A respected think tank is urging the states to consider a property levy to fix their budgets in the face of the ever-growing cost of health and education.
In the second of its papers aimed at finding solutions to the dire position of federal and state budgets, the Grattan Institute says the states have few options to help their fiscal problems: cut costs, raise revenue or both.
"They can increase their existing taxes, most of which are horrible in economic efficiency terms, or they can impose this broad-based property levy, which is much less horrible," the institute's head John Daley told AAP on Tuesday.
He said health and eduction spending was growing faster than GDP "as far as the eye can see".
A broad-based property levy based on council rates could raise about $7 billion a year for states and territories.
This would come from an annual levy of just $2 for every $1000 of unimproved land value or $1 for every $1000 of capital improved property value.
That would translate to a levy of $772 a year on the median Sydney house price of $772,000 or $560 a year on the median Melbourne house price of $560,000.
Mr Daley said even if the levy was doubled, raising $14 billion a year, and states wound back less efficient taxes such as stamp duty, it would still place Australia behind NZ, Japan, US, Canada and the UK in terms of its property tax burden.
Shifting from stamp duty to a broad-based property tax would provide a more stable tax base for the states, spread the tax burden more fairly and add up to $9 billion annually to GDP through efficiencies, the report says.
It would also be hard to dodge given the immobility of property, unlike money being shifted abroad to lower taxing regimes.
Mr Daley argues that at a time of concern over housing affordability, the introduction of a property levy would actually decrease land values by three to six per cent.
He concedes a property levy may not be politically popular, but the states are facing a budget hole.
His proposal also includes a property levy deferral scheme aimed at retirees on a pension so it wouldn't be collected until the house is sold.
The institute is planning to release papers on superannuation and GST in coming weeks.