NSW has recently flagged plans to replace stamp duty with an annual land tax. But NSW Treasurer Dominic Perrottet contends it will be “tough fiscally” to pursue stamp duty and broader GST reform without the help of the federal government:
“It makes sense for them to support [it]. Things can be politically challenging but they don’t need to own the politics of it,” Mr Perrottet said.
“I’ve raised it with the federal Treasurer [Josh Frydenberg] and we’ve had a productive discussion around it.“
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It is incumbent on the federal government to drive the tax reform process, since it controls the money.
After the Second World War, the states lost the ability to levy income taxes. This left the Commonwealth collecting more than 80% of total taxes, with the the states and territories making up the balance.
Accordingly, the states – who are the primary providers of public services (including health, education, transport, and law and order) – have been left cash strapped and highly reliant on Commonwealth grants alongside a narrow base of inefficient taxes like stamp duty:
Given that the abolition of inefficient taxes like stamp duty in favour of land taxes would generate significant productivity benefits to the national economy (see next chart), and the federal government would monetise these benefit via an uplift in personal and income tax receipts, the federal government should provide incentive payments to the states to facilitate reform. This would enable the states to share in the revenue uplift that would arise from the resulting economy-wide productivity growth.
This is how ‘cooperative federalism’ should work – the federal and state governments sharing in the fruits of reform.
Without the federal government’s active participation in the reform process, substantive reforms like abolishing stamp duty will always remain in the ‘too hard’ basket.
The federal government needs to lead the reform process.
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