Opinion & Commentary
Costello holds aces in tax deal
What are the rights and wrongs of this dispute and how is it likely to end up? Costello's demand goes back to the commonwealth-state agreement signed in 1999. It specified what the states had to do in return for getting all of the GST revenue.
They agreed to abolish one set of taxes according to a timetable fixed in the agreement, and to "review the need for" another set in 2005.
The first set, which included financial institutions duty, debits tax and the stamp duty on share transactions, is now history. It is the second set that was in contention at the last two treasurers' conferences and is again in contention now. This includes stamp duties on mortgages, leases, hiring, unlisted securities and non-residential property.
After a year of haggling, all states reluctantly agreed last year to phase out the second set over several years, with the exception of stamp duty on non-residential real-estate transfers. They were especially reluctant to give that one up because it is a big revenue earner ($1.5 billion to $2 billion in total) and its abolition does not directly benefit the punters.
The phase-out timetable is different for each state, with the laggard, NSW, taking the last step in 2012 because of its tighter budget situation. Costello agreed to the different phase-outs and the states thought they had got away with holding on to stamp duty on non-residential real estate, but they were mistaken. The states say the strict letter of the 1999 agreement involved no commitment to abolish this tax, only a "review of the need for [it]". Costello says this is just playing with words and that the agreement has to be interpreted in the context of the states' original commitment at a premiers' conference in 1998 to scrap all the identified taxes by fixed dates. When the Australian Democrats subsequently forced the government to water down the GST by excluding food, the abolition of state taxes was delayed, but not cancelled.
The only purpose of the 2005 review was to check whether the GST was generating enough revenue for the states to cover the cost of abolition, which it was. Regardless of the strict letter of the agreement, Costello is likely to win this argument in the court of public opinion.
The states' other argument is that the 1999 agreement also promised them a net improvement in their financial position; what they gained in GST revenue would have to exceed what they gave up in abolished taxes and the old financial assistance grants from the commonwealth. But the agreement does not say by how much the states should be better off or by when. Costello is able to say they are better off by $2 billion this year and $4 billion by 2009-10, and that they have the financial capacity to do what he wants. The states say they need all that and more for service delivery and that they have already given up more than half their potential gains through abolished taxes. Some of them - particularly NSW - add that the distribution of the net gains is skewed against them.
Costello holds all the aces in this game. The ultimate sanction is to withhold some GST revenue. Costello accepted delay last year and this is likely to be the outcome of this year's dispute.
Stamp duty on non-residential real estate is likely to disappear, but not for some years, and it is likely to be later in some states than others.
The pity is that the bigger issues of commonwealth-state finances are not being addressed.
The GST deal has delivered the states more revenue but not more financial autonomy, which is what they need if the federation is to work as it was intended. And the state taxes that were not mentioned in the 1999 agreement - such as payroll tax, land tax and stamp duties on residential real estate, insurance and motor vehicles - are also in need of reform.
Robert Carling is a visiting fellow at the Centre for Independent Studies.
