Early last century, a salesman by the name of King Camp Gillette came up with a game-changing sales pitch. Not only did Gillette revolutionise the disposable razor blade but he struck an even better idea — give away razor handle and sell the blade. Gillette’s “loss-leader” concept has been often copied ever since. The pitch is simple, get the customer hooked on something by offering a free incentive. Gillette’s free handles would only fit Gillette’s blades, forcing consumers to pay a greater margin so they could use their otherwise useless handle. The tactic is regularly used by the likes of mobile phone companies (who give away handsets) to ink-jet printers to drug dealers — get the user hooked on a product through a clever incentive.

It appears that King Camp Gillette’s tactics have been adopted by an even stranger source in Australia — state governments — who themselves appear to have become addicted to property taxes, largely in the form of stamp duty. Stamp duty is paid on most property sales and is collected by various state governments, which provide virtually no service in exchange for the collection of the duty. Rather, it is a tax on property (be it real or financial) transactions.

State governments appear to have taken the loss-leader approach from Gillette seriously. How are they doing this? Simple: give people a small incentive to buy property (in the form of first-home-owner’s grants) and then charge them a substantially greater sum in the form of stamp duty and other property taxes at the time of purchase.

In 2000, to overcome the GST-imposed slump in housing, the Howard Government created the first-home-owners boost in a bid to encourage construction (and win votes from the mortgage belt). The plan was such a political success that the Rudd Government in October 2008 boosted the size of the grant from $7000 to $14,000 (for existing homes) and to $21,000 for new homes. Like many quickly conceived policies, the grant was a political dream but an economic nightmare, leading to property prices rising as swathes of young home buyers used the grant (plus leverage of up to 90%) to “bid-up” the price of housing.

Amid growing criticism, the Rudd Government started phasing out the boosted grant last September — but various state governments, themselves addicted to property taxes, have introduced grants of their own — much like King Camp Gillette, state governments are giving away the handle and selling the blade. The loss-leader approach is slightly less direct though. The Victorian state government provides a $2000 grant for established homes (in addition to the federal Government’s $7000 grant) but a larger $11,000 grant for newly constructed homes. For established homes, the grant is an immediate money spinner — the $2000 cost is quickly repaid through stamp duty, which is $2870 plus 5-6% of any amount above $130,000. (New South Wales provides a $3000 supplement for new homes only). For purchases of new properties, much of the benefit, which is in the form of higher profit margins for developers, is reaped by the federal Government’s collection of income tax. However, state governments benefit from the continued flow of property taxes while, local governments receive council rates (purchasers of new homes do not usually pay stamp duty).

ABS figures show just how reliant state and local governments have become on property taxes and duties. In 1998, before the current property boom got under way, the total value of property taxes collected by Australian state and locals governments was $4.6 billion, or about 11.1% of total state and local taxes collected. By 2007/08 that figure had skyrocketed to $14.3 billion and had grown to represent 22.8% of all non-federal taxes collected (as a comparison, in 2007/08, the total tax take of the federal Government was $285 billion).

While many commentators are quick to point to the Victorian Government’s dependence on gambling taxes, those revenues are dwarfed by property income. In 2007/08, the Victorian Government reaped $1 billion from poker machines, $117 million from Crown Casino and $124 million in race betting taxes — meanwhile the state government collected $3.7 billion from stamp duty on conveyances alone and a further $865 million in land tax. In the past decade, revenues from gambling have increased by only 10.2%, compared with a 185% rise in property-related tax revenue.

State governments are addicted to the property boom. Even over-priced housing transaction reaps more benefit to the governments, otherwise largely reliant on federal handouts.

The pitch is especially devious because many property buyers forget that they are even paying the stamp duty – for most, it is added to the cost of the property and results in them merely taking a larger loan (which is paid back over a long period, often 25 years).

Have the grants and other so-called benefits actually helped first home buyers? Unlikely. Not only have the grants resulted in prices being bid-up, but affordability difficulties are becoming more widespread. According to a survey conducted by Fujitsu Consulting, almost half of the first home owners who entered the housing marked in the past 18 months (since the first-home-owner’s grant was boosted) are now experiencing “mortgage stress” or “severe mortgage stress”. State governments, by contrast, are enjoying the fruits of Australia’s induced housing boom.