Reforming Tasmania’s state tax system - Some options
There hasn’t been any wide-ranging public discussion concerning the need for reform of the Tasmanian state taxation system, or what such reform might look like, since the State Tax Review Panel process initiated by then-Treasurer Michael Aird in 2010, and which was abruptly terminated in November 2011.
Tasmania’s state tax system contributes a smaller proportion of the revenue required to fund the public goods and services provided by the state government than that of any other state or territory except the Northern Territory – as a result of which, Tasmania’s public finances are more exposed to factors beyond the control of the Tasmanian Government (in particular, changes in the total amount of revenue from the GST and the way it is distributed among the states and territories, and in the conditions attaching to other grants from the Commonwealth) than any other jurisdiction (except the NT).
While all state and territory governments are circumscribed in the ways in which they can raise revenue by the words of the Australian Constitution (and the interpretation of them by the High Court), and by the conditions attaching to Commonwealth grants, successive previous Tasmanian governments have made that problem worse by their own decisions with regard to the taxes which they are allowed to impose.
As a result, Tasmania derives a higher proportion of the revenues it is able to collect in state taxes from what have long been recognized in both official enquiries and academic studies as ‘bad taxes’ (stamp duties on property transfers, also known as conveyance duties, and taxes on insurance) than any other state or territory except Victoria.
Conversely, Tasmania derives a lower proportion of the revenues it is able to collect in state taxes from what have long been recognized in both official enquiries and academic studies as ‘good taxes’ (payroll tax and land tax) than any other state or territory except Queensland.
This Report proposes three options for wide-ranging reform of Tasmania’s state taxation system:
- the abolition of conveyance duty, and its replacement with a broadly-based land tax, which would (in particular) include owner-occupied homes and shacks which are currently zero-rated or exempt from land tax – with transition provisions to prevent ‘double taxation’ of recent property purchasers, and deferral provisions for ‘asset rich but income poor’ households (such as pensioners and retirees);
- a reduction in the tax-free threshold for payroll tax to an amount equivalent to the average annual earnings of five employees in Tasmania, with the resulting revenue used to lower the rate of payroll tax to what would likely be the lowest or second-lowest of any state or territory, and the provision of an exemption for new businesses (either new businesses started in Tasmania, or established businesses from other states or territories which transfer some or all of their operations to Tasmania) for a prescribed period; and
- the re-introduction of estate duties (which Tasmania abolished in the late 1970s), to apply only to the 9% of estates with a gross value exceeding $1 million, but with a provision to allow people whose estates would be liable to estate duties to offset their prospective liability, on a dollar-for-dollar basis, by making gifts or bequests to Tasmanian-based Deductible Gift Recipients – up to the point of extinguishing their liability altogether, if they so wished.
Reforms such as this would make Tasmania’s state tax system fairer – by ensuring that those who currently do not make much contribution to the cost of providing public goods and services (people such as those who haven’t moved house for decades) do make a contribution.
And they would make Tasmania’s state tax system more efficient – in the economic sense – by removing or reducing taxes which distort the decisions which people and businesses make with regard to how they invest their savings or their capital, whether they buy a home and how much they pay for it, the uses to which they put the land which they own, how many people they employ, and what they do with the assets they have accumulated over the course of their lifetimes.
This report challenges the widely-accepted propositions that payroll tax and estate duties are ‘bad taxes’, drawing on a wide range of official enquires, academic studies and statistical evidence. It challenges the almost universally-accepted notion that preferential tax treatment for ‘small businesses’ has done anything to create employment, or to encourage innovation and entrepreneurship.
This report does not advocate that the overall level of state taxation should be either raised or lowered. Either of those options would be open to a government which, alternatively, wished to fund the provision of more public goods and services, or to lower the burden of taxation on households or businesses – either of which are inherently political choices. It would also be open to a government to raise more revenue from any of the options advocated here in order to pursue other taxation reforms which this report hasn’t contemplated – such as the abolition of taxes on insurance policies.
Finally, it is not the intention of this report to advocate that reform of Tasmania’s state taxation system should be undertaken now.
Apart from the obvious difficulties of doing so during a pandemic and a recession, this report argues that wide-ranging taxation reform shouldn’t be undertaken without a mandate from the Tasmanian people at an election – a mandate by which those who do form the government after an election should feel emboldened; and a mandate which those who do not form the government should feel under an obligation to respect.
On the contrary, the purpose of this report is to encourage and assist Tasmanians, and their political, business and community leaders, to participate in a wide-ranging discussion about our state tax system of the sort that we haven’t had for almost a decade – so that a mandate for reform can be an outcome of the next state election due in March 2022.