Should Australia take a Gamble on Las Vegas’ Zonal Taxation Success?

Should Australia take

a Gamble on Las Vegas’ Zonal Taxation Success?

Alexander Moore

Unbeknownst to many admirers, the ‘strip’ in Las Vegas, where the world-renowned casinos and tourist attractions are, is located several kilometres outside the southern city limits of Las Vegas in the town of Paradise, Nevada. Development occurred and continues to happen there in the middle of the Mojave Desert because it is outside the city of Las Vegas’ taxation radius. Here, economic activity and investment are more attractive because of the lower sales and other taxes. This environment has contributed to the region’s emergence as a thriving economic powerhouse. What was formerly arid and unpopulated desert nearly doubled its population in the 1990s, continues to experience rapid growth and has cemented itself as one of the world’s premier tourist destinations.

Whilst the United States’ tax system is very different to Australia’s, the principle of zonal taxation may provide the key to unlocking our economic potential as a nation. A NSW parliamentary committee conducted an ‘Inquiry into Zonal Taxation’ as recently as 2018 which recommended that the government adopt various regional NSW tax offsets. Even more recently, Australia has just entered its first recession in almost 30 years and its deepest since the 1930s. To get the economy moving again, the government has announced enormous government spending. This spending will contribute to a projected $213.7 billion deficit in the 2020/2021 financial year, the largest since World War Two. If Australia were ever to consider an innovative and alternate solution to bring long term prosperity, it seems now is as fitting as ever.

USA and Australian Taxation In the USA, businesses are bound by federal, state, county and city taxes which vary widely depending on their location. Generally, a business’ corporate tax rate

What was formerly arid and unpopulated desert nearly doubled its population in the 1990s, continues to experience rapid growth and has cemented itself as one of the world’s premier tourist destinations.”

is determined at a national level, with each of the other levels of government specifying various sales, property and other taxes. The theory behind this system is that market dynamics will act as a limitation on the power of the multiple levels of government. Hypothetically, if an individual or business feels that a city, county or state mismanages its tax revenue, is underperforming or charges taxes which are too high, it is free to move away from that area. By extension, the best governments will increase their local populations, garner more public support and thereby remain viable into the future through their economic success.

The Australian taxation landscape does not operate in this manner. GST, the equivalent of American sales tax, is uniform across the nation, with state governments surviving primarily on payroll taxes, land tax and stamp duty, and local governments only collecting council rates. There is less variation, especially at the micro level, and Australian state and local governments are very dependent on federal funding.

Economic Prosperity Zonal taxation might assist Australia’s attempts at luring foreign investment and corporate activity by making areas of Australia more attractive business environments. In the Asia-Pacific region, Australia competes with many other countries for this kind of investment which generates economic activity. Many countries have lower corporate tax rates than Australia and are therefore a more attractive proposition to

Zonal taxation might assist Australia’s attempts at luring foreign investment and corporate activity by making areas of Australia more attractive business environments.”

corporations as they provide potentially more profitable operating environments. Singapore, Malaysia, Indonesia, China, India and South Korea, for example, have lower corporate tax rates than Australia.

Both foreign and corporate investment are crucial to the future economic prosperity of Australia as they create both direct employment for Australians, generate additional tax revenue and sometimes lead to infrastructure and other upgrades. They also generally increase economic activity which can benefit other Australian businesses, consumers or employees indirectly. These second and third order consequences are less easily quantifiable but just as beneficial to Australia as a whole.

On the domestic front, increased economic activity in regional areas is beneficial for the connectivity of the Australian economy and could assist in creating efficiencies. Where more regional businesses exist, other regional businesses will benefit from having goods and services which they might need closer to their premises. This phenomenon will translate to increased or more efficient output, and thereby more profit. The macro effect of this is that Australian businesses become more competitive in the marketplace. More regional businesses will also increase local competition for goods and services, thereby lowering prices. Demand increases could even lead to infrastructure upgrades which create further efficiencies by reducing travel or delivery times. The snowball effect of economic activity is significant.

Moreover, for residents of regional areas, one of Australia’s greatest weaknesses is that its population is Sydney, Melbourne and South-East Queensland centric. It places residents of regional areas at a comparative disadvantage in terms of the breadth and depth of opportunities they are afforded. In practice, this creates significant differences: unemployment is higher, there are fewer schools, fewer hospitals, fewer specialist doctors, fewer universities etc. Whilst regions undeniably have their advantages; greater economic activity would complement those advantages by bringing new facilities, goods and services closer to home.

Housing Affordability Zonal taxation could also potentially provide the antidote to Sydney’s housing affordability crisis. Causes of this crisis are plentiful. Pundits often cite negative gearing, foreign investment and an aging population preferring not to downsize as the causes of this unaffordability. Arguably, Sydney’s geography is the greatest contributor. Its national parks and bodies of water to the North and South, mountains to the West and ocean to the East create a restriction on the land that is available for housing. Unlike in other cities, Sydneysiders can’t continue to move to the outer suburbs seeking affordability as the suburbs stop at these geographical features.

By decentralising Australia’s economic activity, market dynamics will be brought back to Sydney housing by relieving the constraints on housing supply. Increased employment opportunities, combined with the benefits of regional living and lower living expenses, will become a more attractive proposition to Australians. By enhancing the value of the alternative, more Sydneysiders will be incentivised to move to the regions. In turn, this dampens demand for Sydney housing, assisting in the housing affordability crisis.

To some, the purported positive effects of zonal taxation might seem overstated. To those readers, I would redirect their thoughts back to the story of Las Vegas. Whilst economic prosperity was not built instantly, over several decades, a dusty and barren dessert became a business mecca. If the government were to follow the recommendations of the parliamentary inquiry’s 2018 report, there is no reason that Australia couldn’t transform its inland desert into something equally as magnificent.