Opinion & Commentary
Add State Tax Reform to COAG’s agenda
Judging from what has so far been revealed of Kevin Rudd’s vision of cooperative federalism, state tax reform is not a part of it. Business groups now want it to be.
Business has beaten this drum before. One response to their latest call would be to dismiss it as an expression of self-interest, given that the lion’s share of state tax dollars is paid (in the first instance) by businesses, but it would be a mistake to see the push for state tax reform only in that light.
Reform is in the public interest because state taxes are seriously flawed when measured against the usual criteria of economic efficiency, fairness and simplicity. This is not just an issue for business. Ultimately households and the whole economy suffer from a sub-optimal state tax system.
The GST and associated tax reforms (State Tax Reform Mark I) improved the overall tax structure but only dealt with the highest priorities for state tax reform. As a result, a bunch of third world taxes on financial transactions has been removed.
But the GST agreement had nothing to say about payroll tax, land tax, or the stamp duties on residential real estate, insurance and motor vehicles. Some of these are almost as deficient as the financial transactions taxes that have been abolished.
In StateTax Reform Mark II, it would be easy to make a strong economic case for getting rid of another group of state taxes worth, say, $15 billion in annual revenue. This brings us to some salient facts that the advocates of reform need to contemplate.
First, tax reform does not necessarily mean tax reduction. Regardless of the rapid growth in particular state taxes and GST revenue in recent years, aggregate state revenue has grown less than Commonwealth revenue since the GST began, and the states do not have a cash surplus. While there is undoubtedly scope for efficiencies in state expenditure, the scope for a net tax reduction may not be all that large. Tax reform is more likely to mean restructuring, such as paying for the removal of stamp duties by broadening the bases of more efficient taxes such as payroll tax and land tax.
Second, state taxes fund just one-third of what states spend. Arguably this is too low – and conversely their dependence on Commonwealth grants is too high - if states are to function effectively as autonomous and accountable entities within the federation. From this perspective, tax reform should mean increasing state taxes and reducing Commonwealth taxes (and the state grants that they fund).
Third, business has something of an obsession with the compliance costs and inconvenience involved in dealing with interstate tax differences. They have half a point here, in that some interstate differences in definitions and administrative practices serve no useful purpose and should be harmonized away. But they have to accept that interstate differences in tax rates are a desirable feature of competitive federalism.
There is no magic wand that will make state tax reform easy. But the business lobby is right to demand that it be added to COAG’s crowded agenda.
Robert Carling is a Senior Fellow at The Centre for Independent Studies, his paper State Tax Reform: Progress and Prospects is available at www.cis.org.au
