There’s merit in giving states greater taxing powers

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By Leith van Onselen

The Institute of Public Affairs (IPA) has proposed adopting a system of “competitive federalism”, whereby the states would be responsible for setting their own GST rate and retaining the revenue. IPA executive director John Roskam suggests that the states and territories could also be allowed to impose their own income taxes. From The AFR:

“The heavy centralisation of fiscal responsibility has been a drag on Australia’s economic performance,” [Roskam] said…

Mr Roskam said premiers had “run away at a million miles an hour” last year when Mr Turnbull raised the prospect of states and territories applying their own income taxes from 2020.

“Our position is one of competitive federalism, that the states should be able to compete on rates of tax as they do in nearly every other federation, as states do in the United States and as provinces do in Canada,” he said.

“The trouble is (state) politicians have found it easier just to blame Canberra rather than take responsibility”…

The Productivity Commission is due to hand down its final report next month. Its draft report found the HFE system acted as a brake on the economy by creating disincentives for states and territories to pursue “productivity enhancing reforms that are in the national interest”.

One of the reasons the federation is not working effectively is because of the vertical fiscal imbalances (VFI) embedded in the system, whereby the Commonwealth raises 82% of total tax revenue, the states and territories 15%, and local government just 3%.

This has left the states – who are the primary providers of public services – to being heavily reliant on the Commonwealth for funding.

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It has also led to unnecessary duplication and cost-shifting between both tiers of government, along with a never-ending ‘blame game’, whereby they accuse each other of sabotaging health/education/infrastructure services to the public.

Any move to reduce VFIs should, therefore, be thoroughly examined. Provided there are mechanisms to protect smaller states with older demographic profiles (and therefore less workers), like South Australia and Tasmania, from being unduly disadvantaged, such as through balancing funding via the GST, then giving the states greater taxing powers would probably work.

After all, it is the states that so often complain that their expenses are growing at a faster rate than tax revenue (due in part to the federal government’s mass immigration agenda, which drives up demand for government services and infrastructure). What better way to address this issue than giving them a direct slice of the fastest growing source of taxation: income taxes? And why not make them directly accountable for this funding?

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Ultimately, a better functioning federation is about having clearly delineated responsibilities, along with revenue sources that are commensurate with their level of responsibility.

The IPA’s proposal is, therefore, a step in the right direction

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.