The report of the National Commission of Audit is out with its vast array of recommendations to government on ways to address structural problems in Australia’s national finances.
One of its options outlined is the reintroduction of income taxes by state governments, which would give the states more flexibility in their spending.
The proposed mechanism is simple: Cut the current 32.% tax rate 22.5% and allow states to introduce a 10 percentage point income tax. This brings the rate back to where it was, with a catch.
The states would be able to adjust the rate.
The commission admits “this has the potential to inject further competitive tension within the Federation as States would have the autonomy to set rates and compete amongst themselves”.
This could potentially lead to a scenario where someone trying to save might find a job in a state for a few years where the tax rate is lower. It would also have huge implications for investment decisions by large companies trying to attract talent.
Here’s the full explanation from the commission’s report. Let us know what you think.
The Commission strongly considers the time has come for there to be a closer matching of revenue-raising capacity of the States with their expenditure responsibilities.
Options to reduce vertical fiscal imbalance have been examined in Australia over many decades.
In 1991, the Working Party on Tax Powers to the Special Premiers Conference noted that it is a basic tenet of a democratic system that the success with which governments perform their roles depends a great deal on the extent to which they are accountable to the community.
This Working Party put forward a number of options which worked to increase the fiscal autonomy of the States.
At the time, it was noted that the options under consideration would involve:
fundamental changes to the relationships between the various levels of government as well as the tax system of the nation. Changes of this nature have far-reaching effects on the community and, while that is no reason for avoiding change, it does argue for very careful consideration.
The Commission endorses the sentiment of the Working Party’s observations. It considers that the most realistic option for addressing the current vertical fiscal imbalance would be
to increase State and Territory revenue capacities by providing them with access to the Commonwealth’s personal income tax base.
The Commission supports an arrangement whereby the Commonwealth would lower its personal income tax rates to allow room for the States to levy their own income tax surcharge.
The impact of lower revenue collections for the Commonwealth would be offset through an equivalent reduction in the payment of other Commonwealth financial assistance to the States. In other words, the financial implication would simply be a substitution of a new untied source of revenue to the States (through the personal income tax system) to replace a series of tied grants.
By way of illustration, the Commonwealth could permit States to access the personal tax base directly by reducing the current personal income rate of 32.5 per cent (which applies on incomes from $37,000 to $80,000) by 10 percentage points to 22.5 per cent.
A 10 percentage point ‘State income tax surcharge’ could be introduced to bring the overall rate back to 32.5 per cent. This 10 percentage point State surcharge would be hypothecated
to the States providing them, in this example, with an estimated additional revenue source of around $25 billion per year.
To offset this, the Commonwealth would take $25 billion out of the $45 billion in tied grants it currently provides to the States. Included in the $25 billion, for example, could be the tied
grants currently provided for schools and the tied grants paid through the various National Partnership Agreements.
It would also be possible to extend the income tax sharing arrangement by allowing the States to periodically adjust the surcharge rate (either up or down by several percentage
points). This has the potential to inject further competitive tension within the Federation as States would have the autonomy to set rates and compete amongst themselves.
The Commission recognises that such a reform would represent a material change in the current financial arrangements and that there would be legal, technical and administrative
details to resolve. However, there is no general legal limitation on State parliaments imposing income tax.
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