Replacing stamp duty with a land tax could save home buyers big money. Here’s how

Infrastructure Victoria has released a draft 30-year plan outlining how the state can grow sustainably.

It focuses on key areas like transport, housing, energy, and public services to support a growing population and improve liveability. The plan also suggests ways to make the state’s infrastructure and tax system fairer, more efficient and more sustainable.

The plan’s recommendations are expected to cost between A$60 billion and $75 billion, mostly spent before 2035. This is around 10% of Victoria’s yearly economic output in 2023-24, spread over the next decade.

With Victoria already spending record amounts on infrastructure, and budget deficits forecast until 2025-26, finding the money to fund social housing, transport and other projects is a key challenge. We estimate the Infrastructure Victoria proposals would add between $4 billion and $5 billion to Victorian government expenditure each year.

Yet one of its proposals — replacing stamp duty with an annual land tax — would only cost between $1 million and $5 million to implement, but generate substantial gains for Victorian households.

Why replace stamp duty with land tax?

Stamp duty is one of the biggest barriers to moving house in Victoria and other Australian states. This tax, which people pay when they buy property, adds thousands of dollars to the cost of moving.

In 2022-23, Victorians paid about $12 billion to move house. Of this, $3 billion went to actual moving costs (like real estate services, and removalists) and $9 billion was stamp duty.

That’s an effective tax rate of 300% on the true cost of moving, and in 2023 added about $40,000, or 5.3%, to the cost of purchasing the average Victorian home.

High stamp duty discourages people from relocating, even when their needs change — whether that’s moving for a new job, finding a bigger home for a growing family or downsizing after retirement. This leads to longer commutes, traffic congestion and a less efficient housing market.

Switching from stamp duty to an annual land tax would make moving easier and spread the tax burden more fairly.

Instead of a large, one-time tax when buying a home, all landowners would pay a smaller tax each year. This would help fund schools, hospitals, and other infrastructure more sustainably.

What can we learn from Canberra?

Victoria University’s Centre of Policy Studies studied a similar reform in the Australian Capital Territory, where stamp duty has been gradually phased out since 2012 and replaced with higher general rates (a type of land tax).

Each year, the ACT government sets a target for how much money it needs to raise. Landowners then pay a share of that total, based on the value of their land.

One of the biggest benefits of this approach is that it raises money more efficiently. Unlike other taxes, land taxes don’t discourage investment or economic activity.

The study found removing stamp duty had a big positive impact on the ACT’s economy. Around 80% of the economic boost came from removing stamp duty, while introducing land tax also had benefits. By studying transaction data from the ACT, we showed each 10% reduction stamp duty rates drove a 6% rise in property transactions.

Would it help housing affordability?

One of the main arguments for replacing stamp duty with land tax is its effect on housing prices. Economists widely agree land taxes reduce land values, which makes housing more affordable.

However, the impact of removing stamp duty is less predictable. Our previous research found the effect on house prices depends on how often properties are bought and sold. Apartments, for example, tend to change hands more frequently than houses. Because of this, removing stamp duty tends to push up apartment prices more than house prices.

Even so, the overall effect of the reform is a drop in property prices. The challenge is ensuring this price reduction is evenly spread across different types of housing.

A fairer tax system

To make the system fairer, policymakers could adjust how land tax is applied. One option is to introduce a fixed-rate component, as proposed in New South Wales. Another idea, suggested 15 years ago in the Henry Tax Review, is to base the tax on the per-square-metre value of land.

Another key factor is housing supply. If planning laws allow more high-density housing in inner suburbs, price changes could be better managed.

We also need short-term solutions

Replacing stamp duty with land tax is a long-term reform that would take years to fully implement. The ACT, for example, planned a 20-year transition.

If all state governments implemented this reform, we estimate Australian households would ultimately be better off by about $,1600 per household per year.

In the short term, other policies could help improve housing affordability. These include increasing Commonwealth Rent Assistance and rethinking first-home buyer support. These steps could complement broader tax, infrastructure and housing supply reforms.

The Victorian government is seeking feedback on the draft plan before releasing the final version later this year. This is an opportunity for Victorians to contribute ideas on how to shape the state’s future and ensure its infrastructure and tax system work for everyone.