The wording of the Constitution and the war enabled the Feds to take away income tax from the states and we are now suffering the consequences. It means the states have to go cap in hand to Feds to get tax money they should have raised themselves and each can blame each other when voters whinge about high taxes or low services. Further the Federal Government has built up a large duplicate bureaucracy to ensure its money (which is really the states money being reimbursed) is properly spent.
Last week the federal Coalition said it was going to do something about it. Prime Minister Paul Keating immediately said it meant state income taxes and … shock, horror … a state GST. As if the state petrol, tobacco and booze taxes were not a GST anyway. Besides, broadening state consumption taxes would run into constitutional strife because Section 90 gives the Commonwealth the exclusive right to levy excise taxes (in layperson’s language this means sales taxes). The High Court has only tolerated booze, smokes and petrol taxes as historic accidents.
Over the past decade, Keating as Treasurer and Prime Minister has successfully hemmed the states in. Commonwealth taxes have remained constant at about 25 per cent of GDP. The Commonwealth has also maintained its largesse to the voters with fairly constant spending. But the Commonwealth has not passed on constant GDP percentages in its grants to the states. As a result the states have been obliged to increase their taxes with horrible consequences that are now catching up.
The trouble is that state taxes are very narrowly based and therefore distorting and easily avoidable. People move themselves or their transactions to places of lower tax. If there are only a few things taxed, this is easier to do and if the tax rates are higher (because there are only a few things to be taxed) the incentive to move business is that much higher.
State taxes are mainly narrowed to stamp duty; payroll; gambling; booze; smokes; petrol and overcharging for monopoly utilities (water, electricity; sewerage and gas).
Broad-based taxes on all income and all consumption are less easily avoided because if you change your economic habits you still produce income and still consume so you still pay tax.
Far from being scared by Keating’s warning that the states will introduce income and consumption taxes we should applaud it. If the Constitution permitted it, every visiting Japanese tourist and itinerant media mogul who visited a state would pay tax. There would be no way big businesses could trade one state against the other for payroll-tax holidays because there would be no payroll tax. There would be just two general taxes (income and consumption) that applied to all businesses and residents.
It would be better to give the states power to raise their own taxes and be electorally accountable for them … no more passing the buck to the Feds and vice versa. Each level would be accountable for what it did with the money it raised.
The present arrangement of the Federal Government raising the taxes and giving them to the states has led to an idiotic form of competitive federalism. Under it, the several states bargain with multinationals or major Australian organisations as to which will give away more of its already-narrow tax base to attract some industry or other. Naturally enough, a system based on narrow taxation can only compete with other states on that narrow base and so only a narrow group of people benefit … the directors and shareholders of a few companies which are bribed to move from one state to another with tax holidays, to the detriment of the broad mass of residents who would otherwise benefit from lower taxes or better services.
How much better for Australia if competitive federalism took the form of states proving themselves in the form of quality services provided more efficiently from lower taxes than elsewhere. At present, any extra state efficiency is rewarded with the Commonwealth ripping off the proceeds. There is a good argument for replacing payroll tax, stamp duties and Commonwealth grants with a state income tax. The constitutional spread of taxes needs revisiting … alas, in a vicious Catch 22, only the Feds can do that.