DAN TEHAN | Australian Financial Review | November 30, 2015
The South Australian Premier, Jay Weatherill, stepped up to the plate last week and made a significant contribution to the tax reform debate. With real momentum growing for tax reform, it is time the other State Premiers did the same. The strength of the reform of our tax system will only be as strong as the buy in from all the states.
In the past decade, tax summits and Commonwealth-State leaders’ meetings have not been a breeding ground for innovative tax reform ideas. Instead, they have been highlighted by grandstanding and some of the worst blame-game shenanigans this nation has ever seen. Sadly, we have had to wait until State Premiers retire before they begin to put forward honest and constructive suggestions.
As Treasurer and then Premier of Victoria, John Brumby described the GST as a “debacle” that was not the “river of gold” it was claimed to be. But it appears that with age comes wisdom as now, having left office, he believes that tax reform at the state level should focus on removing inefficient taxes and that the GST’s regressive nature is overplayed.
Premier Weatherill’s plan to look at the whole tax mix, from raising the GST to distributing income tax to the states, shows leadership that has been lacking. In his proposal, the states would agree to a higher GST rate of 15 percent on the condition that 17.5 percent of the income tax collected by the Commonwealth is given to the states without precondition. It is a simple quid pro quo that illustrates the potential of pragmatic reform and the benefit of participating in constructive discussion.
Weatherill’s proposal cuts to the heart of the Federal-State tax debate: a fiscal imbalance between the government collecting the taxes and the governments providing the lion share of the services.
Since losing their income tax revenue at the end of the Second World War, aside from the introduction of the GST by the Howard Government, the states have had no large single revenue stream that comes without Commonwealth strings attached. Premier Weatherill wants to see this imbalance swing back the states way.
However, his proposal comes from the overriding need to find the revenue to provide services that Australians have come to expect from government. This cuts to the core of the tax reform debate – how do we want to pay for the services and institutions that government provides.
What Weatherill’s plan lacks is an acknowledgement that there remains a spending problem at all levels of government with potential for reform in simplifying service provision and reallocating funding. As Professor Allan Fells said of the reallocation of Federal Mental Health funding, “could the current dollars be spent better? Our answer was yes.”
What Weatherill does identify is that when it comes to tax reform there are limited numbers of large levers that can be pulled or changed that will make a difference to our productivity or standard of living. That is why he rightly points to the GST as a key in driving reform.
This is also why Premier Weatherill has the common sense to point to broadening the GST to financial services and in return suggests that the states could remove the inefficient taxes on insurance and similar products. Broadening the GST to financial services could also be used by the Commonwealth to pay for a company tax reduction.
Weatherill’s contribution has also highlighted the dearth of ideas coming from Labor at the Federal level. In the latest thought bubble, Federal Labour has claimed that increasing taxes on tobacco to make a pack of cigarettes cost $40 could be both a health measure and a revenue raiser. But as fewer people smoke and the health objective is achieved, less revenue would be raised.
Real tax reform will grow our economy and create incentives that drive people to work. The states can play a pivotal role in shaping the tax reform debate and Premier Weatherill has shown the way. The time has come for the other State Premiers to go into bat for tax reform.