The ACT Government has to be concerned about the High Court’s ruling in the X-rated video case last week, at least in the long-term.
In the short-term it is of little moment. The tax can be quite easily restored.
But first let’s look at what the court said. Section 90 of the Constitution says the power of the Federal Parliament to impose excise is an exclusive power. That means State and Territory Parliaments cannot levy excise taxes. But the precise definition of excise has troubled the High Court for the past 80 years.
Various tests have been used, but it comes down to being a tax on production, a tax related to the value of quantity of goods produced.
Last week the High Court answered a theoretical question: is the ACT, like the states, bound by Section 90 and prevented from raising these taxes? Answer: Yes. The Commonwealth Parliament could not completely delegate its exclusive excise power to a territory parliament through the Self-Government Act. The court did not say whether the video tax was in fact an excise, but hinted that it was. Thus the video industry can get its money back. It is not a great deal. Estimates range from between $120,000 and $400,000 a year.
However, we all know the states and the ACT get away with excise taxes. What about the taxes on petrol, tobacco and alcohol? The High Court has permitted these. Some go back nearly 40 years. The key to them is that they are not expressed as excise taxes, but licences or franchises based on past turnover, not a tax on present sales.
There doesn’t seem to be much difference, but remember we are dealing with the law here, and the law is capable of drawing lines of difference so finely they cannot be seen to the ordinary eye.
The High Court has perhaps it recognised that the states have grown to depend on these taxes, but has made it clear it will restrict them to existing methods.
So if the ACT wants to reimpose the video tax, all it has to do is take out a copy of the Tasmanian tobacco tax (sorry, licensing) legislation, which has been approved by the High Court and copy it.
As a practical matter, these state licensing and franchise schemes can only avoid the ban on excise taxes if they are applied to a limited classes of goods: homogenous commodities sold according to easily identifiable weight, volume, quantity or size. Alcohol, petrol and tobacco are good examples. X-rated videos might squeeze in. But once you attempt to put a licence fee or franchise on the sale on a collection of various products (like hardware or clothing) it would be ruled out as an excise, solely within the province of the Federal Parliament, as John Hewson (he of the GST) is well aware.
The states would not get away with general sales taxes on a wide range of goods. And so they states will remain the begrudging recipients of federally raised money. The Commonwealth raises about 70 per cent of total government revenue, but spends only 50 per cent of total revenue. This is what economists call vertical fiscal imbalance. They blame all sorts of woes upon it: reckless state governments spending money that they do not have to raise; domineering federal governments putting inappropriate conditions on the money it hands to the states that have no bearing on local conditions; and a silly system full of duplication and lack of accountability in which those that administer do not have to raise the money and those that raise the money have to double up on administration to check it is spent properly.
The ACT naively thought (until the High Court told it otherwise last week) that Section 90 did not apply to it. It thought it could raise excise taxes and, indeed, at the beginning of the year changed the way it raised alcohol tax on new licensees, making them pay in advance. The changes might infringe the High Court ruling so the ACT Government might have to restore the old (less lucrative) law.
In the long term it means the ACT will have to restrict its franchising to those items now generally accepted as permissible (alcohol, fuel and tobacco and perhaps a different form of tax on videos) and it will have to use the accepted methods, just like the states. These now raise $44 million for the ACT, and the ACT will be restricted to that sort of revenue base. Legally it would be hard to broaden the base; electorally it would be hard to deepen it by increasing the existing taxes.
But unlike the states, the ACT has other disadvantages, most notably that the biggest occupant of the ACT is the Commonwealth Government which can make itself immune from ACT taxes. The Grants Commission does give the ACT some credit for this disability, but it is debatable whether it could ever make up for the power to tax in novel ways all of your citizenry and landholders, including the Federal Government.