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How the NSW government could reduce the stamp duty on housing and improve the funding of public transport in Sydney at one and the same time By Richard Kirwan, a Director of P/P/M Consultants Pty Ltd [This material is copyright] The Inquiry recently established by Michael Costa into Public Passenger Transport provides a real opportunity to establish the funding of public transport in Sydney on a sound and sustainable footing. In the process the Government could significantly reduce the unacceptably high current rates of stamp duty on property transfers. This could be achieved by creating a new specific source of funding for transport infrastructure and services in Sydney which would reduce the burden on general budget funds and hence allow a reduction in stamp duty. Properly structured, a public transport infrastructure charge would put existing areas, which are well provided with infrastructure, and newly-developing areas, where infrastructure needs to be installed, (such as the north-west sector and the outer south-west) on a even footing. It could generate sufficient cash flow to fund a large part of the requirement for additions and improvements to the networks without unduly penalising newly-developing areas and it could overcome some of the anomalies involved in other proposed methods of paying for new infrastructure in these areas. No-one likes a new tax. But the experience of the GST showed us that there can be significant reform of the tax ...

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How the NSW government could reduce the stamp duty on housing and improve
the funding of public transport in Sydney at one and the same time
By Richard Kirwan, a Director of P/P/M Consultants Pty Ltd
[This material is copyright]
The Inquiry recently established by Michael Costa into Public Passenger Transport
provides a real opportunity to establish the funding of public transport in Sydney on
a sound and sustainable footing. In the process the Government could significantly
reduce the unacceptably high current rates of stamp duty on property transfers.
This could be achieved by creating a new specific source of funding for transport
infrastructure and services in Sydney which would reduce the burden on general
budget funds and hence allow a reduction in stamp duty.
Properly structured, a public transport infrastructure charge would put existing
areas, which are well provided with infrastructure, and newly-developing areas,
where infrastructure needs to be installed, (such as the north-west sector and the
outer south-west) on a even footing. It could generate sufficient cash flow to fund a
large part of the requirement for additions and improvements to the networks
without unduly penalising newly-developing areas and it could overcome some of
the anomalies involved in other proposed methods of paying for new infrastructure
in these areas.
No-one likes a new tax. But the experience of the GST showed us that there can be
significant reform of the tax system if there is a tangible
quid pro quo
in the form of a
reduction in existing taxes and if there are clear advantages in the new tax
arrangements.
Stamp duty on property transactions is unpopular with households and with the
commercial property sector. The tax on housing transfers reduces the affordability of
housing and discourages households from adjusting their use of the available
housing stock to suit their current needs. Many small households, for example, are
discouraged from moving out of large dwellings by the high transaction costs.
Access Economics has branded stamp duty one of the most inefficient taxes, a barrier
to movement and to yielding up unused space. They have calculated that 80% of the
tax is a cost rather than a benefit to the economy — something that it would be good
to reduce.
At present public transport infrastructure and services are funded predominantly
from State Government general revenues: the Ministry of Transport’s submission to
the Inquiry suggests that the government will provide about $2.4 billion in this
coming year while passengers, through fares, contribute only about $850 million.
The present system has two main disadvantages: it limits the amount that can be
devoted to the operation and improvement of the system because the Treasurer has
to balance the competing calls on the buoyant but nonetheless limited pool of general
revenue; and it isolates people from any direct involvement in the allocation of funds
to public transport projects. Economists often argue against ear-marking taxes for
specific services on the grounds that the design of a good tax system is a different
matter from determining how best funds should be spent. But most people prefer
taxes that are dedicated to specific purposes. It improves accountability and allows a
much more focused debate about the need for more services or lower taxes.
1
In an ideal world, it can be argued, funding reform should cover all forms of
transport, roads as well as public transport. In practice this is unlikely to happen in
the short term. The issue of road funding is complex, not least because of the strength
of the motoring lobbies and the involvement of the Commonwealth (as recipient of
fuel excise). It would be a pity if the call for reform across the board was used as an
excuse for doing very little about public transport funding. It is a valuable objective
for the longer term but the opportunity to develop new and sustainable ways of
funding public transport in the short term should not be lost.
Passenger fares will never cover the full costs of public transport in the metropolitan
area. They are capable of covering a significant proportion of the cost of bus services
(although the government contribution through the school student subsidy is very
important to the viability of most bus operators). But fares are never going to cover
the full cost of urban commuter rail services. There is nowhere where they do; (even
in Japan the subsidy is through the tax system). Exactly how much passengers
should contribute and how quickly (or slowly) fares should rise are legitimate and
important matters of debate. The issues are political, social and economic. But in the
end there is bound to be a very large residual cost to providing rail services (and
probably some cost to providing bus services) that is not covered by the revenue
from fares. If we are to have more frequent and reliable services — which is the only
means of persuading more people to use public transport — the cost is likely to
increase (at least in the short run).
