The High Court has done it again — dealt with a big-ticket item that Australian politicians have run away from. This time tax reform. Earlier it was land rights and freedom of speech.
After yesterday’s decision invalidating state taxes running to $5 billion a year, the federal and state governments will now have to deal with tax. They should have dealt with it long ago.
The High Court judgment is dramatic because it is immediate. It declared NSW tobacco taxes invalid with immediate effect. It means tobacco retailers no longer have to add state taxes to the price of a packet of cigarettes.
And as all other states follow almost identical schemes for tobacco, liquor and petrol taxes, a huge hole is left in state finances.
My guess is that the Federal Parliament will have to pass some fairly quick legislation to enable the Feds to collect the invalid taxes until a new federal-state tax split is arranged. But even here there is a snag. Federal substitute taxes, to be valid, would have to be uniform across the six states, whereas the present state taxes are not. Queensland, for example does not have a petrol tax.
There may be some complicated way for the Commonwealth to rebate the Queensland petrol tax as a Section 96 grant and then for the state to give it to the wholesalers who in turn would give it to the consumer. But it is bound to be messy. Further different states and territories have different exemptions from the taxes. It is an administrative nightmare.
My guess is that the Feds can fix the problem in the ACT and Northern Territory very easily. (Though after the euthanasia debate would territory politicians be hypocritical enough to welcome the Feds’ meddling?)
The mess has been caused by Section 90 of the Constitution and artful steps by state governments to overcome it.
Section 90 says that “”the power of the (Commonwealth) Parliament to impose duties of customs and excise (are) exclusive”, and that all state laws imposing such taxes are of no effect.
The states cannot impose customs or excise taxes. Customs, of course, are import duties. Excise is a tax on goods and is levied at any stage after manufacture and before consumption.
The constitutional aim was to create one nation out of six colonies. That required free trade within and between the colonies subject to a single tariff regime against the rest of the world. If the states could impose their own customs duties it would wreck the nation’s uniform tariff regime. If the states could impose excise taxes internally they could wreck free trade by favouring their own production.
The states tried to get around the prohibition by imposing what they called licence fees upon retailers. They did this in the mid-1950s with alcohol. The requirement for extra state revenue had become more severe after the Commonwealth had taken over income tax exclusively during World War II and kept it. Later the states imposed licence fees on tobacco and petrol. Once again the revenue thirst became stronger after the states so foolishly abandoned death duties (which the Commonwealth has so artfully picked up subsequently in the form of the capital-gains tax).
The licence fees have become more and more artful and heavier and heavier. Licences became monthly and fees were charged according to the value of the goods sold.
The states have got away with it because every time they have been challenged in the High Court judges have made exceptions or accepted idiotic distinctions of form, rather than dealing with substance.
Yesterday in a tightly argued, logical and commonsense joint judgment, the four majority judges (Brennan, McHugh, Gummow and Kirby) put paid to decades of verbiage and only titular homage to the Constitution. They saw the states’ so-called franchise licence fees for what they are: taxes on goods, not a single flat fee for the right to engage in a trade. They looked at substance not form.
And they said it made no difference if it was tobacco, petrol or alcohol; they were all goods.
In the past, some judges have allowed exceptions for these goods, but, as the majority judges said, the Constitution did not make any exceptions.
The judgment is sand in the eyes for Queensland Premier Rob Borbidge and Deputy Prime Minister Tim Fischer who have attacked the court for straying form the words of the Constitution and calling for a stricter adherence to the meaning of the Constitution’s words. Well, that is exactly what the court did this time.
There is only one thing worse than not getting what you want; that’s getting it.
Borbidge and his fellow Premiers face gaping holes in their revenues. They can only be patched up by Commonwealth help and further dependence on the Commonwealth. All because the court followed the words of the Constitution.
The Commonwealth did not want this outcome either. It would have preferred the status quo because now it will have to fix the mess.
And note, too, Fischer has called for the appointment of capital C conservative judges to replace those retiring in the next year. But in this case Dawson — often labelled a conservative — joined Gaudron and Toohey, who have been very strong on implied terms and in the majority of Wik, in the minority judgment which was strong on discovering the underlying purpose of the Constitution.
And Kirby, seen by some conservatives as a dangerous social engineer, joined Gummow the so-called literalist and black-letter law man with Brennan and McHugh.
It seems Fischer’s ad hominem attack has more to do with a dislike of an outcome than with judicial methodology.
The difference between the majority and minority in fiscal outcome was enormous. The minority said excise taxes applied to goods produced domestically, so any state tax which applied indiscriminately to both locally produced and imported goods was not an excise and not prohibited under the Constitution. The minority said the purpose of Section 90 was to prevent state protectionism; that purpose was not destroyed by a tax that hit all goods irrespective of which state they were produced in.
The minority would probably have permitted a state GST.
But the welcoming thing about both the majority and the minority was that they saw through the artful state “”licensing schemes”. They went past form and looked at substance.
Oddly enough, the states may ultimately be better off because tax issues now have to be dealt with (as distinct from taalked avbout) nationally. It may end the folly of having the Commonwealth raising the money and the states spending it. The annual hand-outs and the Grants Commission equalisations will be seen as inefficient and politically unaccountable.
The entity that spends the money should have to raise it. At present it is too easy for each tier of government to blame the other.
Overall it means the states can never raise taxes on goods, but they can raise taxes on services, like the NSW bed tax. They can raise income tax if the Commonwealth lets them. They can also raise death duties and property taxes and continue with bank deposits and withdrawal taxes and other financial taxes.
It will be good if this judgment is a catalyst for the states to embrace some of these taxes instead of relying too much on gambling and housing stamp duty, both of which have pernicious social impact.
The High Court may well have triggered a political rethink where the politicians have feared to tread.
Internet:
crispin.hull@canberratimes.com.au