Property related taxes are, by far, the largest source of tax revenue for the state and local governments. With buoyant housing market conditions over the 2009/10 financial year, property related tax income for the state and local government sector rose to new highs, however Governments should be budgeting from much lower property related taxes over the current financial year.

During the 2009-10 financial year, state and local governments raked in almost $32 billion in taxes from property – the highest amount on record. Over the financial year, total property related tax revenue increased by 14.3% following a -10.5% fall in property tax revenue during the softer housing market conditions of 2008-09. Last year’s increase was the largest of any financial year since 2000-01.

Total property related tax revenue

The total value of residential property transactions during 2009-10 was more than $247 billion. Of course a portion of the property related taxes come from non residential properties however, the total value increased by 20.3% during the year compared to a fall of -14.1% during the previous year. The growth in taxation revenue from property during the most recent financial year (14.3%) was lower than growth in the total value of transactions however; it was greater than both the growth in dwelling values (11.6%) and the growth in dwelling sales transactions (3.9%).

Property related taxes are the biggest cash cow for state and local governments, accounting for more than 48% of total tax revenue during 2009-10. The second largest contributor to the tax based coffers of state and local governments is tax on employer’s payroll and labour force which accounted for slightly more than 25% of taxation revenue. This result highlights just how important property taxes are to state and local governments and why they are so reluctant to remove taxes such as stamp duty.

Total property related tax revenue by category
The data broadly breaks property taxes into two types: taxes on immovable property which includes rates and land tax and taxes on financial and capital transactions which include stamp duties. Taxes on immovable property accounted for 58.5% of property tax revenue and taxes on financial and capital transactions accounted for the remaining 41.5%. Stamp duties on conveyances were the largest single contributor to revenue ($12.294b) followed by municipal rates ($11.645b).

During the financial year, the total tax revenue on stamp duties on conveyances increased by 29.1% and municipal rates increased by 6.5%. Interestingly, this growth in stamp duty was greater than the 20.3% increase in the total value of residential property transactions. Given that stamp duty is applicable on most transactions the result may actually be reflective of a recovery within the more expensive capital city housing markets during the financial year (higher rates of stamp duty are typically applied for more expensive properties). Other taxes such as land taxes and rates typically also increase as a property’s value increases (even though they are usually assessed based on the unimproved capital value (UCV) of the land).

Growth in tax revenue and selected other property statistics
The improvement in taxation revenue from property transactions is reflective of the improved market conditions during last financial year where we saw improvements in dwelling values and an increase in sales volumes. When the residential property market is performing well with values growing and a large volume of transactions it is certainly also beneficial for state and local governments as the amount of tax revenue grows in periods of a strong market.

In what is sure to be unwelcome news for state and local governments, the 2010-11 financial year looks set to see a drop in property related taxation revenues. Between May 2010 and February 2011 capital city dwelling values have fallen by -1.6% and sales volumes during 2010 were their lowest on an annual basis since 1996. For the remainder of the financial year sales volumes are unlikely to record a significant rebound and value growth looks unlikely to return.

As a result of these current soft conditions we expect that state and local governments will experience a budgetary hole at the end of this financial year due to fewer transactions within the sector which accounts for their greatest source of taxation revenue.