A day late, and $20 million short

I wrote a piece for the Guardian, urging the Queensland government to hold the line on its plan to close a tax loophole for wealthy investors, in the face of a ferocious Murdoch media campaign, and sabotage from the Perrottet government in NSW. Sadly, just as I submitted it, the government caved in. But the critique of the Courier-Mail might get a run on Media Watch. Anyway, here it is

The Queensland government’s announcement that it is closing a loophole in the land tax system, benefiting interstate investors has produced a furious reaction from the Murdoch-owned Brisbane paper Courier-Mail. More than a dozen editorials and articles have quoted ‘experts’ who warn that the proposal will be unworkable, unconstitutional and will raise rents. These articles have been backed up by editorials and by a parallel campaign in the Courier-Mail’s Sydney counterpart, the Daily Telegraph.

Oddly enough, hardly of these “experts” is a tax economist or, indeed, any kind of economist. The Courier-Mail has managed to locate one economist willing to support its claims: Shane Oliver of AMP. But the vast majority of its sources are representatives of the property lobby.

Economists are famous for disagreeing among themselves, so it might seem surprising that hardly any have come forward to criticise the Queensland government. In reality, however, one of the few propositions on which nearly all economists, of all persuasions, agree, is that governments should raise more revenue from taxing land.

The economic reasoning is simple. Taxes change incentives. In particular, taxes on capital, while desirable as far as equity is concerned, tend to reduce investment in new capital goods. But as a saying variously attributed to Will Rogers and Mark Twain puts the case for buying land “they aren’t making any more of it”. Whether land is taxed heavily, lightly or not at all, the amount of it won’t change. And changes in the value of land aren’t driven by investment, but by the general development of a given area.

The standard analysis of land tax is based on the assumption that all privately owned land is taxed at a common rate. In fact, there are a range of exemptions, reflecting the political difficulty of taxing land. Owner-occupiers are exempt from land tax. Landowners in general are taxed on a sliding scale, with the first $600 000 of land exempt.

This is where the loophole comes in. Each state levies its own land tax independently, with its own threshold and sliding scale. So, large landowners with holdings in more than one state can gain the benefit of the threshold separately in each state. It is rather as if people who derived income in more than one state could split their income and take advantage of the tax-free threshold several times over. The effect of closing this loophole will be to reduce the incentive for interstate investors to buy land, thereby making it a little cheaper for local buyers, both owner-occupiers and investors.

Apart from interstate investors, the big losers from closing this loophole will be real estate agents who rely on their business and benefit from inflated land prices. But neither of these groups is likely to attract much political sympathy. So, to oppose the tax, it’s necessary to claim that it will lead to an increase in rents.

The simplest, not to say most simplistic version of the claim is that land tax is a cost that will be ‘passed on’ to tenants. As any competent economist will tell you, rents, like other prices, are determined by supply and demand. A land tax changes the ownership of land and houses, but has no effect on supply. So, there’s no reason for changes in land tax to affect market rents.

A more elaborate version of the claim is that closing the tax loophole will lead interstate investors to sell, and that the buyers will be owner-occupiers. The Property Investors Professional Association claims that, as a result, Queensland 162, 239 fewer rental properties – or a reduction in supply of nearly 30 per cent. https://www.realestate.com.au/news/interstate-investors-snub-qld-market-set-for-major-sell-off/?rsf=syn:news:nca:cm:spa

There is just one problem with this claim – where did the owner-occupiers come from? If they sold an existing home, there is no change in the net supply. If they were previously renters then the reduction in rental supply is matched by a reduction in demand. And if they moved from interstate or overseas, they made the same addition to demand whether they bought or rented.

The ferocity of the Courier-Mail campaign against the closure of a relatively small loophole also yields some interesting insights into the operations of the media. Most of the time, the Courier-Mail presents itself as a fiercely parochial local paper. But in this case, it is acting to defend the interests of interstate investors, at the expense of Queenslanders (at least those who don’t own land interstate).

The Palaszczuk government has shown unusual courage recently, defying the mining lobby by raising royalty rates, and announcing a radical expansion of renewable energy. Closing the land tax loophole isn’t on this scale, but it’s an important and progressive reform. Let’s hope that it succeeds.


2 thoughts on “A day late, and $20 million short

  1. Well, I don’t know that I agree that real estate econ is as simple as presented here – but otoh, I’m not that great at econ.

    Where I live, economists don’t seem to disagree nearly enough. They allll try to say that deregulating zoning is going to usher in a magical time of affordability in densely crowded coastal regions. (No one seems to ever mention when this has ever happened before, though. I think because it hasn’t.)

    Or at least, the ones who know better very rarely say anything at all. Or, even, maybe it is that all of our major press (and it really is all of them!) assiduously ignores any disagreement, to the extent it exists. (One can find a tiny bit, here and there – but nothing on the scale of what it should be.)

    I think that Yimbyism is a scam, and a fad – rather like charter schools were. 10 or 15 years later, no one talks about charters here now. Those people did a lot of damage to the teaching profession, they did help a few kids who are actually *in* a well-run charter, and some of them made some bank. The big picture? Exactly the effing same. And, no one ever talks about it. I think yimbyism will be the same story.

    Also – and, sorry, I guess all this isn’t exactly on point, but, you did say that economists disagree! well, if yourrrrs do, lucky you!! – here, this tax problem might be “solved” by just making a bunch of LLCs. Here, it’s hard to know who owns anything anyway. Good for you-all if you have avoided that somehow.

  2. JQ, your post is an interesting example of the importance of reading the fine print of legislation. Even though one tax loophole, viewed in isolation, isn’t a big hole, many do make a big hole in taxation revenue in the first instance and, secondly, many little loopholes contribute to the wealth concentration when used by skilled operators and their accounting and legal advisers. Moreover, using only the ‘small’ tax loophole in the post as an example, it is sufficient to illustrate how wealth concentration can be expected to lead to further wealth concentration. Those who can buy land in 5 states gain more than those who can buy only in 4 states, …. 3 states, … 2 states …. only in 1 state.

    Indeed, the property, developer and real estate agency lobbyists and their selected media outlets provide a never ending stream of obfuscating arguments.

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