The states have not won an ingenious legal-financial trick since Geoffrey Sawer told them how to raise tobacco taxes in the 1970s.
The Commonwealth, on the other hand, has been flush with new tricks. The latest is the Superannuation Guarantee Levy, which passed into law this week.
While most have rightly concentrated on the three most important things in politics these days (jobs, jobs and jobs), the super levy has some longer term implications for Australia, not only ensuring that the soon-to-be retirement-boomers pay their own way.
Superannuation is the latest, and no doubt not the last, of a series of widening uses of the Commonwealth’s taxation power.
The story begins in 1988, when the Commonwealth passed legislation for the Child Support Scheme. Under it the Child Support Agency collects maintenance money from fathers (and let’s face it is nearly always fathers) to support their children after separation. Before 1988 less than a third of fathers obeyed court orders for their children’s upkeep. After the law more than two thirds did. The agency had the power to lift the money from a father’s pay, before he got it in his pay packet.
It was a very effective, sensible law. It meant dads, not taxpayers, maintained children. The agency now collects about $165 million a year from 140,000 parents.
The law was clearly within the Commonwealth’s constitutional power. The Constitution provides that the Commonwealth Parliament has power to make laws with respect to marriage, divorce and in relation thereto parental rights and the custody and guardianship of infants. No-one could argue with it.
However, the administration of the scheme gave the Commonwealth some new ideas. The beauty of the Child Support Scheme is that the money is lifted before it goes into the pay packet — just like pay-as-you-earn taxation.
One of the defects of income tax decades ago was people did not have enough money at the end of the year to pay it, or they just did not pay it as it fell due. The same defect applied to Family Court maintenance orders. The best way was to take the money before they could get their hands on it.
The important point about the 1988 scheme was that the Commonwealth found an administrative-legal link between enforcing social aims and taxation.
The link had been there in general terms for a long time, but it had been more passive. Governments wanting to encourage investment or gifts to charity, for example, gave tax breaks. The Government pursued its social aims through tax relief. The 1988 breakthrough was to use tax burdens like PAYE (rather than relief) to pursue social aims.
During the debate leading up to the Child Support Agency, it was thought by some that the scheme should be administered by the Australian Taxation Office, which was used to pay-as-you-earn administration. However, feeling, caring, wet social engineers thought the filial relationship too important to be tainted by the Tax Office collecting child maintenance.
How right they were. The muddying of tax collection and social laws would have been a bad precedent. So rather than the Tax Office collecting the maintenance, it is collected by the Child Support Agency (which was set up within the Tax Office). So the nominal separation of tax and maintenance collection made no difference. Besides, it was a PAYE scheme no matter who collected it. The precedent of muddying tax and social policy was set. The scheme began on June 1, 1988.
HECS was next. The Higher Education Contribution Scheme was introduced in the Federal Budget and began in the 1989 academic year. Students were charged about $2000 a year university fees. Instead of paying up front, they were required to pay after they got a job with a threshold income. The money was taken from their pay, just like tax. The scheme was administered by the Tax Office. Incidentally, it has nothing to do with Austudy, a scheme for living allowances as distinct from tuition fees.
The PAYE tax system was again used for collection, but there was no separate agency. Students get their notices direct from the Tax Office.
The more significant difference is that, unlike the maintenance of children, education is not a federal head of power. So the Federal Government widened its power over education through the tax system. The over-taxed middle classes did not squeak much. Parents were generally relieved that their children would pay later rather than them paying now.
Next was training — in July, 1990. This time the net was wider, but it was still administered through the Tax Office. Once again, the Federal Parliament has no specific power over training, but it has used its taxation power make sure its gets its way.
Employers with a payroll higher than $214,000 who do not spend one per cent of their payroll on training have to pay the shortfall into the Training Guarantee Fund. The rate goes up nest Wednesday to 1.5 per cent.
The training levy broke new ground in that it bound the states. The states were forced to pay 1 per cent of their payroll to training under a Federal law.
The states screamed a bit, but did not challenge the law. It seems the Commonwealth can tax the states, provided it does not tax them out of existence, under its general tax power. The tax power is expressed generally, without excluding the states, whereas some other powers (banking, railways and industrial relations specifically exclude intrusion into state affairs). The reasoning its that the Founding Fathers would have created a specifically excluded the states from the ambit of the tax power if that is what they intended.
So once again, the Federal Parliament, or more specifically the Labor Government controlling the Parliament, widened the ambit of Federal power. Gough Whitlam must wish he had thought of it.
Having got away with that, superannuation was next. It, too, binds the states. So now the Commonwealth can force the states to pay superannuation to employees. It has also forced every employer over a certain size to do the same thing.
One can hardly complain at the political and social aims of the legislation. Parents should support their children; employers should train their staff (forced to do so they will spend $150 million a year, which is still not enough); we should be forced to provide for our own retirements, instead of relying on Nanny State, and Australians don’t appear to want to do it voluntarily.
However, what will be next? We have seen how the Commonwealth has stretched its tentacles using the tax power since 1988.
The schemes are quite simple. Individuals will do certain things (pay maintenance or tuition fees) or they will get hit with higher PAYE deductions from their pay. Companies and other employers will do certain things (train their staff, provide superannuation) or they will get hit with an extra tax.
What is now to stop the Commonwealth from taxing employers who fail to spend a set amount on equal opportunity, safety training, tree-planting, greenhouse gas emissions and so on.
While many have worried about the foreign-affairs power being used to stretch Commonwealth power into areas undreamed of in 1901, the tax power has been a much more effective weapon to increase Commonwealth power.
The foreign affairs power has its limitations. It requires an international treaty on the subject matter which the Commonwealth wants to legislate over. The Rio summit has shown that environment is an international affair anyway, so the fuss over the Commonwealth getting into the area in the mid-1980s was largely misplaced.
However, the tax power is different. A Federal Government so-minded could use it to widen its powers into virtually any subject matter it wants.
It may well be that the schemes are efficient and laudable and that the Commonwealth in general runs things better and cleaner than the states, but before the Commonwealth goes much further, the people ought to get a say.
As the Commonwealth widens its financial power, the states have had to rely more on its largesse. The only win they have had constitutionally for decades has been the power to levy what amounts to a sales tax on petrol, alcohol and tobacco. The Constitution envisages the Commonwealth as having the exclusive power over excise taxes (taxes on goods). But Geoffrey Sawer devised an ingenious licensing arrangement based on past sales to allow the states to tax these goods.
Perhaps the states need some more clever constitutional lawyers to advise them if they want to stop the embarrassing charade of the Premiers Conference and the embarrassment of having the Commonwealth determine the training and superannuation levels of their employees.