Real debate needed on taxing powers of the states

RETURNING income taxing powers to the states needs serious consideration for Australia to stand any chance of repairing its broken federal/state taxing and spending structures, the Taxpayers Research Foundation* (TRF) said today.

Failure to take tough decisions, including a fair dinkum look at returning states' income taxing powers, risked Australia’s economic and social future, the TRF warned.

Launching its latest Tax Policy Journal: A New Federalism. A New Tax System, TRF spokesperson Terry Ryan said Australia desperately needed tax reform to provide long-term fiscal sustainability for all the governments in our Federation.

“Policy makers at federal and state levels must recognise the need to implement long-term reforms to our federal and state spending and taxation structures,” Ryan said.

“We need vigorous debate and commitment to reform at a critical time of our economic and political cycle. We simply can’t leave this to chance given the current political uncertainty in Canberra,” he said.

While the Federal Government has commissioned the White Papers “Tax Reform” and “Reform of the Federation” to be delivered by the end of this year, with a view to presenting reform proposals, the 2015 Tax Policy Journal focuses on better informing the public and policy makers about our Federation’s fiscal problems – particularly the mismatch between revenue and expenditure between the different levels of government.

Ryan said Tax Policy Journal papers highlighted:

• states revenue sources are insufficient to fund their expenditures and the Commonwealth’s tax bases deliver more revenue than needed to meet its spending commitments. And a half of that amount is tied to federal spending priorities
• vertical fiscal imbalance is common under federal systems, but is high in Australia by international standards. Nearly a quarter of federal tax revenues are passed back to the states, in the latest year $54.9 billion in untied grants, mainly from the GST and $46.3 billion in specific purpose payments
• even with the untied grants the allocation of these funds to the different governments is determined by Federal government equalisation priorities and not by the revenues collected per state, eg Western Australia only receives about a third of its total revenues from federal funds whereas South Australia receives nearly half of its revenues from the Federal government
• while there are many benefits for Australia in a federal system, reform of income taxes, GST and state taxes can reduce the imbalances in our federal system and increase efficiency for all levels of government.

Ryan said there was a strong argument to give real power back to the states.

“This includes allowing them to again levy income tax to reduce the imbalances and this is discussed at some length in the 2015 Journal.

“Also discussed are the specific roles governments perform and the governance needed to ensure genuine accountability and responsibility from all elected representatives.”

Ryan said past failed attempts to make meaningful changes were also discussed, highlighting that reform from the two White Papers “would be just the beginning”.

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