Prof John Freebairn at the 123rd Annual Henry George commemorative dinner.

1. Reforming State Taxes: Rationale
and Options
John Freebairn
The University of Melbourne
3 September 2014

2. Outline
• Arguments for reform of state taxes
• Description and critique of current taxes
• Some reform options and packages
• Builds on:
– Henry Review (2010)
– State tax reviews, including Harvey (2001), IPART (2008),
ACT tax Review (2012)
– Extensive academic & professional literature

3. State taxes, 2012-13
(fund about 33% of state expenditure)
Tax Category $billion
Payroll
Land
Stamp duty:
conveyances
insurance
motor vehicles
Other motor vehicle
Gambling
Total
20.8
6.2
12.8
4.2
2.5
6.1
5.5
63.5
Plus royalties of $10.6 billion

4. Arguments for State Tax Reform
• Improve productivity and efficiency
– Remove most inefficient state taxes
– Broaden bases of potentially efficient land and payroll
taxes
– Rationalise special taxes on motor vehicles and gambling
• Provide a “hard budget” constraint for the states
• Leave most of redistribution and macroeconomic
management tasks to the commonwealth

5. Current Taxes and Critique
• Describe each in terms of:
– Tax base or taxable sum, especially exemptions
– Tax rates
• Assess effects and critique in terms of:
– Distortions to decisions and efficiency costs
– Long run economic incidence and distribution
– Simplicity and operating costs
– Potential use as part of “hard budget constraint”

6. Current Land Taxes
• Narrow tax base
– Exempts owner occupied housing and primary
production
– Use asset value (rather than rental income)
• Progressive tax rate schedule
• Results:
– Distorts the efficient allocation of land across different
uses
– Some of the tax burden passed forward as higher costs
for consumers of higher land tax uses

7. Proposed Land Tax Reform
• Design:
– Comprehensive base of unimproved land value with minimal
exemptions
– A single flat rate. But, right for states to vary rate for “hard budget
constraint”
– Simple to use existing local government base
A revenue neutral package, including replace current land tax and
conveyance duty, would require a doubling of local government
rate
• Effects:
– Remove distortions to best use of land
– All burden on landholders, and any change a one-off windfall
change in asset value

8. Current Payroll Tax
• Narrow base
– Small businesses exempt, and about 50 % of employees
– Other special exemptions
• Rate
– Flat marginal rate
• Effects:
– Exemptions distort choice of business structure and
organisation
– In the long run, most of the tax is born by employees of both
taxed and non-taxed businesses as lower wages

9. Payroll Tax Reform
• Design
– Comprehensive labour remuneration for all
– Flat rate. But, right to vary rate for “hard budget constraint”
– Use workers compensation or commonwealth PAYG base
– Either:
• Lower rate for same revenue
– Less business structure distortions
– Minimum changes in wage rates
• Increase revenue to fund replacement of relatively less efficient state taxes
• Effects
– Efficiency gains from removal of business structure distortions
– Minimal distortions to investment and saving decisions

10. Current Conveyance Duties
• Base
– Transfer of property, including value of land, improvements and
buildings
• Rate
– Progressive
• Effects
– Among the most inefficient of all taxes
– An additional indirect tax on a specific product, buildings
– Important incidence on a specific business input
– Distorts reallocation of property from less valuable to more
valuable uses with changing circumstances
– Inequitable to frequent property transferees
– Most volatile revenue of all state taxes

11. Replace Conveyance Duties
A replacement broader base and higher rate land tax, e.g.
double local government rates
• Significant efficiency gains
• Long run equity effects
– Small net increase in burden on landholders
– Small fall in burden on the building industry
• Short run, political noisy, losers
– Infrequent property sellers
– Asset rich and income poor
May require a long transition process, such as ACT
strategy

12. Stamp Duties on Insurance
• Current
– An extra indirect tax on a specific product
– Leads to non- and under-insurance, and more so among
the less well off
• High priority to remove for efficiency and equity
reasons
• Possible replacement options
– Larger land tax (as for the fire levy)
– Larger payroll tax
– Larger GST
– Access to commonwealth income tax

13. Rationalise Taxes on Motor Vehicles
• Current. Historical revenue raisers
– Federal fuel excise
– State stamp duties, registration fees, parking fees, licence
fees
– Together, they collect a bit more than expenditure on road
construction and maintenance
• Henry Review and PC propose explicit user pay fees for
– Use of roads and damage caused
– Congestion by road and by time
– Pollution to internalise external cost
(first two could be reformed state charges)

14. Rethink Taxes on Gambling
• Current
– Very different effective rates on different types of gambling
– Logic is to internalise external cost of problem gambling
• Henry review assessment
– Unclear that current taxes are effective in deterring problem
gambling, and distort leisure spending choices
– A logical case to tax the economic rent earned on government
restricted supply casinos and machines
• If, as many argue, demand is not price responsive, an
efficient tax. Equity and simplicity says a flat rate for all.

15. State Tax Reform Package
• Land tax: broader base and flat rate
• Payroll tax: broader base and flat rate
• Stamp duties: replace
• Motor vehicles: rationalise as user charges
• Gambling taxes: focus on economic rent
• Meaningful reform will require federal and state
cooperation. Include revised federal-state financial
relations. Maybe promised White Papers!