States could collect income tax

A 2014 National Commission of Audit proposal, initially dismissed by then prime minister Tony Abbott, could see states and territories collect their own income tax.

For the last 75 years, the Federal Government has been responsible for setting the rates of, and collecting, income tax. The responsibility for this was at the time taken away from states and territories to fund the country’s World War II campaign. In what could be seen as a radical move, Prime Minister Malcolm Turnbull has flagged the opportunity for the Commonwealth to reduce the rate if income tax it collects, allowing states and territories to set a rate of tax deemed necessary to fund services such as health, education and transport. “We, the federal government, will reduce our federal income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount,” he said.

By withdrawing Federal Government funding from a range of existing grant schemes, Mr Turnbull claims taxpayers would see no increase in income tax. “This, we believe, is the only way that we can genuinely reform our federation. It will give the states real financial autonomy,” he said.

The initial proposal made by the National Commission of Audit would see the marginal income tax rate reduce from 32.5 per cent to 22.5 per cent. The states and territories could then impose a levy of more or less than the remaining 10 per cent, depending on the cost to provide services for which funding would be withdrawn.

The plan will be discussed at the Council of Australian Governments (COAG) meeting which will commence in Canberra tonight. While Treasurer Scott Morrison would not commit to the plan, he did concede that he was open to discussing the issue. “ This has been an ongoing dialogue. I’m a pragmatist on all these issues. It is about trying to fix the problem, and the problem is you’ve got to be able to manage your increase in costs and how you are going to pay for them. You can’t pay for something with nothing,” he said.

The Treasurer also said that, “The Commonwealth will continue to engage on the basis that these reforms do not increase the overall tax burden.”

Tony Shepherd, the chairman of the National Commission of Audit naturally agreed that the proposal was a “great reform”. Speaking to ABC Radio National yesterday, he said, “The states have most of the responsibility for delivery of services and infrastructure, and yet they produce very little of the taxation necessary to fund it. The vertical fiscal imbalance is what is killing the federation.”

However, the response from state and territory leaders has been mixed. South Australian Premier Jay Weatherill is concerned about the confusion it would cause, while his Western Australian counterpart, Colin Barnett indicated he was open to the proposal. Northern Territory Chief Minister Adam Giles warned of a ‘race to the bottom’ while ACT Chief Minister Andrew Barr said he was “relaxed” about the proposition. Speaking to ABC’s Lateline program, Mr Barr said, “I think there’s certainly scope for reform of taxation. It’s an option that needs to have a public debate and we certainly look forward to what the prime minister will put on the table this week.”

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Opinion: Fiscal disarray apparent

If there was any doubt that the Federal Government was in disarray over its fiscal policy, the news that states and territories could be given authority to set their own income tax rates confirms all our suspicions. ‘Passing the buck’ comes to mind.

For the last six or seven years there has been a general acceptance that our tax system is complex and needs to be simplified. Indeed, just last week it was mooted that Treasurer Scott Morrison was considering a proposal to simplify tax returns by allowing people to claim a standard deduction for work-related expenses. Yet as a new day dawns it appears that blowing apart the current income tax system is the way forward.

Of course, as with all the ‘proposals’ that have been discussed, the devil is in the detail. The Prime Minister has stated that taxpayers would see no increase in the income tax they pay under any proposed system. Of course they won’t because you can bet your bottom dollar (that’s all you may be left with) that any levy imposed by a state or territory will not be classed as ‘income tax’.

When the National Partnership Agreements were withdrawn in the 2014/15 Federal Budget, the states and territories could no longer provide the necessary funding for health, education and transport. With this proposal the Federal Government is simply putting its hands up in surrender. It may try to disguise it by passing it off as giving the states and territories fiscal autonomy, but all it’s really doing is handing over a ticking time bomb, the fuse of which it lit.

Already there is disparity between states and territories on taxes – stamp duty and payroll tax are prime examples. There is also a greater burden on the heavily populated states to provide more transport, while the cost of rural health is greater in the more remote areas. Dividing the issues does not make them easier to solve.

To pit state against state is not a clever strategy for a government facing the very real threat of a shrinking economy and higher costs. To borrow the catchphrase of the British Government when faced with the threat of Scottish independence – Better together – you bet we are.

Do you think states and territories should be able to levy their own ‘income tax’? Do you think this would lead to more tax being paid by individuals? Would you see it as being the first step to ending the Federation? How would you fund the growing shortfall in revenue for health, education and other essential public services?

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