Victoria is in a precarious financial position. Labelled the “nation’s debt dunce”, the state’s gross debt reached a staggering $213 billion as of July this year. This figure represents nearly a third of the total debt owed by all Australian states and territories combined. While new, unpopular taxes on property and payrolls have managed to stabilise the fiscal position for now, the underlying issue remains: our state tax system is inefficient and is holding us back.
For too long, Australian states, and Victoria in particular, have relied on stamp duty—a burdensome, inefficient, and inequitable tax. The time for piecemeal adjustments is over. A bold, overdue reform is needed: the abolition of state-based stamp duties and the introduction of a broad, federally administered land tax.
The Heavy Burden of Stamp Duty
Stamp duty, or land transfer duty, is a significant upfront cost imposed on property buyers. This tax is a major barrier to homeownership, a drag on the economy, and an unreliable source of revenue for the state government.
Economically, stamp duty is one of the most inefficient taxes in our federation. It discourages people from moving to homes that better suit their needs, whether that’s downsizing for retirement, upsizing for a growing family, or relocating for a better job. This creates a misallocation of housing stock, with many people living in properties that are no longer suitable for them simply to avoid the hefty tax slug. Studies have shown this can stifle labour mobility and productivity, costing the economy billions.
Furthermore, stamp duty is an unpredictable revenue source. It is intrinsically linked to the ebbs and flows of the property market. When the market is hot, revenue flows in. But when the market cools, the state budget takes a significant hit. This volatility makes long-term financial planning for essential services like health and education incredibly difficult. With a funding gap of $1.6 billion in a $22 billion health budget this year alone, Victoria cannot afford such an unreliable income stream.
The Sensible Alternative: A Broad-Based Land Tax
The solution is to phase out stamp duty and replace it with a broad-based annual land tax. A land tax is levied on the unimproved value of land and is paid by the owner, not the purchaser. This is not a new or radical idea; it has been championed by economists and tax experts for decades as a more efficient and equitable alternative.
The benefits of a switch are numerous:
- Improved Housing Affordability: Removing the large upfront cost of stamp duty would make it easier for first-home buyers to enter the market and for existing homeowners to move.
- A More Stable Revenue Stream: A land tax would provide a predictable and stable source of revenue for the state, delinked from volatile property sales volumes. This would allow for better long-term budgeting for essential services.
- Increased Economic Efficiency: By removing the disincentive to move, a land tax would encourage a more efficient use of housing stock and improve labour mobility, boosting economic productivity.
- Fairness and Equity: A land tax is paid by all landowners, not just those who happen to be transacting property. This spreads the tax base more broadly and equitably. Exemptions for a principal place of residence could be maintained to protect vulnerable homeowners.
The Victorian government has already taken a step in this direction by abolishing stamp duty for commercial and industrial properties, replacing it with an annual property tax. This is a welcome, if modest, reform that signals an understanding of the benefits of this model. It’s time to apply this logic to the entire property market.
Making it a Federal Issue
While states currently levy land taxes, a nationally consistent, federally administered land tax would have the greatest positive impact. The current system of competing state economies, each with its own complex web of taxes, is a relic of the past. As Victorian Premier Jacinta Allan has noted, states without access to lucrative resource royalties need a broader tax base.
A federal land tax, with the revenue distributed to the states, would create a level playing field across the country. It would address the “vertical fiscal imbalance” that sees the Commonwealth collect the lion’s share of revenue while the states are left with responsibility for expensive services like healthcare. This would provide financial stability not just for Victoria, but for states like Tasmania and Queensland which are also accumulating debt at a rapid pace.
The combined gross debt of Australian states and territories is forecast to hit $900 billion by the end of the decade. When federal debt is included, Australia’s debt mountain will be over $2.1 trillion by 2029. This is not a uniquely Victorian problem, but a national one that requires a national solution.
The Path Forward
Transitioning from stamp duty to a land tax would need to be managed carefully to ensure fairness for all. Those who have recently paid stamp duty could be offered credits towards their future land tax obligations. A gradual phase-in period would also allow households and the market to adjust.
The political will to enact such a significant reform has been lacking. However, with state budgets under increasing pressure and the dream of homeownership slipping away for many, the case for real and overdue tax reform has never been stronger. For Victoria, a state grappling with immense debt and an urgent need for savings, leading the charge on replacing stamp duty with a broad-based land tax is not just an option—it’s a necessity for a more prosperous and equitable future.