both efficiency and fairness at the same time.

− Or you can improve efficiency without affecting fairness (as may be possible, for example, when any reform impacts are contained within a single group of taxpayers).

What is ‘welfare’?

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What are we ultimately trying to achieve with reform?


• All taxes distort economic activity in some way.

• The worst taxes shrink the South Australian economy a lot for every dollar they raise – hurting the prosperity of families and businesses.

• Think of it this way: the more that taxes change your decisions, then the bigger the negative impacts that they have.

• Given markets are usually best at allocating resources, the goal is to raise revenue in a way which least distorts market outcomes:

− Higher taxes should be raised on less mobile bases (such as land rather than capital).

− Higher taxes can be less damaging where either the demand or supply side of the market to be unresponsive to tax – meaning that governments don’t change choices.

− Business taxes are often less efficient than taxes on households as they distort capital decisions.

− Concessions can reduce the effectiveness of efficient taxes.

What makes a tax more or less ‘efficient’?

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What are we ultimately trying to achieve with reform?


• The least efficient taxes have around four times the welfare cost of the most efficient taxes.

• Many taxes on businesses (shown in red) are less efficient than the corresponding taxes on individuals.

• Overall these estimates show that there are potential gains from tax reform in SA.

• Similar rankings have been found in previous Deloitte Access Economics analysis, as well as modelling for the Henry Review.

Rankings of the efficiency of SA taxes

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Different taxes have different welfare costs



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Different models give different results – but not that different


Conveyance taxes tend to be inefficient, as they are taxes on transactions rather than fixed (less mobile) assets. Particularly when they are levied on businesses.


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Payroll taxes are somewhere in the middle. Think of them as an income tax with a different ‘concession structure’. Their efficiency is similar to that of an income tax, but could be better.


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Land taxes and rates are more efficient. They are a tax on an immobile base and therefore don’t do as much to change people’s decisions.


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Incidence of taxes in South Australia – who pays?


• It is important to understand which groups ultimately pay each tax (that is, whose purchasing power does a tax reduce?) That isn’t as obvious as you think, as the legal incidence of a tax does not always equal its actual incidence. Those who legally pay the tax may pass it on to others:

• Example 1: Although employers pay payroll tax, the ultimate incidence of the tax is reduced take-home pay for workers. That is, higher payroll taxes eventually mean lower wages rather than lower profits. In effect payroll taxes mimic an income tax despite one tax being levied on workers and the other levied on businesses. “All taxes, whether payroll tax, land tax, GST or the queen bee levy, are ultimately borne by individuals on the earnings from only three factors of production: labour, capital and land (including natural resources). … The payroll tax can therefore be viewed as a tax on labour income or, equivalently, as a tax on the consumption of goods and services” - http://taxreview.treasury.gov.au/content/downloads/report/Architecture_of_Australias_Tax_and_Transfer_System_Revised.pdf

• Example 2: Land taxes on investment properties are largely passed on to tenants. This ensures that capital yields the same after tax returns as its alternative uses.

What is ‘incidence’? Who actually pays the tax

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http://taxreview.treasury.gov.au/content/downloads/report/Architecture_of_Australias_Tax_and_Transfer_System_Revised.pdf

http://taxreview.treasury.gov.au/content/downloads/report/Architecture_of_Australias_Tax_and_Transfer_System_Revised.pdf

Options for reform


• The relative rankings give some idea of where the largest gains from reform can be made.

• Chart to the right shows just business taxes.

• Could the South Australian public agree on a reform that shifted the burden of tax away from ‘worse’ taxes and towards ‘better’ ones?

Where can gains be made?

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Tax reform


• The Government has outlined a range of options in its Discussion Paper.

• The process is still ongoing, with submissions currently being received.

• Today we’ll briefly look at some of the most common options that have been publicly discussed – the potential for: − Reforms to payroll tax

− Removal of insurance taxes

− Replacing property conveyancing taxes with a broad-based land tax.

So what are the options?

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Tax reform


• Payroll tax is relatively efficient compared to other State taxes and mimics a personal income tax in effect (and efficiency).

• As with many taxes, its exemption structure can affect its incidence and efficiency.

• Commonwealth Grants Commission (CGC) data suggests that this State relies less on payroll tax than other States.

• The Discussion Paper raised several possible reforms, ranging from changes to concession structures to wholesale change:

− Lower or remove the tax-free threshold (or phase it out at some point).

− Remove exemptions and lower rate.

− Replace with cash-flow tax as per Henry.

Options for tax reform Payroll tax changes

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Options for tax reform Insurance taxes

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• Consistently found to be among the least efficient of all taxes.

• Henry Review recommended removing them.

• CGC data suggests that this State relies more on insurance taxes than other States.

• The difficulty is in what to replace it with:

− Raises revenue of around $0.5 billion for the State.

− Incidence is anyone who buys insurance: both businesses and households.

− Can lead to underinsurance.

− Potential replacements could come from more efficient taxes, such as a mixture of payroll and property taxes.


Options for tax reform Conveyance duty broad based land tax

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• Conveyance duties are inefficient. Most revenue comes from property duties.

• In contrast, land taxes are among the most efficient taxes.

• Therefore, one option is to replace one with the other. Both are on property, so impacts are largely contained within the same group (although not entirely).

• Options might include: − Increasing land tax but maintain current exemption structure.

− Remove exemption for principal place of residence.

− Alter tax structure (such as a flat rate land tax, or a charge per square metre).

• One of the potential difficulties lies in transition costs.

Conclusion


• Arguably the best one liner about Australia and Australians was written in The Economist magazine back in 1986. It said that “Australia is one of the best managers of adversity the world has seen – and the worst manager of prosperity”.

• Reform has the opportunity to benefit this State at a time when those benefits would be particularly welcome. Estimates of inefficiency across different types of tax (by both Deloitte Access Economics and others) consistently show that the potential benefits of reform could be large.

• There is still some low hanging fruit when it comes to tax reform, in part as State taxes (including those levied in South Australia) are among the more inefficient taxes levied in Australia.

• Yet even if tax reform makes a lot of sense, it is very hard to achieve. At any time, every tax reform process in Australian history has been three banner headlines away from being derailed.

• Precisely because the potential for tax reform to lead to a more prosperous South Australia – with both businesses and families being better off – is so fragile, I’d counsel you to think carefully before you come to a view. The chance to come to community agreement around tax reform comes rarely ...

Conclusion There are large potential gains – but any reform process is fragile

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