“Based on the estimated average increase in value of the relevant blocks, the ACT government has increased the tax (general rates) base, with a single stroke of the pen, by $8.050 billion,” write JON STANHOPE & KHALID AHMED.

In a recent article on land supply performance, we noted that the ACT government policy allowing a secondary dwelling on blocks larger than 800sqm in RZ1 zones, while creating wealth for existing homeowners, is unlikely to be effective in increasing supply. 

Among the comments we received was the observation, with which we agree, that in effect (our emphasis) there are no windfall gains. 

According to information gleaned from FOI requests, the ACT government has estimated that the Unimproved Value (UV) of the relevant 800-900sqm blocks will increase from an average of $829,000 per block to $1.008 million, an increase of $178,889 per block on average. 

Inner-city suburbs will obviously see much larger increases. For example, the UV of eligible blocks in Deakin will increase by $340,000. The change in UV will purportedly affect 45,000 dwellings across Canberra.

The dwellings captured by this change will, of course, be liable for increased rates, and on top of that, if they are rented, they will be liable for an increase in land tax. 

Based on the estimated average increase in value of the relevant blocks, the ACT government has, through this policy increased the ACT tax (general rates) base, with a single stroke of the pen, by $8.050 billion. 

The average value of the subdivided blocks is estimated at $403,156. If all the eligible blocks are subdivided, the increase in the ACT tax base is estimated to be $18.142 billion. 

Homeowners who decide to subdivide will also be required to pay a fixed $40,000 Lease Variation Charge (LVC) or they can, alternatively, seek a professional valuation (at their own cost) and subject to its acceptance, pay a 75 per cent LVC. The sum of the LVC on all the relevant subdivided blocks is estimated at $1.8 billion. 

The construction cost of the secondary dwelling is estimated to be, on average, between $456,000 and $681,000, which will need to be financed by the homeowners who decide to subdivide. 

The secondary dwellings will be exempt from stamp duty (the tax that Treasurer Barr committed over a decade ago to abolish) for a period of two years. No such relief will be available if the homeowners decide to sell. These fundamentals of the policy were, regrettably, missing from the Chief Minister’s media release.

While noting that it is almost certain that not all the relevant blocks will be subdivided, it is nevertheless clear that the territory’s tax base has been increased by between $8 billion and $20 billion.

What does all this mean? 

Firstly, it guarantees the ACT government a major increase in tax returns. 

For existing homeowners, however, the benefit is highly qualified. They have a choice to act as a developer, at considerable effort and incurring considerable costs, or they can remain and simply pay much higher rates. 

How, then, do the selected 45,000 homeowners realise the “increased wealth” which the ACT government has endowed them? 

They can, of course, simply sell and move, but the family that buys the home will be paying much more than they otherwise would have but for the new policy. 

In a similar vein, the homeowner moving out, if they remain in Canberra, will be buying a new home in a dramatically inflated market. Too bad if they don’t want to move. The wealth is there but not available. The government, however, wins whichever way the cookie crumbles. Heads I win, tails you lose.

Any economist worth two bob would readily admit that the secondary dwelling policy is not only extractive but places an overall burden on the economy, without delivering affordability outcomes. 

Worryingly, that burden is created through interference with existing property rights, which may in many cases have been granted decades earlier.

The government has once again avoided dealing with the real problems, which includes inadequate land supply, the massive sell-off of public housing, and a scandalous shortage of community and affordable housing. 

The zoning policy is little more than a distraction, albeit, a costly one. We will discuss the cost of the real problem, chronic undersupply, and the damage it has caused the ACT economy in a subsequent article.

The fallacy of heads I win, tails you lose

In the 15th century, John Morton, Lord Chancellor to King Henry VII, argued that those who lived lavishly were obviously rich and therefore could pay more tax and that those who lived frugally will, consequently, have accumulated savings and therefore could pay more tax. 

That argument remains familiar, even today.

Morton’s Fork, now commonly known as heads I win, tails you lose is a logical fallacy whereby contradictory propositions, one or both of which are wrong, lead to the same conclusion. It may also be presented as two equally unpalatable choices.

Whether intentional or not, Morton’s Fork is a common feature of public administration. Bureaucracies are particularly prone to it due to their technocratic, value free nature, and narrow focus on singular objectives. Inattentive or incapable ministers are, obviously, particularly prone to miss the fallacy when presented with new policy. Some may even be enthusiastic participants. 

In everyday life, such fallacies are readily identified as a matter of common sense. However, when they underpin government policies, unpicking the fallacy can be difficult, due to an information imbalance and/or the primacy of vested interests. Consequently, Morton’s Fork is typically accompanied by “red herrings” or “exclusion fallacies” as distractions and diversions from actual problems and their solution.

Over the past several years, such thinking has been pervasive within the ACT government. Consider, for example, the Mr Fluffy remediation program, where contaminated houses were compulsorily acquired from their owners – retaining the house was not really an option – demolished, and the land decontaminated. The owners were then given the option of purchasing the land. The “market value” paid to owners for their (contaminated) house and land was much lower than the price at which the decontaminated blocks were offered back to owners, thereby reflecting the speculative potential of the blocks at a time when the government was also reducing land supply. 

The owners were presented with two options, ie they could re-buy the land and incur significant additional costs, or they could buy elsewhere and incur significant additional costs – heads I win, tails you lose.

As for the distractions, the fact that the Commonwealth Government did not accept responsibility for remediation of the properties dominated public discussion but was irrelevant to affected households. Also irrelevant was the fact that the ACT government borrowed $1 billion from the Commonwealth Government to manage the cashflows of the program – ultimately and inevitably, households paid for the remediation. While the program may have been a bureaucratic success it was manifestly unfair to the affected homeowners, many of whom, unable to afford the costs and higher mortgage, were forced to relocate interstate.

Amidst reports that the ACT currently has the worst hospital performance in Australia, Health Minister Rachel Stephen-Smith first blamed the increase in demand (attendances) at the emergency department, and then that patients presenting in the ACT have greater complexity, and/or that the emergency departments are clogged up by people who should not be there. The increase in presentations was in fact consistent with the relevant and known growth parameters (population, ageing and utilisation), and the latter two propositions (excuses) advanced by the minister, quite simply, could not be simultaneously true. All were “red herrings”. 

Morton’s Fork with red herrings

In what was quite extraordinary advice, people were asked to self-assess and not turn up at A&E for “mundane reasons”. Among the reasons mentioned by the chief operating officer of Canberra Health Service for not attending the hospitals was the experiencing of symptoms indicative of a heart attack and stroke. 

In other words, Canberrans were told that if they were unwell or experiencing symptoms they believed warranted the attention of a doctor that the choices were to either attend the hospital and wait beyond the clinically recommended times, or stay away from the hospital altogether, because there are too many complex cases and there are too many people who should not be there.

The real problem, one of the government’s making, was the repeated deferral over the last decade of investment in Canberra’s hospitals and clinical services, leading to a shortfall of 150 beds. A shortfall that is unarguably, in the main, a consequence of prioritising the light rail project over health services. The “solution” from the government was Morton’s Fork with red herrings.

Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.