Insights

Fear mongering over property taxes helps nobody: developers and the community can both win when we share the windfalls

Posted July 13, 2021

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Article by Gerard Lind, Senior Associate, SGS Economics and Planning and Emily Sims, Research & Policy Manager, Prosper Australia first published in The Fifth Estate.

In the recent State Budget, the Victorian Treasurer announced a raft of new tax measures designed to protect the revenue base and invest in the post-covid economic recovery. Among the big-ticket items is an additional land tax on holdings over $1.8 million, a premium stamp duty rate on property sales over $2 million, and a windfall gains tax of 50 per cent on rezonings.

Despite its relatively modest price tag of around $40 million per annum, the windfall gains tax has attracted special ire from the property lobby. The fear mongering has commenced, with claims of unfairly targeting the development sector, rising home prices, reducing supply and dashed hopes for infill development. These claims are unhelpful and plain wrong.

The first claim is that the tax is an unfair grab from an industry that already pays more than its fair share to state coffers. However, a windfall gains tax is simply taxing the unearned land value generated by a rezoning. As far as taxes go, this is about as fair as they come.

Zoning laws give property rights to develop land and they directly dictate the value of development sites. Land holders can make millions on the stroke of a planner’s pen when places are rezoned from low value uses to dense residential uses.

These property rights for land development are not earned, they are given. It is fair and economically efficient to charge for them, just like for mining rights, access to telecommunications bandwidth, or quotas in commercial fisheries.

Giving property rights away for free when it’s time to rezone, as was the case in Fishermans Bend nearly a decade ago, is akin to letting mining companies dig up minerals without paying any royalties. From this perspective, making landowners pay for only half of the property rights is a bargain.

It’s true that not all rezonings come from planning departments, and developers do put time and money into some ‘proponent-led’ rezonings for planning, engineering and design work. Fair enough, the tax leaves 50 per cent on the table specifically for that purpose.

The second big claim of the property lobby is that home prices will get pushed up. This is a well worn myth. Developers operate in a competitive market, they are already charging the highest prices they can get. This means they start with what they can charge for housing and work backwards. They must build all their project costs into the price they are willing to pay for land. The ‘economic incidence’ of expected taxes and charges falls on landholders in the form of lower bids for development sites, not on home buyers.

The final claim is that development will grind to a halt. You just need to look at the booming ACT to see this is unfounded – they have had a windfall gains tax of 75 per cent in place for 40 years. Meanwhile, the Growth Area Infrastructure Contribution, a form of rezoning windfalls tax, hasn’t slowed development in Wyndham or Casey.

As it stands, Victoria has over 15 years of land already zoned for development in both metropolitan and regional areas. If zoned supply does not hit the market as retail lots, the problem resides with private land bankers. A rezoning windfall gains tax can actually reduce the incentive for leapfrog development.

Planners have raised concerns that urban renewal will suffer. Infill development is highly desirable, but is riskier and appropriate sites less abundant. Projects could fall over because developers have already paid high prices where rezonings are expected. Developers may respond by banking sites until apartment prices rise, retaining them in their current use. Government has a role in minimising those risks and the Treasurer has flagged transitional arrangements that should avoid major pain in the short term.

In the longer term, the tax will hopefully encourage communities to welcome infill development, which faces frequent local opposition. It puts benefits back into the community and reduces incentives for corruption, like last year’s scandal at the City of Casey, which casts a devastating public image for rezoning. Planners, developers and the community will be able to find more common ground when the windfall gains also go towards infrastructure and services for a growing population.

While the facts about the windfall gains tax are clear, the property lobby rolls out the same myths time and time again. It’s easy to see why. Land owners stand to lose a state-funded property rights hand out they’ve been quietly accepting from time immemorial.

But this fear mongering is a short-sighted tactic that will only serve to get in the way of big opportunities to develop our cities. Developers and the community can both win when they share the windfalls. Developers can build more and earn more. The community can get denser, more affordable housing, close to jobs and transport – along with the tax base to fund much needed infrastructure and services.

Just like the minerals within the earth, the property rights in our most productive cities are a precious commodity. We should properly value this scarce resource and share the spoils when we make it more valuable as we rezone, densify and grow our cities.

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