State governments are giving away billions in development rights that create huge private land windfalls, when pricing those rights could fund housing, infrastructure and fairer state taxes.

The debate over capital gains tax has exposed a deeper issue in our property market. Many of the gains now being argued over in Canberra are not ordinary investment returns that happen to be lightly taxed. They are windfalls created much earlier, by state governments, and only later dressed up as normal returns.

When permission is granted for more intensive development, government is handing over a valuable asset – a ‘development right’. A factory site can become an apartment precinct. Farmland can become a housing estate. Millions of dollars in land value can be created not by work, risk or innovation, but by the stroke of an official’s pen.

Yet instead of pricing these development rights at a fair market rate, states usually give them away for free. The Commonwealth is then left to tax this value later, after it has been capitalised into land prices and reported as a private capital gain, as if it were comparable to an ordinary return from........

© Pearls and Irritations