States panic as GST revenues enter terminal decline

Treasurer Josh Frydenberg says the federal government would not pursue changes to the GST without a mandate from the public, adding that it has no plans to seek one. His comments follow the New South Wales government’s release of a discussion paper which canvasses broadening the GST base to offset a forecast decline in revenue from the tax. Several states have indicated that they may be open to considering GST reforms, although Victorian Treasurer Tim Pallas has ruled out an increase in the tax rate. From The AFR:

“Due to a high number of exemptions, the GST covers a small share of all household spending relative to the Organisation for Economic Co-operation and Development [OECD] average and this is falling over time.”

Mr Perrottet said it was now worth looking into where that GST should be broadened.

“We have seen GST revenue eroded over time, have a complicated series of funding arrangements and partnerships with the Commonwealth, and face significant challenges as our population ages, technology advances and work patterns change.

On Monday, Victorian Treasurer Tim Pallas said while he did not support a rise in the GST rate, he was open to discussions about other aspects of the tax…

The head of the federal Parliamentary Budget Office, Jenny Wilkinson, told a Senate estimates committee in Canberra on Monday that falling goods and services tax (GST) revenue could create greater pressure on federal-state relations.

The NSW Government is correct. As household expenditure on GST-exempt items like health rises, this necessarily reduces spending on GST-levied areas, thus reducing the overall tax take as a share of the economy. This erosion of revenue comes at the same time as state funding requirements are rising in areas like health, education and infrastructure as the population both ages and swells in size.

Something has to give. And broadening the base of the GST would help to remedy the situation at the margin.

That said, the states could solve their revenue problems by implementing a broad-based land tax, as well as broadening payroll taxes and abolishing stamp duties, as explained by Dr John Freebairn five years ago.

However, any reform to state taxes is necessarily politically difficult, with much of the gains likely to accrue to the Commonwealth, according to Dr Freebairn:

The final point I want to argue is with all those good arguments why don’t states do it? The rationale is most of the pain of state tax reform would be borne by the states. Most of the benefits of state tax reform would be reaped by the Commonwealth, the larger and more productive economy. Who gets the benefits for the larger and more productive economy? Well, states get a little bit of extra payroll tax, but the big winner is the Commonwealth, big gains in income tax, big gains in corporate tax. So this has got to be a discussion between the Commonwealth and the states. Tax reform done just at the Commonwealth level won’t do it. Tax reform done just at the state level won’t do it.

This is why tax reform needs to take place at the federal level, which also means it won’t happen, since it is dysfunctional.

The truth is, in an ideal world, we’d reform the entire tax system, including by:

  • Unwinding the many tax concessions that are broadly inequitable, cost the Budget significant sums in revenue foregone, and reduce the progressiveness of the tax system, including: negative gearing, the capital gains tax discount on investments held for more than one year, along with FBT concessions on cars ‘purchased’ under a novated lease for private use.
  • Taxing superannuation contributions/earnings at a progressive but concessional rate, as advocated by Deloitte, MB and the Henry Tax Review.
  • Taxing superannuation earnings in the retirement phase, thus extending the 15% tax rate to fund earnings in that stage (perhaps with an offset for people earning below the tax-free threshold).
  • Reducing superannuation contributions limits.
  • Placing a lifetime cap on superannuation nest eggs.
  • Tightening means testing of the Aged Pension by including one’s principal place of residence in the assets test, supported by an expansion to the Pension Loans Scheme, so that asset-rich retirees can continue to receive income support via a government-run reverse mortgage.
  • Eliminating inefficient taxes like stamp duties in favour of a broad-based land tax and greater taxes on resource rents.
  • Extending the 2% Medicare Levy to incomes sheltered from tax by the above tax concessions (e.g. the CGT discount).
  • Cracking down on discretionary trusts and private companies, which allow relatively well-off individuals to avoid tax by diverting and ‘sheltering’ their income or income producing assets.
  • Abolishing the private health insurance rebate (which, less face it, is inflationary and hasn’t reduced pressure on public hospitals).
  • Similar treatment for different types of savings.

The wishlist goes on.

There is much that needs to be done around tax reform, and changing the GST doesn’t even touch the sides.

Leith van Onselen

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