Greedy states won’t forgo stamp duty on insurance
By Jessica Irving. Published in the Sydney Morning Herald, 19 April 2006

AS PETER Costello and Michael Costa limber up for their final bout over a timetable to remove a host of state-imposed stamp duties, it is timely to note one glaringly inefficient duty was never even considered.

The stamp duties imposed on insurance products by every state and territory government remain among the nation's most offensive taxes.

As alarm bells sound over a national “underinsurance crisis”, with some estimating as many as nine out of 10 Australians might not be fully insured, these stamp duties represent a blatant tax grab by the states, the costs of which are borne entirely by consumers through higher premiums.

Stamp duties are one of the oldest forms of taxation in Australia. They date back to colonial days when payment literally entitled you to a stamp on your document or contract, hence “stamp duty”.

All state and territory governments levy a stamp duty on insurance products, ranging from the highest of 11% in South Australia, to the lowest of 7.5% in Queensland. NSW’s rate lies in the middle at 9%.

Most major insurance products attract the taxes, including household, travel, mortgage and some commercial property insurance.

NSW policyholders have had a roller-coaster ride with insurance stamp duties over the past four years: first a precipitous drop, then a steep climb.

In 2002, the then NSW Treasurer, Michael Egan, slashed the duty from 10% to 5% in an effort to prop up an ailing industry that was reeling after the collapse of big insurer HIH, and to bring down rising premiums.

However, times have moved on and the state’s coffers are no longer overflowing with the tax revenues created by the boom in residential property. With the budget surplus hanging in the balance, the Labor Government last year jacked up stamp duty on insurance to 9%.

Singling out the insurance industry for heavy tax treatment like this is inefficient in three ways.

First, it taxes a “good”, not a “bad”. While taxes have got to come from somewhere, if faced with a choice, taxes should be imposed on activities we wish to discourage. That’s the rationale for charging an excise on alcohol, cigarettes and gambling.

Insurance is something government should be encouraging as it provides security for citizens in the event of disasters.

A recent report by the Centre for International Economics, however, finds that taxes on insurance now raise more revenue than alcohol, and not much less than gambling and tobacco.

Insurance is something government should be encouraging as it provides security for citizens in the event of disasters.

A recent report by the Centre for International Economics, however, finds that taxes on insurance now raise more revenue than alcohol, and not much less than gambling and tobacco.

Second, stamp duty imposes a tax on another tax, namely the goods and services tax. Avoiding this sort of “cascading” of taxes was a primary reason for the widespread introduction of the GST in the first place.

In NSW and Victoria, things are even worse for insurers. These states impose an initial 22% fire services levy on premiums to fund fire-fighting services.

So after that levy is charged, followed by a 10% GST, followed by stamp duty, a basic home insurance premium in NSW of $100 can end up costing $146.28.

Finally, imposing a stamp duty on insurance products is undesirable from an equity perspective. By keeping premiums higher than otherwise, it encourages those under financial stress not to insure adequately, or not to insure at all.

The nasty twist is that it is these poorer people, who tend to live in areas with higher crime rates, who are likely to need insurance the most.

Outraged? You should be, but the chances are you haven’t been. Consumer reaction to the rise in stamp duties on insurance in NSW has been muted. Maybe that’s because you bought Treasurer Andrew Refshauge’s line at the time that the big bad insurance companies would feel pressured to just absorb the cost. Maybe it’s because you hate paying insurance so much you barely look at your statements.

But if you have been watching, you’ll notice the insurance industry passes stamp duty increases onto customers holus-bolus and without hesitation.

But there are other, more systemic, reasons that explain the underwhelming consumer outcry, and the widespread “underinsurance” problem. It appears that some consumers have simply convinced themselves they just don’t need any, or much, insurance. There are three common excuses.

First, there’s the “it won’t happen to me” factor. Fifteen years of uninterrupted economic growth have exerted a calming influence on Australians through real wage rises and low unemployment.

When times are good and the wages are rolling in, consumers are more likely to think they’ll be able to cover any risk themselves. It is a unique feature of insurance products that demand for them tends to rise when economic fortunes appear to be waning. Demand for most other consumer goods falls in a downturn.

A second reason why insurance slips off the radar for some is the ”I couldn’t be bothered” factor. Deciding whether or not you need to take out some form of insurance involves a complex weighing of risk.

When that decision is made, there is a flood of different products on offer, from which it’s often hard to choose which one will best match your requirements. Some perfectly sane but time-poor people will put off a decision to take out insurance. It’s a good example of a case where an economist’s assumption of a rational individual making decisions under conditions of perfect information can fall down.

Third, there’s always the “if something really bad happens to me, the Government will bail me out” excuse. Economists call this a “moral hazard” problem.

When people think they will be immune from the full consequences of their actions, they are more likely to make riskier decisions. In the case of insurance, if they think the Government will step in to cover the gap for large claims, they are likely to underinsure their property.

Instances such as the Federal Government’s stepping in to help victims of the Canberra bushfires in 2003 serve to reinforce this moral hazard. (Of course, this strategy won’t help you much if only your house is affected and you can’t drum up enough sympathy to get the Government to help you.)

So consumer reaction to the increase in insurance stamp duties has been muted.

But why hasn’t our anti-stamp duty crusader, Peter Costello, been on the case?

Quite simply, stamp duties on insurance were never part of the deal. The deal struck between the Federal Treasurer and the states in 1999 to hand GST to the states was made in return for the states agreeing to “review” a range of stamp duties. These included stamp duties on mortgages, leases, business conveyancing and hire of goods, and were to be offset by the GST.

Insurance wasn’t on the hit list. The states were never going to agree to abolish all their taxes and it would have been obvious at the time what an important money-spinner it was for the states.

The Insurance Council of Australia predicts the 9% stamp duty in NSW brings in revenues of $540 million a year. This would have been a sizeable addition to the $1.4 billion a year in taxes Costello would like to see stripped from the NSW annual budget through the other stamp duties.

So as yet another NSW Treasurer, Michael Costa, sits down to tally his first budget, don’t hold your breath for tax reform on this front.