Into Dangerous Territory !

The coming White Paper on the possible " Reform of Federation " opens a Pandora's Box of possibilities. At the heart of the matter is how the states and the Commonwealth will share the tax pie - and indeed it seems that all the options of how that " pie " is formulated looks like being dissected - and possibly rehashed !

It is quite evident that the states are falling short in their need to finance both health and education under the present tax regime.  The Feds are passing the finance buck back to the states by cutting  grants and that seems to encourage state Treasurers to think of an increase in the rate and a broadening of the base of the Goods and Services tax.  ( GST ).

Queensland Premier, Campbell Newman has raised the issue of allowing the states to impose a state income tax.   In simple terms, this would run in tandem with the present Federal income tax regime - with the state tax collected by the Feds on each state's behalf.   It is proposed that each state should set it's own tax level and therefore use state income tax as an inducement to attract both residents and industry.   It could also trigger a " race to the bottom " - with tax level incentives used to get industries to relocate on a " beggar my neighbour " basis.

The average taxpayer will not be fooled by the " Reform of Federation " label.   The intention of this white paper is clearly to devise a mechanism to extract more money from the purse or wallet of Australian citizens to fund the shortfall that is  crippling state services.   The only question - is the mechanism that will achieve that purpose.

It would suit the Commonwealth government to have the states petition for an increase in the GST and/or a broadening of the base because that would be an unpopular move that would then rest on state shoulders.
The GST has remained at 10% since it's inception on July 1, 2000, and that is unusual because other countries have hiked the rate of their GST or VAT taxes and many are at 20% or even higher.   From a tax point of view, the GST is a marvellous tax because it is hard to dodge.  No matter where the money comes from, the tax man has a grab whenever it is spent - and some see that as fairly distributing the tax load.

A hoary old chestnut is being dragged out to justify the state income tax idea.  It is proposed that such a state tax would see inefficient existing state taxes - such as stamp duty and payroll tax - abolished to bring in a fairer tax regime.   When the GST was proposed, exactly the same deal was part of the arrangement with the states and they were allowed several years of grace before this abolishment was to occur.    When that time came, all the states reneged - and we now have those same inefficient taxes and the GST running in tandem. That old saying - Once bitten - twice shy comes to mind.

Unfortunately, by it's very nature politics will play a big part in the coming discussion.   Whatever is proposed will have an upside - and a down side, and because of the adversarial system of party politics each will be enhanced by opposite sides of the parliament.

The only thing that is absolutely certain - is that there is a problem that has to be fixed if we are to maintain the way of life that makes Australia such a pleasant and comfortable country.   We will all have to pony up a little more money to make up the shortfall.   How that will be achieved is the only thing to be decided !