New research into how the 2010-2011 Queensland Floods impacted people’s incomes, tax deductions, and taxes owed highlights the challenges of predicting economic recovery and taxpayer behaviour following natural disasters.
Professor Mehmet Ulubasoglu, Associate Dean (Research) and the Head of the Department of Economics in the Faculty of Business and Law and Deakin University and Merve Kücük, a climate policy researcher at the German Institute of Economic Research, have conducted new research to examine how the 2011 Queensland Floods impacted people’s incomes, tax deductions, and taxes owed.
As natural disasters become more frequent and intense worldwide, understanding their effect on the fiscal system is crucial. Disasters pose significant policy challenges, as aiding recovery and rebuilding the economy demands substantial budgets from local and national governments.
Even with available funding, economic recovery after disasters presents two main challenges. First, it is difficult to predict how economic agents will be affected in the aftermath: disasters can disrupt jobs and businesses, with vulnerable groups like low-income workers and minorities being the hardest hit. However, they can also provide opportunities to rebuild infrastructure and launch new businesses, potentially stimulating economic growth.
Second, predicting how people will respond to financial shocks caused by disasters is often challenging: after Hurricane Katrina, flood victims opted to use insurance payments to pay off mortgage loans rather than rebuild their properties. Similarly, people may hesitate to purchase disaster insurance, expecting government aid after a catastrophe, a phenomenon known as the “Samaritan’s dilemma”. These unpredictable responses complicate planning and increase the fiscal strain of disasters.
The 2010-2011 Queensland Floods
The 2010–2011 Queensland Floods were an exceptionally rare event, affecting the Greater Brisbane area due to heavy rainfall between December 2010 and January 2011. The floods caused widespread damage, particularly in rural areas, but also in cities like Brisbane and Ipswich.
The disaster claimed 33 lives and affected 2.5 million people, with 78% of Queensland declared a disaster zone. Initial estimates placed the cost at AU$5 billion, but later reports increased this figure to between AU$14.1 and 15.9 billion. Approximately 29,000 homes and businesses were flooded, with 70% of the damage related to housing and infrastructure and 30% linked to lost revenue and production.
Australia’s well-developed disaster management system, the Natural Disaster Relief and Recovery Arrangement, provided funding to states for recovery efforts. After the floods, local, state, and federal governments offered extensive support, with post-disaster relief estimated at AU$11.8 billion. The federal government contributed about AU$6 billion, with over AU$500 million paid directly to individuals. The direct payments comprise one-off payments of $1000 and $400 per eligible adult and child, respectively, under the Australian Government Disaster Recovery Payment, and up to 13 weeks of federal income support to assist eligible employees or sole trade under the Disaster Recovery Allowance. These relief payments are not taxable and do not usually appear in tax returns.
The Australian Taxation System
Individuals earning income in Australia use either a Tax File Number (TFN) or an Australian Business Number (ABN) as a unique identifier. For those paid through a TFN, taxes are automatically withheld by the employer under the pay-as-you-go system. For those working with an ABN, they are considered a business and must pay taxes at the end of the fiscal year. In both cases, an annual tax return must be filed to report income and claim any deductible expenses.
Tax-deductible expenses are mostly work-related costs necessary to earn income, such as car, travel, clothing, and self-education expenses. For an expense to be deductible, it must have been personally paid without reimbursement. Other deductible expenses include accommodation during work trips, phone, internet, overtime meals, donations, investment-related costs, and tax-management expenses.
Taxpayer Response Across Different Income Groups
A method called difference-in-differences was applied to compare changes in economic conditions of taxpayers living in the Brisbane River catchment area (the treatment group) with taxpayers in demographically and economically similar zones in Sydney, Melbourne, Adelaide, and Perth (the control group). The analysis satisfied the necessary assumptions for the method, including the parallel trends assumption, which means that prior to the disaster both the treatment and control groups must have displayed similar trends in incomes, tax deductions and taxes owed. To further maintain economic comparability of residing in urban areas, the sample was limited to taxpayers who remained in either the treatment or control regions post-disaster.
The study found a temporary 1.2% drop in income for people living in flooded areas of Brisbane in 2011 compared to 2010, relative to the control group. This was accompanied by a 1.7% increase in tax deductions, resulting in a 3.2% reduction in taxes owed that year. No significant changes in income or taxes were observed in later years, although a 1.9% rise in tax deductions occurred in 2013.
On average, disaster victims claimed more deductions and paid less in taxes. The average affected taxpayer paid AU$338 less in taxes in the disaster year, leading to an estimated AU$192 million reduction in tax payable from the disaster region. Including individuals who moved away from the disaster areas, the tax loss increased to AU$385 million.
The findings for the average disaster victim, however, do not represent the dynamics observed by disaster victims in different income groups. Different income groups were affected in varying ways. The low-income group saw no change in income, deductions, or taxes owed, while both the middle- and high-income groups experienced a 1.1% income decline during the disaster year, resulting in lower taxes owed. Middle-income individuals did not change their tax deductions, whereas high-income individuals increased their deductions in 2013.
The insignificant effects in 2011 and 2012 may be attributed to the one-off flood levy applied to unaffected taxpayers from July 1, 2011. This levy ranged from 0.5% to 1% for those with taxable incomes over AU$50,000 and AU$100,000, respectively, which may have influenced the control group.
When comparing the disaster effect to a longer pre-disaster period (2008–2010), low-income individuals experienced a 2% drop in income and a 4.1% tax reduction in 2011. Middle-income individuals saw a 1.3% income decline and a 3.8% tax reduction, but no change in deductions. High-income individuals had a 1.3% income drop, a 2% tax reduction, and increased deductions by 2% to 4% over the three years after the disaster.
Tax Deduction Items as a Mechanism
The disaster did not affect non-work-related deductions but increased work-related travel deductions for high-income taxpayers, who raised claims by 1.5% and 2.2% in the two years following the disaster. In contrast, middle-income taxpayers’ travel deductions fell by 4.6% and 3.9%, while low-income taxpayers saw no change. For “other” work-related expenses, low-income taxpayers increased deductions by 3.4% in 2011 and 3.9% in 2012, while middle-income earners had smaller increases. High-income taxpayers showed no significant changes.
Interestingly, deductions for gifts and donations rose by 6% to 13% across all income groups, suggesting that the disaster may have fostered greater empathy, aligning with other studies.
Wide-reaching impact
The findings have important policy implications and confirm that post-disaster relief programs must be carefully designed. Governments often allocate large amounts of funds after disasters, but efficient distribution can be difficult. Following the 2010–2011 Queensland floods, the Australian government directed over 90% of the AU$6 billion recovery budget to businesses, likely helping to keep businesses afloat and protect jobs, reducing severe income shocks. A similar approach was adopted globally during the COVID-19 pandemic.
The study also found that tax revenue losses from the floods were limited, likely due to effective post-disaster management by the Australian government. However, the floods affected income groups differently, and future recovery programs should consider the vulnerabilities of specific economic groups, particularly sectors with a high proportion of small business owners, part-time workers, women, and young workers, who are often more exposed to disaster-related economic shocks.