economic priorities - yoursay...transaction tax it hits people who move frequently more than those...

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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

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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

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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Who pays State taxes and when?

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

Government has commissioned NATSEM to undertake an analysis of the distribution impact of existing State taxes

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The efficiency of State taxes

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Most efficient / least efficient

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

Feedback received to date

• The most talked about reform option has been the replacement of conveyance duty with a broad-based property tax

• Other reviews have suggested a shift to a broad-based property tax due to potential improvements in welfare

• But…

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Possible reform to conveyance duty

• …reaction to the Discussion Paper indicates community acceptance a real challenge, with the treatment of people who have recently paid stamp duty a real issue

• The Government would only pursue this reform with community acceptance

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• There are a number of policy considerations for a significant reform like moving to a broad-based property tax

• Under Treasurer will talk about these considerations in more detail

• Government asks submissions to the Tax Review to address these issues

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Distributional impact of State taxes

• The impact of taxes can fall more heavily on some sections of the community than others

• NATSEM analysis included in the Discussion Paper found, based on income:

- A number of State taxes tend to be regressive; and - Conveyance duty was the most progressive of the State

taxes modelled

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• NATSEM’s total result based on income is below:

• The table shows that: - households with the lowest 20 per cent of incomes spend

about 3.55 per cent of their total spend on State taxes - But households with the top 20 per cent of incomes spend

only 2.71 per cent of their total spend on State taxes 14

Income Quintile Q1 Q2 Q3 Q4 Q5 Total % of household spend 3.55 3.65 3.25 3.45 2.71 3.16


• NATSEM’s total result based on wealth is below:

• The table shows that based on wealth, State taxes are somewhat progressive although this relationship is not perfectly linear

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Wealth Quintile Q1 Q2 Q3 Q4 Q5 Total % of household spend 2.71 3.53 2.87 2.86 3.48 3.16


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% of spend Q1 Q2 Q3 Q4 Q5 Total Insurance duty 0.54 0.53 0.49 0.47 0.36 0.44 Vehicle rego 0.85 0.89 0.89 0.65 0.41 0.64 Gambling 1.15 0.95 0.77 0.60 0.45 0.66 Vehicle duty 0.21 0.25 0.32 0.25 0.09 0.20 Conveyances 0.65 0.85 0.55 1.26 1.21 1.02 ESL (current) 0.15 0.20 0.23 0.22 0.19 0.20 Total 3.55 3.65 3.25 3.45 2.71 3.16

• NATSEM results based on income quintile


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% of spend Q1 Q2 Q3 Q4 Q5 Total Insurance duty 0.25 0.35 0.47 0.47 0.52 0.44 Vehicle rego 0.89 0.83 0.64 0.62 0.46 0.64 Gambling 1.06 0.84 0.45 0.62 0.57 0.66 Vehicle duty 0.33 0.25 0.16 0.20 0.13 0.20 Conveyances 0.13 1.13 0.97 0.74 1.49 1.02 ESL (current) 0.05 0.14 0.18 0.20 0.30 0.20 Total 2.71 3.53 2.87 2.86 3.48 3.16

• NATSEM results based on wealth quintile

Conveyance duty

• Duty from residential transfers is expected to generate $660 million in 2014-15

• Around 41,400 transactions expected in 2014-15

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Conveyance duty

• Highly inefficient - People live in homes that don’t perfectly suit their needs - Overall housing stock is lower

• Inequitable - Although NATSEM found it to be progressive, because it’s a

transaction tax it hits people who move frequently more than those that don’t

• Volatile source of revenue

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• Other reviews have recommended replacing conveyance duty with a broad-based property tax:

- No change in aggregate incidence on property - Improved equity

• Past modelling indicates real improvements to welfare (including employment):

- Removes disincentives for people to transact - Leads to improved use and level of housing stock

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Possible reform to conveyance duty Transition

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Transition option Period Est impact on debt ACT approach 5 to 20 years Potentially neutral

Exemption for a period of time 5 to 10 years $0.7 billion to $2.7 billion

Credits for past stamp duty paid 5 to 10 years $1.7 billion to $3.1 billion

Commence paying replacement tax when property is next transferred

50 + years for all to be paying

$13.9 billion


• Questions on transition: - What is the appropriate time-frame? - What impact would these options have on the property

market? - How should the budget impacts be financed; higher rates for

those already paying the replacement tax or temporary adjustments to other taxes?