Reform needs to come in two parts: to the funding of the rail infrastructure; and to
the funding of public transport services.
The main rationale for continuing to support rail transport in Sydney is its role in
relation to travel to and from work, study and school. If no-one used the train for
work trips, it is doubtful if anyone could justify the very high cost of continuing to
maintain and run the system for the limited use that people make of it for other
purposes. Yet only a small proportion of people use the train for work and study
trips. More importantly only a proportion of people are in a position to derive any
benefit from the rail system. These are the people who live in areas where there is an
accessible rail service and where there is some probability that they might travel for
their work or study to one of the places served by rail.
If it is worth continuing to devote capital to rail infrastructure and to maintain the
system, we must be prepared to generate some return on the invested capital — to
cover its depreciation, the need for replacement and renewal and the possibility of
new and improved services. Different parts of the system have a different value, both
in terms of the potential cost of replacement and in terms of the cost of continuing
maintenance.
At the same time we need to recognize that not all parts of Sydney benefit from rail
infrastructure to the same extent. Rail users benefit directly; and through fares they
pay what is deemed to be their reasonable contribution. But areas benefit indirectly:
residential areas where the availability of rail services enhances the value of an area
by increasing the range of transport options; and commercial areas where the
availability of rail services makes it possible to attract employees more cheaply.
A sensible way to fund infrastructure in this context is through a charge on land
value because land captures the benefit of access. Some people have argued that a
more appropriate method would be to tax the increase in value due to the
2
availability of transport. But this has always proved difficult to establish. A tax that
relies on an ill-defined tax-base is a bad tax.
A tax on land value to cover the cost of public transport (or more specifically rail)
infrastructure needs to be carefully and equitably designed. The principles that
should be followed are fairly straightforward. Each part of the rail network has a
value: it can be valued at its cost of replacement less its depreciation. Each trip that
people make uses a succession of different parts of the network. From each area and
to each area there is a probability that residents and employees will use the train for
their travel to work between the two areas. (The Census provides a reasonably
accurate account of the use made of the rail system for work travel, from which the
probability of use can be derived. The figures are up-dated every five years.) From
these ingredients it is possible to attribute to each area the share of the network’s cost
that reasonably represents the benefit derived from it. (How the cost should be
shared between areas of residence and areas of work requires a political decision but
we could start by saying that the benefit is split 50:50.)
The annual cost of the infrastructure — that is the sum of a return on the capital
employed and its essential maintenance cost — could then be recouped through an
ad valorem
tax on land value in the same way as local Council rates. The rate
applicable to each area would depend on the value of the infrastructure that served
the area and the way in which it was used. The rate of tax would be lower — in terms
of cents in the dollar — in areas where property was more valuable.
This would have a number of beneficial effects. In cash flow terms it could generate
sufficient funds to cover the costs of maintenance and rehabilitation as well as the
cost of extensions and improvements. In terms of the incidence of cost, it would
mean that areas paid more that were well served by the rail system and where more
people used it; areas would pay little or nothing if they had very poor access to rail
services and the services were of little use for the trips they wanted to make.
An infrastructure charge of this type would be especially beneficial for newly-
developing areas. A continuing charge, paid monthly or quarterly, is much more
appropriate than a single upfront payment at the time of development. Developer
contributions, it is true, can provide a significant injection of funds towards the initial
provision of infrastructure (although there are political limits on the amount that can
be raised in this way due to the fear of increasing house prices). But they are scarcely
equitable because housing in newly-developing areas faces an impost that was not
imposed on most of the areas currently served by transport infrastructure. In the new
areas households gain a benefit but also pay a cost; in existing areas households
simply obtain the benefit of infrastructure. A continuing contribution charged to all
areas that are served by, and benefit from, infrastructure is much more equitable and
more efficient. Households and businesses in “old” and “new” areas are treated
equivalently, with contributions based on the replacement cost of the relevant
infrastructure (which in the case of new areas is the same as its new investment cost).
Moreover a charge of this type has the incidental merit of
reducing
the price of
housing (although this does not of course mean that the cost of living in an area is
reduced).
The positive cash flow required to assist with the initial investment costs in areas
where new infrastructure is needed arises not from upfront capital contributions but
from the total income raised from new and existing areas combined.
3
4
A second tier could be added to this public transport “availability” tax to pay for the
level of services that was not covered by passengers’ fares. In this case the allocation
of cost would be offset by the revenue generated: a well-served area would not
contribute more if the services were well patronised. Local communities could decide
the appropriate balance between service frequency and cost.
New taxes are never popular. But the opportunity to place the funding of public
transport infrastructure on a sustainable and equitable footing could be made more
palatable by a consequent reduction in stamp duty. A reduction in the stamp duty on
property would have a significant benefit in freeing up the housing market and
encouraging mobility; and it would be welcomed by commercial property
developers and owners.
© Richard Kirwan, Sydney 2003.