It is occasionally claimed that sharing of tax bases will impede Commonwealth national responsibilities for economic management and redistribution.
However, these Commonwealth roles do not constitute any impediment for transferring tax powers to the States.
Economic Management
Other federations have no difficulty managing the economy with a lower level of vertical fiscal imbalance.
In fact, added flexibility for the States could make the Commonwealth’s economic management task simpler, as it need not worry so much about the differences in economic cycles between States.
Minimising VFI would still leave the Commonwealth with substantial scope to use fiscal policies (particularly as these policies generally involve only marginal expansion or contraction of taxes and expenditures), and would not affect the Commonwealth’s other economic management tools (eg. monetary and wages policy).
Moreover, economic management is now less about using fiscal policies to manage overall economic activity, and more about ensuring the sustainability of fiscal policies and the efficiency of resource allocation in the economy.
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In this regard, the sustainability of States’ fiscal policies is now closely scrutinised by the financial markets, which act to keep States under tighter discipline than in the past when State borrowings were closely regulated by the Commonwealth.
In the same way, there is no reason why State voters and competitive federalism cannot regulate the size of the State public sector, and indeed much more efficiently than is now the case, where the voter is completely confused about which government is responsible for what.
Redistribution
The discussion above has already indicated how Commonwealth redistribution objectives need not be significantly affected by transferring tax powers to the States. In this regard, the Commonwealth could retain the progressive element of its taxes, or alternatively the States could maintain the Commonwealth’s scale of progressivity for the taxes transferred to them.
C
ONCLUSIONS FORR
EFORMO
PTIONSThe above assessment suggests that a well designed base sharing system is superior to revenue sharing arrangements on most counts.
For a revenue sharing arrangement to meet the requirements of States for a secure and adjustable revenue source, it would need to involve:
• Embodiment in the Constitution or, at the very least, a secure Commonwealth-State arrangement which could not easily be changed unilaterally by the Commonwealth.
• States being involved in decisions on changes to the base. • States’ entitlements being linked to the base rather than
tax as a State tax, and reduces the dependence on Commonwealth tax policy.
• A minimum time lag between tax collections and disbursements to the States — as well as helping to identify the tax as a State tax, this assists the Commonwealth to run responsible budgets.
• Distribution between the States on the basis of tax origin, or a close approximation — this again helps to identify the tax as a State tax.
• Provision for the States to collectively review and reset the rate periodically — which the Commonwealth would be bound to implement.
Features such as these may be very difficult for States to secure. Suitably secured revenue sharing arrangements could have a place for consumption taxes. Ideally, a balanced reform of Commonwealth-State financial relations would provide the States with direct access to broad based taxes on both income and consumption.
However, the States are currently excluded from broad-based consumption taxes by the Constitution and the High Court’s interpretation of the Constitution. Hence, the States could only gain access to broad based consumption taxes by the removal of Constitutional impediments or by entering a revenue sharing arrangement with the Commonwealth.
Any such revenue sharing arrangement would need to be part of a package which also provided States with a base sharing arrangement.
Compared with revenue sharing, base sharing by States of broad-based Commonwealth taxes offers substantial potential benefits in terms of:
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• capacity for States to fund their responsibilities; • improving government accountability;
• promoting competitive federalism; and
• allowing diversity to meet regional needs and cope with change.
Base sharing can also be implemented simply (eg. in the case of income tax), it maintains equity within a framework of community choices, and it will not impede Commonwealth national responsibilities.
The income tax base is a natural candidate for base sharing, as there is no Constitutional impediment to States accessing the income tax base.
The basic features of a personal income tax base sharing scheme between the Commonwealth and the States could be:
• State entitlements to be authorised by State legislation.
• The Commonwealth revenue base to be used by all jurisdictions.
• Collection by the Australian Tax Office using a single tax form for both Commonwealth and State components of the income tax.
• All States to set tax rates on a consistent basis (either flat rate or same progressivity scale as the Commonwealth).
• No State rebates or tax credits.
• A simple and uniform residence test to determine allocation between States.
• Each State to be able to set its own rate.
Sharing of the personal income tax base provides a workable reform of Commonwealth-State finances that would enhance States’ autonomy, accountability and capacity to fund services.
Ultimately, however, the appropriate direction for reform of intergovernmental relations will depend on the sort of federation that Australians want — a federation in which States have flexibility in the services they provide and the taxes they levy, or a federation where services and tax rates are controlled centrally.