The San Francisco houses that show why NSW stamp responsibility adjustments gained’t work
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To demonstrate this, a computer scientist from Dartmouth University created an interactive map. It uses California public data to show the huge differences in property taxes paid in a neighborhood.
I used this tool to search the city of San Francisco. On Scott Street I found three neighboring townhouses of the same size and year of construction. The three nearly identical terraces had annual tax bills of $ 28,500, $ 3,200, and $ 41,000, respectively. They were last sold in 2008, 1993 and 2019. They have taxable estimates of $ 2.3 million, $ 2 million and $ 3.4 million, respectively.
P13 has created a multi-level property tax system. People who bought their homes long ago pay very little tax; People who bought recently pay many times more.
There are two main perverse outcomes. First, it has undermined California’s tax base. Second, it has created massive frictional losses for people moving home. Why move if it would increase your annual tax burden?
US economists almost agree that P13 was a bad idea. However, politics is so politically charged and so popular with the beneficiaries that it is almost impossible to relax. Compare that to the policy cost of negative debt cancellation or capital gains tax breaks in Australia.
With households in NSW opting to pay the new property tax, it is likely that a similar two tier property market will emerge in NSW. Just like in California, it will become the norm in NSW for neighbors to be taxed differently in identical homes. A neighbor may have paid stamp tax in the distant past and then live tax-free in their apartment. Another neighbor can pay tens of thousands of taxes annually.
This discrepancy will reduce the likelihood of households moving when a new tax bill is linked to their new home. This is the exact opposite of what the stamp duty reform intended.
It is also possible that a property that is not subject to property tax may be passed on to the next generation through inheritance. Such real estate would become (tax-free) heirlooms that could remain in family ownership for generations, while the rest of the real estate market is burdened with property taxes. This would exacerbate wealth inequality.
One way to avoid California’s troubles is to put a lockdown (e.g. in 10 or 20 years) after which every property will pay property tax. Homeowners who lack the money to pay the new tax could be given the option to take the tax out of their home’s equity and repay it at the time of sale or transfer.
Alternatively, the NSW government could consider the ACT approach, which gradually introduces the new property tax over 20 years. This approach is less fair to home buyers who have just paid stamp duty. However, this could be mitigated by offering a tax break to the youngest buyers.
In addition, the government should consider dealing with inherited properties. If a property is transferred to a family member, the home could automatically be included in the new property tax. Exceptions are possible if the recipient lives in the property as their main residence. This is similar to a recent reform of P13 that California just passed.
Any of these approaches would be a useful addition to an otherwise laudable proposal by Perrottet. And they will avoid the pitfalls of the California experience.
Benjamin Ward is a PhD student at Harvard Kennedy School of Government and a research fellow at the Harvard Joint Center for Housing Studies. He is from Sydney but lives in California.
