It is the right time in the economic cycle to abolish stamp duties what with house prices falling, auction clearance rates plunging and state government stamp duty revenue forecast to be $12 billion lower than previously estimated over the next four years, now is the time to abolish this insidious tax and replace it with a broad-based annual tax on the unimproved value of land for the principal place of residence.

Under a new option for any reformist federal and state treasurers, state governments could allow future purchasers of property to choose between paying the existing costly one-off conveyance duty or opt in to paying a lower land tax annually.

Currently, for a $1m property purchased in NSW, home buyers must write a cheque to the government for $40,990. For a $2m purchase, the tax slug is $95,490. In effect the tax hit is funded by home buyers taking out a larger mortgage, meaning the real cost is higher after allowing for interest expenses. Surely if given the option, a large share of buyers  would prefer to pay an annual land tax of, say about $3000 to $8000 for the aforementioned property values, based on their unimproved land value excluding the physical home on the property. But under the existing perverse GST system, states would be penalized by lower GST payments from the Commonwealth if they pursued an ambitious reform. The new council of state treasurers could help grease the wheels for reform.

Stamp duties are universally recognized as evil by economists because they significantly increase the financial cost of moving, the transaction tax locks potential downsizer Baby Boomers, the elderly and other owners into homes that are too big or the wrong fit, instead of selling their homes to younger growing families who need more space.

The catch is federal government would need to top up state revenues in the interim, due to tax revenue lag from people opting out of stamp duty and into periodic land tax payments.

Courtesy: John Kehoe - AFR