Make states raise own revenue, say Liberal MPs

Make states raise own revenue, say Liberal MPs

Phillip Coorey – The Australian Financial Review – Wednesday 6 November

The orthodox view that increasing the GST is fundamental to federal-state tax reform is under strong challenge from within the federal government as a view emerges that states should raise their own revenue.

At least one MP, NSW’s Jason Falinski, has suggested that the government revisit the idea of allocating the states a percentage of income tax and then allowing them to set their own individual rates over time.

This was last put forward by Malcolm Turnbull in 2016, when he proposed that from 2020,  the federal government reduce the rate of income tax,  and the states would then levy an income tax equal to the deduction to ensure there was no overall tax increase.

The states would have been free to individually raise their rate as they saw fit.

The common view of the Liberal MPs, who include Tim Wilson and James Paterson, is that the states should be responsible for raising their own revenue because that would make them more accountable for how they spent it.

“What would be welcome is if a state actually walked the walk in finding ways to drive reform and reduce spending before putting their hand out for more taxpayers’ cash,” Mr Wilson said.

“Every time states lose tax powers, they lose the impetus for reform because the easier political argument is to simply blame Canberra for shortfalls, not drive reform that would actually create jobs.

“When all major tax powers reside with the Commonwealth, states simply become client councils of monopoly Canberra.”

The debate has arisen following a recent call by NSW state Treasurer Dominic Perrottet for either the rate or the base of the GST to be looked at as part of a wider change so that the states can continue to fund health and education.

The NSW Treasury has forecast that under current tax settings, the states face a shortfall of $45 billion a year by 2030 to meet the costs of healthcare and education.

Liberal senator Dean Smith has backed the call to increase the GST and abolish payroll tax as a compromise, but there is next to no support among his colleagues.

Mr Falinski said it was “hardly good-faith politics” for the states wanting the Commonwealth to increase a tax so they could abolish one.

“What our Federation really needs is for the governments who are spending the money to raise it so voters can see the nexus,” he said.

“At the moment, councils and states can get elected promising to spend more money because they know the Feds have to pay.”

Mr Falinski said there was merit in Mr Turnbull’s old proposal. It would involve giving the states a certain percentage of income tax, about 10 per cent for example. After two years, each state could vary the rate as it saw fit but would have to be accountable for any increase.

Conversely, a state could decrease its tax rate to give itself a competitive advantage.

Senator Paterson’s long-held view that the states need to be more accountable to their voters means they need to “be accountable for the revenue they raise”.

He believes in getting rid of inefficient state taxes such as stamp duties but it should be up to the states to find ways to replace them, instead of going cap in hand to Canberra.

Senator Paterson also said it was a false argument to propose expanding the GST base to include healthcare and education because that would be double-taxing people who already funded these services through their other taxes.

Prime Minister Scott Morrison, who as treasurer looked at increasing the GST in 2016, is no longer interested in the solution either.

Apart from the political downside that the Commonwealth – not the states – would bear, he says the sheer size of the compensation needed in income tax cuts and welfare increases would soak up much of the revenue and have little effect on economic growth.

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