- Could different transition mechanism apply to principal residential and investment residential property?

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• Valuation basis and rate settings: - Would capital or land values be used? - Would rates be proportional or progressive and would a flat

dollar amount apply? - Should rates be based on the value of the property or the

value per-square-metre?

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• Number of property tax systems: - Would separate tax systems apply to different classes of

property (residential, non-residential)? - Could there be some consolidation of property based-taxes

or would conveyance duty replacement tax remain separate?

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• Exemptions/concessions: - What property would be exempt? - How would low income households be treated? - Primary production land is exempt from land tax but not

conveyance duty in most instances

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Land tax (private)

• Relatively small proportion of total State tax revenue (8 per cent or $347 million) compared to size of all tax

• Relatively efficient • Less efficient than it could be due to tax-free threshold

and steeply progressive rates • Based on aggregate land holdings

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Possible land tax reform options

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Reform option Benefits Impacts

Levy land tax on the per-square-metre value of land

Increased efficiency Significant incidence effects

Reform aggregation Improved equity More complex to administer

Remove tax-free threshold Increased efficiency, less progressive rate structure

More properties liable for land tax


• Remove aggregation and apply a flat rate of around 0.6 per cent on all liable land

• Would remove current incentives for landholders to structure their land holdings to minimise land tax

• Would increase the number of ownerships subject to land tax and provide windfall gains to entities with high value of aggregate land holdings

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• Levy land tax based on the per square metre land value of individual land parcels

• Allows aggregation to be removed but for some form of progressivity to be retained

• Significant incidence effects, in general: • Tax payable on properties located close to CBD, beach and other high

value areas higher than properties in less sought after areas • Shift more of the land tax burden towards residential land owners

• Should different arrangements and rate scales apply to residential and non-residential land?

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Tax reform in South Australia Residential taxes seminar

Chris Richardson Tuesday 24 March

Deloitte Access Economics Pty Ltd © 2015 - Tax reform – Residential 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.

• Residential tax seminar today. There was a matching business tax seminar last week.

The backdrop

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-50

0

50

100

150

200

250

300

350

400

Budget2000-01

Budget2002-03

Budget2004-05

Budget2006-07

Budget2008-09

Budget2010-11

Budget2012-13

Budget2014-15

Effect of the economy on the Budget

$billion

The Federal Budget: Easy come, easy go

The cost of permanent promises

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Budget2000-01

Budget2002-03

Budget2004-05

Budget2006-07

Budget2008-09

Budget2010-11

Budget2012-13

Budget2014-15

Policy costs on taxes

Policy costs on expenses

Effect of the economy on theBudget

$m

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.

• Some of the most efficient taxes are levied on the residential sector, including land tax, while the same is true of local government municipal rates.

• 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 less efficient, as they are taxes on transactions rather than fixed (less mobile) assets.


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Land tax and rates are much more efficient. This is because they are taxes on immobile assets and therefore don’t change decisions to the same extent as transaction taxes.


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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: 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. ABS data indicates that tenants tend to be younger, and lower income households, than investors or owner-occupiers.

• Example 2: 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.

• Fairness: In each case the incidence determines whether the tax is progressive or regressive. In the examples above it is tenants and labour respectively that have their purchasing power reduced, while capital in largely unaffected.

What is ‘incidence’? Who actually pays the tax

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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 private and residential 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, and are of most relevance for residential an private taxes – the potential for: − Replacing property conveyancing taxes with a broad-based land tax.

− Removal of insurance taxes.

So what are the options?

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Tax reform


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.


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.

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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economic priorities - yoursay...transaction tax it hits people who move frequently more than those...

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