Federal-state relations will undergo their biggest change since 1942.
In that year, the Commonwealth forcibly took over the states’ income tax regimes. And every year since the states have been dependent on the Commonwealth for annual hand-outs, now called FAGs, or federal assistance grants.
Under yesterday’s package, the states will automatically get all the GST revenue — about $27 billion in the first year of 2000-01. The Commonwealth will collect it on behalf of the states. The states will pay the collection costs but get all the revenue.
This is unlike the 1942 arrangements where the Commonwealth’s reimbursement of income tax was purely discretionary and only partial.
Moreover, in the 1942 arrangements the Commonwealth got access to the increasing revenue source. Under yesterday’s package the states will get access to the increasing revenue source — the GST. The GST is likely to increase as service industries increase. It is likely to have been grossly under-estimated.
There is a snag for the states. They will have to agree to abolish permanently a lot of regressive indirect taxes: the bank-account-debits tax (BAD); the financial institution duty; stamp duty on shares, cheques, promissory notes, mortgages and other financial transactions; and bed taxes as in NSW (which will be welcome just before the Olympics). But the states can keep land tax and stamp duty on land transfers.
The will also have to take over total responsibility for local government. At present the Commonwealth gives the states money ear-marked for local government.
At present FAGs total about $17 billion a year. The GST revenue will replace the FAGs and all the abolished state taxes with a bit left over. Prime Minister John Howard said that by 2010 the states would be $25 billion better off in total with the guaranteed GST revenue, but this presumes FAGs stay at their existing level.
Nonetheless the states get substantial independence. They would no longer have to do the annual haggle at the Premiers’ Conference.
The Premiers and Chief Ministers would get power of veto over any changed GST rate. All would have to agree, along with both Houses of Federal Parliament, to either raise or cut the rate.
This is not only a guard against a rate increase because their would always be at least one populist premier, but also would prevent a rate cut and thus partially stop states engaging in foolish tax holidays to attract industry from each other. However, payroll tax stays.
The new state fiscal independence will reduce what is called vertical fiscal imbalance. The Commonwealth raises 72 per cent of total public revenue and spends just 57 per cent of it. The states raise 24 per cent and spend 38 per cent. Local makes up the balance of under 5 per cent.
If automatic GST payments are regarded as state taxes, each level of government will be more directly responsible for its revenue (if collectively) and spending. It gives less excuse for blaming another level of government for poor service.
The GST money, however, would not be paid to each state according to population or according to where the money was raised (which would suit the ACT very much). Rather it would go in a similar way to the present FAGs funding. This is a formula set by the Commonwealth Grants Commission. The aim of the formula is to ensure that Australians, in whatever state or territory they live, have access to equal government services, as far as practicable. This is called horizontal fiscal equalisation.
It means that the Northern Territory and Tasmania get far more per head in FAGs than NSW, Victoria and the ACT.
Under yesterday’s plan, the grants commission will apply horizontal fiscal equalisation to the pool of GST funds and distribute them to the states according to that formula.
The Commonwealth also gives the states and territories special purpose grants under Section 96 of the Constitution. These amount to $14 billion a year. They are for special projects and programs in the states that the states cannot fund. But they are nominated by the Commonwealth. As it happens the split up of the $14 billion is roughly in accordance with population, except in the case of the Northern Territory which takes about twice what its population would warrant.
The states will also be expected to reduce their direct taxing of gambling to allow the GST n gambling to be revenue neutral. The states would get back the reduced direct taxes via the GST.
The question is whether the Labor states, NSW and Queensland, will agree. Mr Howard’s response was that if he wins the election with this plan before the people, he would expect them to agree. In any event, though, if the plan passes the Senate, Queensland and NSW would be virtually cajoled in the acceptance or the Commonwealth could threaten them with fiscal sanction.
If you have them by the short and curlies their hearts and minds will follow.