Tax reform doubts: Rates rises not enough to cover stamp duty losses, says Budget review

A review of the 2024-25 ACT Budget has questioned whether the ACT Government is backing away from its tax reform program, saying the increase in rates will not be enough to cover the loss in revenue.

The Pegasus Economics review for the ACT Legislative Assembly’s Select Committee on Estimates 2024-2025 suggests the government is using increases in payroll tax to make up for the shortfall.

The review also says the Budget is becoming increasingly vulnerable, with net debt expected to increase by 70 per cent over the forward years to $12 billion in 2027-28, and interest payments forecast to reach $514 million in 2024-25 and $832 million in 2027-28.

This is $127.2 million higher than the estimated 2023-24 outcome and is forecast to increase by a further $318.3 million over the Budget and forward years.

The 20-year tax reform project aims to rebalance the ACT’s tax base through incremental general rates rises in four stages and a gradual elimination of inefficient charges such as stamp duty on the sale of property.

The goal is to provide a more reliable revenue stream and put the Territory’s finances on a more solid footing. Economists have generally praised the approach.

Rates will rise 3.75 per cent this year and the next to complete Stage 3. It is not known how much rates will rise in Stage 4, which kicks in in 2026-27.

However, the review says general rates are not rising quickly enough to replace the amount of revenue lost from changes in commercial and residential conveyance thresholds and rates.

It argues that in nominal dollars, the increase in rates does exceed the decline in stamp duties, but this ignores the growth that could have been expected in both revenue sources over the period without the change in policy.

“As a result, when expressed as a percentage of total own-source revenue, the increase in rates is less than the decline in stamp duties,” the review says.

“The level of rates as an overall percentage of total own-source revenue remains largely flat at just over 29 per cent in 2024-25 and through into the out-years.”

This is despite the forward estimates including two years of Stage 4 of tax reform.

“If the ACT Government were intending to replace the amount of revenue lost from changes in commercial and residential conveyance thresholds and rates with increases in general rates, you would probably expect the overall amount of revenue collected from both sources would remain about the same in terms of an overall percentage of ACT Government own-source taxation revenue.” the review says.

“However, this is not the case as the percentage of ACT Government own-source revenue from the combined commercial and residential conveyance thresholds and general rates actually falls across the years from an estimated 41.9 per cent in 2023-24 to 39.0 per cent in 2027-28.

The review says either the Government is backpedalling on its tax reform program by not increasing rates sufficiently to make up for the reduction in stamp duty or it is not being transparent about its plans for Stage 4.

It says the shortfall appears to be made up through an increasing reliance on payroll tax, which is now forecast to increase from 29.0 per cent of own-source taxation revenue in 2023-24 to 33.4 per cent by 2027-28.

The government also brought forward in the Budget the introduction of a payroll tax surcharge for very large businesses from 1 July, ostensibly to make up for the loss from fewer people employed in the consultancy sector due to Commonwealth in-sourcing.

The review also highlights a more than doubling of revenue from fines (from an estimated $52 million in 2023-24 to an estimated $108 million by 2027-28). This includes fines from traffic offences and mobile speed cameras.

Overall, the review says that while the ACT has a strong balance sheet, that position is deteriorating over time, with growing debt and falling net worth.

“The ACT has moved from the position of being a net creditor at the beginning of the last decade to having a substantial and increasing debt and interest burden in the Budget and forward years,” it says.

“The recent downgrade of the ACT credit rating is an indication of its weakened position.”

The review casts doubt on the Budget returning to surplus in 2026-27 as forecast due to its dependence on Commonwealth funding and population growth.

“Past trends suggest that a return to surplus would require a shift in policy settings and a continuation of favourable economic circumstances,” it says.

“A return to surplus in the medium term cannot be assumed.”

The review also says that while the ACT’s fiscal position has deteriorated, the Territory still sits within the range reported by other states and territories.