Last week saw further confirmation that federal-state taxation is a mess with a ruling in the ACT Supreme Court that struck down the ACT’s stamp duty on used cars. The ruling is likely to be challenged with other states intervening. In total about $500 million a year is raised by state and territory governments in Australia. If those taxes can no longer be raised, some remedial steps must be taken if states and territories are to obtain the finances necessary to run health, education and other services.
To add to the worry, other taxes might also be subject to similar challenge. The tax on new cars is an example.
The essential difficulty is that the Constitution gives the Commonwealth Government the exclusive right to levy excise duties. The definition of excise duties has been the subject of much legal debate and court rulings in the past century. Broadly an excise is a tax on production. A simple test has been that if the tax goes up with the value or quantity of the goods, it will be an excise. In the past 25 years, the states have got around this by charging licence fees on trading in things like alcohol, petrol and tobacco, which went up according to the value or quantity of goods in the previous year. For a long time the High Court allowed this sophistry, but earlier this year it struck all these taxes out. The Commonwealth had to come to the rescue using its exclusive power to levy excise duties to levy the hitherto state and territory licence fees. It then remitted them to the states.
Until now, no-one had questioned the transfer tax on new and used cars, imagining them to be transfer fees in the form of a stamp duty. Chief Justice Miles has now informed us that they are in fact an illegal excise.
Other stamp duties, like those on land transactions are safe, even though they are levied according to value. This is because land is not a product and any levy on its transfer could not be an excise.
But getting beyond the legal technicalities, a severe political and economic question must be settled.
Since this year’s case, the Commonwealth has been raising more than 70 per cent of total government revenue in Australia, but the states and territories are responsible for more than half the spending.
This vertical fiscal imbalance is accompanied by a game of shifting political blame. In matters like health and education it has become too easy for the states and territories to argue that their failings can be put down solely to a lack of federal money. The Feds in turn blame the states and territories for incompetence or misdirecting funds into short-term vote buying schemes.
The recent fiasco over excise taxes can only make things worse. The states and territories are tied to Commonwealth purse strings and they are too politically weak to introduce new methods of financing, like death duties for fear of political backlash. They have got away with huge increases in gambling taxes, however, because the gambling masses are too stupid to notice or too addicted to care. The fact that the states and territories have had to increasingly rely on gambling taxes, however, is proof of the dangerous and destructive results of the vertical fiscal imbalance.
Further, large stamp duties tend to discourage sensible decisions in housing. People are reluctant to move to more suitable housing because of transfer costs.
As a general principle small taxes levied broadly are better than large taxes levied narrowly. That was part of the rationale of the GST. Under the original plan, a lot of state duties, including those under question now, were to be abolished as the states got access to the GST revenue. Alas, after the Democrats-induced compromise to drop food, these taxes will stay.
The other matter affecting federal-state relations is the question of federal courts being able to exercise state jurisdiction so matter can be run in a single court, for the convenience of all.
These matters can only be fixed by referendum, but that process of constitutional change has been so poisoned in the past that obvious reforms appear beyond us.